Dr Anastasiya Ostrovnaya, of Imperial College Business School‘s Centre for Climate Finance & Investment, writes on the economic challenges at the centre of climate mitigation and what this means for achieving the international targets set each year at COP.
There’s a problem with COP. Happening at the end of each year, COP opens the season of climate cries for help, calls for urgency, and promises to cut emissions. The promises which don’t come true. Why?
Nations signed the UN Framework Convention on Climate Change in 1992, kicking off the COP ritual. Looking back, Kyoto ( COP3, 1997) and Paris (COP21, 2015) brought the most publicity and hope. Yet, with the sole exception of 2020 (the year of the global pandemic), global greenhouse gas emissions have risen every year since. COP28 offers yet another hope for action: the final text calls for a “transition away” from fossil fuels in energy systems in a just, orderly and equitable manner, accelerating action in this critical decade so as to achieve net zero by 2050 in keeping with the science. It is proclaimed to be the beginning of the end of fossil fuels, but there’s little evidence thus far of producer countries and companies pledging to cut down any production.
Action or inaction?
A sense of climate inaction fatigue is setting in. By now, the reality of climate change and its causes are largely undisputed. The urgency for action is obvious and has been called for again and again and again. There has been significant progress in renewables cost reduction and deployment, which undoubtedly has helped to moderate the growth of emissions. And the amount of capital flowing into climate continues to increase annually. Yet year after year we fail to reduce emissions and fail to decarbonise, emitting more and more heat-trapping gases, and depleting the limited carbon budget for 1.5 or 2-degree targets. At the current rate, we reach 1.5°C warming milestone in 5 years, give or take (with 50% probability).
The actions required to mitigate climate change causes are clear, yet the inaction is deeply frustrating. Why do we continue to burn coal, why are we building new coal power stations and drilling for more oil and gas when we know full well that we cannot burn what we already have and maintain a balanced planet?
Perhaps we are looking at it all wrong. Climate action is stymied not by lack of finance and technology, but by diverging economic and strategic interests among nations, corporations and peoples which prevent humanity from following the ”globally optimal” path.
Take, for example, oil companies and petrostates. The optimal strategy in the short and medium terms is to “drill, baby, drill”: drill for as much oil as possible as soon as possible before demand dwindles. There are numerous parties interested in keeping the oil flowing. And the recent geopolitical tensions have been used for fossil fuels promotion under the flag of energy security. But these generally are not the parties which have to pick up the check for the climate damage around the globe (any loss and damage fund wouldn’t match the oil and gas revenues). (During the first days of COP28, $700m was pledged in Loss and Damage funds according to the UN, while recent reports from UN highlighted on average $86bn a year in losses over the last 50 years from weather, climate and water extremes, and the Guardian reported that the oil sector delivered $3bn-a-day profit, on average over the same 50 years). Why are we then surprised the oil superpowers and supermajors don’t rush to wind down their business, don’t invest in enough renewables, or don’t do the “right thing” and “play their part” in the transition? The answer is that isn’t their business.
Global cooperation in decarbonisation
To solve climate change, global coordinated action is required. But countries, firms and people optimise their own economic objectives (plural!), not one global target. Basically, climate change mitigation is a giant prisoner’s dilemma: if everyone transitions, everyone benefits. If no one does, everyone loses. But if one party believes that everyone else will decarbonise, the optimal strategy is not to pay the transition costs while benefiting from everyone else’s actions. And there’s no actual penalty for non-cooperation. If others believe this too, no one decarbonises and everyone loses. Global cooperation is made more difficult by the asymmetry of mitigation costs and vulnerability to climate change.
There isn’t an easy solution to the climate problem, no one nation can solve it on their own, and if any nation does achieve net zero, it offers no guarantee of climate stability. As such, there is no “carbon diet pill”, and every country and corporation must do their part in climate transition. But a pursuit of eternal GDP growth and quarterly financial returns often trumps other considerations. What can be done? What we need is cooperation between nations and climate conscious actions from corporations. To achieve it is tricky, here are my considerations.
Actions to bring us closer to our climate goal posts
There are no legal mechanisms to enforce climate mitigation without a global carbon tax. EU is pioneering an attempt of a trading relationship policies based on carbon emissions (Carbon Border Adjustment Mechanism (CBAM)), which would impose a tax on imported high carbon-intensive goods, and therefore incentivise the development of local carbon pricing mechanisms and, therefore, decarbonisation. More carbon-based international relations could drive decarbonisation, but that should not be done from an isolationist platform but be underlined by technology sharing and financing.
A global green R&D fund would aim to develop clean technologies for the benefit of all nations, rather than a specific patent holder, which can potentially accelerate the clean tech deployment globally.
In addition, there is a major flaw with the design of net zero targets. Such targets are becoming widespread, they imply that a company or a country will have net zero emissions by 2050 (or some earlier or later year), some have also interim targets.
First, net zero is a journey, not a destination. It’s the absolute cumulative emissions that matter, not final emissions or emission intensities (relative to product volume or revenues). Zero emission intensity at the end is equivalent to zero emissions, but in the interim absolute emissions would depend on either the product volume or revenues (e.g. emissions intensity measured against revenues of oil companies goes down in the years of high oil prices). Many firms set emission intensity targets, but what we need instead is the absolute emission targets and transparency thereof. In addition, what could really bring the difference and accountability are the absolute emission budget targets: a firm is to pledge, that until 2050 it would emit X tonnes of GHG emissions. This would mean, if they don’t decarbonise fast enough in the near term, they would have to decarbonise more rapidly later, and potentially be net negative emitters before 2050.
Scope 3 emission reduction targets are also critical for cooperation and collaboration on emission reductions. Some companies have declared intention on emission reduction for their own operation and across the supply chains, but it’s not a given. To date, no country has set scope 3 emission targets (or so called consumption emissions), covering their own emissions and those of their trading partners. With such goals, international relationships and trade agreements would then be guided by mutual decarbonisation goals. This could serve as a tool for genuine cooperation, ensuring environmentally responsible co-development and collaboration towards achieving climate targets.
Can we afford not to?
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