New Momentum for Change in the Race to Zero
With the postponement of the COP26 in Glasgow, Climate Week New York City 2020 (CWNYC) has grabbed everyone’s attention as this year’s biggest climate event.
Freed from the need for in-person attendance, political and business leaders have delivered a series of what could be become game-changing announcements prepared for the postponed ‘Paris Agreement + 5 years’ COP as Glasgow was previously characterised. Instead, these announcements instead have spilled out over the past fortnight.
These are likely to have substantial ramifications on future investment programmes. Let’s have a look at a few of them.
China in Focus
The most significant commitment is President Xi Jinping’s proposal to make China carbon-neutral by 2060, bearing in mind China is a source of 28% of global greenhouse gas emissions. It sets a deadline, by when all fossil fuel assets must either be closed or incorporate carbon capture.
But it is also an enormous challenge for an economy the size of China, which is significantly dependent on the high-emitting and hard-to-abate sectors and gives China only 30 years to decarbonise from 2030, its target date of peaking.
The policy should have a significant chilling effect on investment in long-lived assets like power-stations. Remember China’s 1000 GW strong coal fleet is on average just 14 years old; coal power stations last 50-years plus. In 2019, 40 GW of new coal came online even though intermittent renewables are driving down utilisation rates and plant profitability.
Let’s hope that the 2060 cut-off deters investment in building assets that will be stranded in their middle age. Given the importance of China as a centre for global manufacturing– this announcement has a huge impact on embodied carbon emissions by China’s trading partners.
Multiple Net Zero Targets
Interestingly South Korea has also set a provisional net-zero carbon emissions target for 2050. Soon after KB Financial Group became the first major South Korean bank to announce it would half funding the construction of a new coal power plant.
The EU made a major announcement on 17 September tightening its 1990 to 2030 emissions reduction target to 55%. To bring this into effect EU will introduce measures which include revising and expanding the EU Emissions Trading System; the framework for land use emissions; reinforcing energy efficiency and renewable energy policies; and strengthening CO2 standards for road vehicles.
For international comparisons, Climate Home has compiled a handy list of global net-zero targets as of mid-September. It's available here.
EU-China Climate Axis
The climate-entente between the EU and China is geopolitically important. China (13 bn tCO2) and EU (4 bn tCO2) together account for around 40% of the world’s GHG emissions. Together with other countries with net-zero carbon targets: UK, Canada, South Korea, New Zealand to name just a few - they comprise an important net-zero climate diplomacy axis whose impact could be broader than just carbon. Add California, equivalent to the world’s fifth-largest economy and the axis has influence.
The EU is also proposing an interesting carbon border adjustment mechanism to protect low-carbon local manufacture engendered by carbon pricing from high-carbon foreign imports.
China is itself strengthening carbon pricing internally and might see a tactical advantage in aligning tariffs to carbon emissions alongside its new climate ally. Adjusting tariffs to incorporate embodied GHG emissions could profoundly ease the decarbonisation of hard to abate sectors like steel and aluminum where the threat of carbon leakage through international imports strains meaningful reductions.
Major Announcements CWNYC
• New Zealand became the first country to introduce mandatory climate risk reporting: 200 of the largest banks, insurers, and investment managers have to publish TCFD-style information on their exposure to climate risks. The investment manager would have to publish the data on a fund by fund basis.
This regulation is a game-changer in making the suppliers of finance obliged to gather information from the users of finance and will force greater accuracy and comparability of their carbon accounting data. It also allows investors to gain real insight into the carbon impacts of their savings.
• California Governor Gavin Newsom spoke about the phase-out the sale of all ICE cars and passenger trucks by 2035 to improve California’s air quality and address climate change. As the largest car market in US, California’s leadership will oblige US car manufacturers to develop EV models and scale up production. Making up 4.7% of the vehicle Californian market in 2018 manufacturers will soon have the scale of demand necessary to drive down EV design and manufacturing costs and roll-out the charging infrastructure. Other states are sure to follow the lead by the country’s largest market.
• BP continues to elaborate on its NetZero ambition promising that by 2030 it will have expanded its wind generation 20-fold to 50 GW through investing $5 billion a year. To achieve this kind of scale with unfamiliar technologies it is partnering with other companies.
Last week, it announced a partnership with Equinor to develop 4.4 GW of offshore wind, off the Massachusetts and New York coasts. In its wider strategy, BP has ambitions to become a major player in the hydrogen economy and biofuels economy.
Such investments perhaps linked to short-term company-wide targets could form the basis of transition strategy in line with the ideas Climate Bonds promulgates in its report Funding Credible Transitions.
• In the world of retail, Walmart announced its plan to become a regenerative company, without using carbon offsets, by 2040. To do this it is electrifying its fleet of vehicles, harvesting wind and solar to zero out electricity use, and restoring or protecting 50 million acres of land and 1 million square miles of ocean.
• On 22nd September, ECB announced a policy change recognising the use of sustainability-linked bonds (SLBs), where the coupon paid to investors is lower if sustainability targets are reached.
Eligible SLBs, issued by corporates using the EU taxonomy to set their target, will soon be eligible as central bank collateral or can be purchased by the pandemic and Quantitative Easing (QE) asset purchased programmes. This puts sustainability-linked bonds on the same footing as sustainability-linked loans and creates a modest incentive for more loans/bonds to be issued with a sustainability linkage.
If 30% of the massive €750 billion EU recovery instrument (half of which will be through EU borrowing) is aligned to the EU taxonomy it will transform the trajectory of investment to a Paris Aligned recovery.
The Last Word
From China’s 2060 Carbon Neutrality Commitment to the EU’s explicit position via the ECB to use the EU taxonomy to provide incentives to invest in green. We hope other EU institutions will join the ECB in using the EU Taxonomy.
Overall the Climate Week NYC was action-packed, to say the least, and it’s been a good fortnight for the climate. Focus on 2030 & 2050 has been strengthened.
Next year’s postponed COP in Glasgow, will meet with the ambition bar set that much higher.
Race to Zero is gathering pace!
‘Till next time,
Climate Bonds.
