China and US hold key to successful climate outcome

nyThe UN Climate Leaders’ Summit demonstrated political will for a universal climate agreement in 2015, but not enough ambition, in our view.

The lack of new pledges shows much work needs to be done – with finance the main sticking point. We consider a China-US bilateral deal to hold the key to unlocking policy ambition.

Whilst some 179 member states attended Tuesday’s summit, with two-thirds represented by their top official, there is still a ‘wait-and-see’ attitude from countries on how ambitious emissions reduction pledges should be.

Most national statements called for a binding UCA but they were not accompanied by national commitment on pledges – in other words, they were not new forward looking policies. We think there is political will to reach a UCA in 2015 although the level of ambition is still far from limiting temperature rises to under 2°C.

Peak emissions: Importantly however, China and the US, the world’s top two emitters, agreed at the summit that they have a responsibility to lead. Even though neither announced new pledges, the US will put forward post-2020 emission reduction targets “early next year” and China intends to announce post-2020 actions “as soon as we can”. China’s actions are designed to bring about “the peaking of total CO2 emissions as early as possible.” Presidents Obama and Xi will discuss climate change at their next bilateral meeting in November in Beijing. Emission reduction pledges from other global leaders made in national announcements were centred on previously published documentation.

Sticky finance: The means of financing a 2°C world remains a sticking point for the UCA (see Keeping it cool, 10 September 2014). Only a few countries announced new financial pledges to the Green Climate Fund (GCF). The largest new contribution was from France (USD1bn), while Korea and Switzerland pledged USD100m each (Table 1). In total, additional pledges to the GCF were USD1.3bn, taking total capitalisation to USD2.3bn. The next opportunity for countries to highlight their financial commitments will be at a GCF pledging conference in November. We maintain that green bonds are a good way for both the public and private sector to demonstrate leadership in 2°C finance.

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2°C finance signals

There were signs that the momentum for 2°C finance remains strong, but in our view the UN climate leaders summit has not provided the comfort that developing countries are looking for – that there will be a safety net of funds for them to tackle the consequences of warmer temperatures. Some developing countries made the point that they could do much more with international support. The finance provisions involved are growing but still not of the order of the agreed USD100bn per year from 2020. For example, in its national statement, the EU’s President Barroso announced intentions to allocate EUR3bn (USD3.85bn) over the next seven years to support sustainable energy in developing countries. Again, there were no details as to what this entails, but we think it could be similar to the recently launched Pan- African program, where bilateral flows to Africa include 2°C finance flows. It’s worth noting that these flows from the EU would be outside of the GCF.

Further finance initiative announcements were made in the summit chair’s summary although details were sketchy. For example, they include commercial banks issuance of USD30bn in green bonds and the insurance industry doubling its investments in the green sector to USD84bn, both by the end of 2015. In total, the various announcements by governments, financial institutions and investors involve more than USD200bn, according to the UN.

Whilst we welcome new finance commitments, the estimates of incremental cost to convert finance to 2°C finance are still much greater, at around USD700-800bn per year in addition to normal spending. We think the challenge to scale up 2°C finance remains but it could be boosted by stronger policies, such as carbon pricing, renewable energy and energy efficiency targets. For instance, the 2014 investor statement on climate change (signed by 348 investors representing USD24trn in assets) called for “stronger political leadership and more ambitious policies” so that investments into the low-carbon economy and climate resilience could be scaled up.

Other issues

Carbon pricing – There were renewed calls for carbon pricing in a statement supported by 73 countries, 22 subnational jurisdictions and over 1000 companies and investors. In our view, understanding how to better price in the risks associated with climate change would make low-carbon options more economical as high-carbon options become more expensive – hastening the transition to a low-carbon world.

Forestry – The New York Declaration on Forests is a “global timeline to cut natural forest loss in half by 2020, and strive to end it by 2030.” Some 27 countries (including Indonesia but not Brazil), many companies and NGOs (but not including Greenpeace) as well as indigenous people endorsed the declaration. Norway announced it would continue to contribute USD500m per year to 2020 to help stop tropical deforestation – again, this is outside of the GCF. As part of this forest declaration, many palm oil producers committed to the goal of zero net deforestation by 2020.

Adaptation – Many national announcements highlighted previous action on adaptation but President Obama announced an executive order requiring “the integration of climate-resilience considerations into all US international development work”. We think this is an important signal as it is future looking and would involve technical support – something which the developing countries have been asking for, in addition to financial support.

What next?

Concrete jungle where dreams are made of: New York Mayor Bill de Blasio said “New York City must continue to set the pace and provide the bold leadership that’s needed” as he committed to reduce the city’s greenhouse gas emissions by 80% by 2050 (from 2005 levels). The New York summit catalysed vocal support from civil society, investor commitment and political will to tackle climate change and reach a UCA in Paris next year.

There’s nothing you can’t do: In our opinion, the level of ambition is not yet in tune with limiting warming to 2°C. However, there were enough hints from countries that more could be done if: 1) developed countries led with ambitious pledges, and 2) developing countries were supported through finance. An indicator of the willingness of developing countries to put forth more ambitious pledges could come during the next meeting of the BASIC countries (Brazil, South Africa, India, China) which is scheduled for the third week of October in South Africa. In addition, further negotiations regarding which elements to include in a draft agreement will take place in Bonn at the end of October. We think the bilateral talks between China and the US (scheduled for 12 November, just after the APEC summit in Beijing) will be important as the two countries might discuss their post-2020 emission reduction pledges. If the US is willing to make an ambitious pledge, then China could follow suit – opening the door for other countries to do the same and raise the overall level of ambition. The US should announce its pledge before the end of March 2015.

Let’s hear it for New York: This summit, though outside official negotiations for a UCA, undoubtedly furthered the climate agenda. It made leaders to make climate change a top priority and publicly declare a position on the matter. Though not much was new for avid climate change followers, we believe these signals of political support are vital to channel finance in the right direction – that of a low-carbon world.

Next stop Lima: We expect a draft negotiation text for the UCA to emerge from the 20th annual Conference of Parties (COP20) in Lima from 1-12 December 2014. From there, we expect national pledges to be announced mostly by the end of March. The endgame is a universal climate agreement at COP21 in Paris in December 2015 (Chart 1).

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