COP27 - Mind the gap!

COP26 was marked by a series of pledges to keep the global net-zero 2050 target within reach. COP27 is critical to ensuring that these pledges are updated and translated into credible action to limit temperature rise to 1.5°C above pre-industrial levels by the end of the century. With each passing year that pledges and actions fall short of what is needed, the gap widens and achieving the Paris goals becomes less likely. It is critical for investors that policymakers provide the right signals and incentives to enable capital allocation in line with the net zero target. COP27 must also reach agreement on who will pay for the losses and damages caused by the physical climate impacts that are rampant around the world today. These include droughts, heat waves and floods, which often tragically affect the most vulnerable developing countries.

Progress since COP26

Little progress has been made in implementing the pledges and promises made at COP26. Many of the pledges can only be described as "plans for plans:

• Developed countries have not sufficiently updated their 2030 pledges, nor have they increased climate finance for the Global South;
• There is still insufficient indication of how the commitments will be achieved or financed, and too much reliance on technologies that have not yet been developed;
• Carbon pricing remains a rarity, covering about 20 % of global emissions. Where they exist, they are often far too low to incentivize decarbonization;
• Climate action has been put on the back burner due to major global pressures - Ukraine war, cost of living crisis and recession.
• At the same time, unprecedented climate hazards have emerged around the world.

What does success at COP27 look like?

Four interconnected gaps that need to be addressed at COP27 stand out:

Closing the ambition gap: Nearly a year after Glasgow and countries' Nationally Determined Contributions (NDCs), warming is still only limited to 2.4°C, according to the Climate Action Tracker. With the exception of India and Australia, few countries have meaningfully updated their NDCs. Nothing less than NDCs reaching 1.8°C, preferably even less, would be needed to sufficiently narrow the ambition gap and be considered a success.

Closing the credibility gap: The credibility gap between pledges and binding actions does not incentivize business decarbonization and investment. Over 90 % of GDP is covered by net zero targets and 83 % of emissions, but the reality is very different:

• Emissions continue to increase, rising by 6 % in 2021;
• Deforestation in the Amazon reached record levels in 2022; and
• Fossil fuel subsidies total $420 billion, according to a 2021 UN report.

A multi-tiered global carbon pricing mechanism would be ideal to close the gap, but we doubt it can be agreed upon, especially when geopolitical tensions between the world's largest emitters are so great. A more realistic goal for COP27 would be detailed information on how the NDCs will realistically be achieved, accompanied by credible national measures.

Closing the equity gap: At the heart of the climate justice gap is the fact that those who have contributed least to global emissions, particularly in the Global South, are often the hardest hit by the impacts of climate change. Developed countries have promised climate finance of $100 billion per year to developing countries by 2020 - this pledge has not yet been met. Developed countries must take more responsibility and provide the necessary climate finance to close this gap at COP27, including:

• A binding commitment to climate finance, amounting to at least $100 billion starting in 2023
• A dedicated loss and damage financing facility to support the most vulnerable countries

Closing the Adjustment Gap: The loss and damage from climate impacts already being felt around the world underscores the need to focus funding on closing the adaptation gap to protect against the physical impacts of climate change. Even if global warming can be limited to below 2°C, it is too late to focus on mitigation alone. A binding commitment to increase adaptation funding would provide the necessary incentives to ensure that private finance also flows into adaptation projects.

How likely is it that these gaps will be closed?

Unfortunately, hopes are low. Few countries seem willing to increase their commitments, and international cooperation will be more difficult to arrange given the current global economic and political environment. So it will likely be another call to action, but probably a weak call with too few carrots and sticks to ensure a positive outcome. While there may be reluctance to officially acknowledge that an alignment to 1.5°C is now unachievable, post-conference commentary is likely to be dominated by the size of the gap between what is needed and what is being done. This will trigger a debate about the implications for climate commitments and the even greater importance of adaptation finance.

Author:
Eva Cairns is Head of Sustainability Insights & Climate Strategy at abrdn, a global investment firm with a focus on ESG issues. Jeremy Lawson is Chief Economist & Head of Research Institute at abrdn.