Given that the economic costs and frequency of extreme weather events are at global highs, and the hottest July on record coincided with the first Global Stocktake of the Paris Agreement, it seems appropriate to ask: will the goals of COP28 pass a reality check?
One prediction we feel confident about is this: the Global Stocktake is likely to show that the world is not on track to reach the goals set in Paris. Is it time to rethink the approach to achieving a low-carbon transition?
There has been much pushback about the UAE hosting COP28, but no one can deny that oil and gas continue to have a strong influence on the world’s energy mix, and the incumbents will play a crucial role in transitioning to a more sustainable global economy. While this year’s Stocktake is likely to report that urgent action is needed, recent history has shown that we cannot simply shut down high-carbon energy production overnight – nor would doing so achieve optimal real-world outcomes.
We are now 20 years into the energy transition, and while a growing number of countries that account for the world’s GDP, population and emissions are committed to net zero, we have made little if any progress toward achieving the goals established in Paris. A key reason for this lack of progress is that divestment doesn’t work – it simply passes that reins of carbon-heavy businesses into the hands of other (willing) buyers, and there is no shortage of buyers. Supporting this view: moves to divest from the oil and gas sector have had little impact on the cost of capital for “dirty” companies.
Portfolio decarbonization is not the same as real-world decarbonization. We can easily decarbonize a portfolio through sector allocations and screening, but that does not equate to real world outcomes. Furthermore, with water scarcity becoming more of a concern across more of the world, we believe water use must be included in determining whether energy is truly renewable.
Separately, while the push to decarbonize has not yet reduced global emissions, we are encouraged by the continued emphasis on the importance of a just transition to a clean energy future.
Role of policymakers
While I have focussed primarily on the investment side of achieving the Paris goals, it is essential to note that investors alone cannot and should not bear responsibility for decarbonizing the global economy – the role of policymakers cannot be understated. We are in a world of increasing geopolitical tension and destabilisation, with climate change-driven inflation (drought and floods that reduce food supplies, and rising insurance costs are just two examples), and increased energy demand in developing countries. We urge governments to take a holistic view in establishing policies that work in concert with investors’ ability to direct capital towards innovative climate solutions.
That holistic approach should include concrete actions that uphold a just transition to a cleaner energy future. The US has announced it will invest $1.2bn to help develop two commercial-scale direct air capture facilities that absorb more than two million metric tons of CO2 emissions annually to jumpstart a network of carbon removal sites. Importantly, this effort is expected to involve meaningful community and labour engagement and create 4,800 good-paying jobs.
This is a great step, but large economies can more easily use subsidies to attract green investment than emerging market and developing economies, putting the latter at a disadvantage in terms of developing clean energy jobs. Making a just transition to a greener world will not be easy, but it is essential to long-term sustainability.
Despite the challenges, we can motivate action by focussing on potential solutions, not just problems, and using both carrots and sticks to address the lack of progress in upholding the Paris Agreement.