Considerations for Net Zero Targets in Climate Change Policy: The Good, the Bad, and the Ugly

Policy Pulse – 6 July 2022 – Veritas Global

Photos by Gabor Koszegi, Chris LeBoutillier, and Dulana Kodithuwakku on Unsplash

Key points

Considerations for net zero emission targets in climate change policy:

• The good: targets are conceptually easy to grasp by policy makers, appropriate for technology modeling and suitable for signaling long-term policy intention

• The bad: sectoral targets risk being less cost-effective if they do not allow the use of carbon offsets from other sectors; when targets are narrowly applied, they can crowd-out investments that help reduce emissions

• The ugly: in the absence of scaled-up access to climate finance, targets risk condemning the poor to poverty for longer or at the other extreme poorer countries may pull out of climate protection programs leading to collapse of the global climate agenda

Context

Net zero emission targets have become an increasingly popular means through which to communicate climate policy ambition. According to the latest available global data, 134 countries covering 83% of emissions, 91% of economic activity, and 80% of the population have pledged to achieve net zero emissions this century. While private sector actors also actively use net zero targets as part of their climate strategies, the focus of this brief is on national and global emission targets.

The good

Net zero emission targets are conceptually easy to grasp by policy makers and the broader public. They offer a relatable benchmark against which to measure success and are a useful reference point for the scale of action required to achieve temperature goals. The Intergovernmental Panel on Climate Change (IPCC) has used net zero metrics to explain the link between greenhouse gas (GHG) emission trajectories and Paris Agreement temperature goals. In its 2018 Special Report on 1.5°C, the IPCC highlighted that limiting global warming to 1.5°C implied achieving net zero emissions globally by around 2050 whereas limiting global warming to 2°C implied achieving net zero emissions globally by around 2070.

Net zero emission targets can be used in modeling to identify climate-friendly technology roadmaps in specific sectors. Such roadmaps are particularly useful for design of technology innovation policy. For example, modeling done by the International Energy Agency (IEA) on roadmaps for the energy and heavy industry sectors can help identify specific research and development interventions to support technology innovation in these sectors.

More broadly, having net zero emission targets in place offers greater certainty on future intended trajectory of climate mitigation policy. There are many different policy options and means through which to achieve net zero emission targets. Therefore, to reduce uncertainty, a clear policy framework is needed that supports achievement of net zero emissions. Nevertheless, even in the absence of a detailed policy framework for implementation, net zero targets can offer some certainty on the overall intended policy trajectory.

The bad

Sectoral net zero emission targets risk focusing on measures that are less cost-effective if they do not allow the use of carbon offsets from other sectors. The cost of reducing one metric ton of carbon dioxide varies significantly from sector to sector. The midpoint estimate in the latest IPCC report indicates that agriculture, forestry, and other sectors, can generate about 40% of the global mitigation potential under $100 per metric ton of carbon dioxide in 2030 (see chart below), with carbon sequestration actions making-up a significant portion of these measures. Meaning that the midpoint expectation is that carbon sequestration activities offer significant cost-effective opportunities for neutralizing emissions from other sectors. Therefore, to be cost-effective, net zero emission targets for a sector (such as energy and heavy industry) should allow trading of mitigation actions with other sectors.

Some scenarios considered by the IPCC, expect that as much as 1221 Gt of CO2 (about 80% of all CO2 emitted by human activity since 1750), may be sequestered from the atmosphere in this century through carbon dioxide removal methods. However, these estimates are highly uncertain. Given the uncertainty, it is critical to use technology neutral policy instruments to incentivize desired investments. Carbon pricing policies can be designed in a technology neutral way and are generally more efficient instruments than engineered technology-based emission trajectories. Carbon pricing is not a panacea and is most effective when combined with a broader policy mix. Nevertheless, in general, a price signal on carbon ensures that the most cost-effective emission reductions are prioritized not only within a sector but also across sectors.

In this context, the net zero emission trajectories developed by the IEA for the energy and heavy industry sectors do not reflect the most cost-effective trajectories because they do not appropriately incorporate carbon trading opportunities for sourcing offsets from agriculture and forestry sectors and more broadly from carbon dioxide removal. Furthermore, it is unclear whether the IEA approach allocated the mitigation burden across developed and developing countries in a manner that is acceptable to the global community. For these reasons, IEA modeled scenarios should not be used in determining whether investments or activities are aligned with Paris Agreement temperature goals.

Requiring the use of IEA net zero emission trajectories in screening for Paris Agreement alignment as a condition for accessing international public finance will have adverse consequences. First, doing so risks mis-prioritizing investments and channeling resources to less cost-effective climate actions. Second, it could make it harder for project developers to access technologies that are climate-friendly, which help reduce emissions but might not eliminate them. Third, project developers could instead seek financing from non-OECD sources that are less aware of Paris Agreement alignment considerations. The increasing role of non-OECD countries serving as creditors makes this a real possibility. The share of external public debt held by non-OECD creditors grew from about 25% in 2006 to about 65% in 2020 in countries eligible for the Debt Service Suspension Initiative. Therefore, a common understanding, across diverse creditors and borrowers, on how to align investments with the Paris Agreement, needs to be developed in a transparent and inclusive manner. In this respect, the announcement by G7 leaders on 28 June 2022 to take a transparent and inclusive approach to creating a global climate club, for addressing GHG emissions from heavy industry, should be welcomed. Experience from designing the global scheme for addressing emissions from international aviation demonstrates the importance of taking a transparent and inclusive approach.

Narrowly applied net zero emission targets can crowd-out investments that reduce emissions and help fight climate change. Europe has already fallen victim to narrow application of net zero emission targets. For years, European policy makers postponed strategically important decisions to invest in diversifying natural gas supply, in large part because of misplaced climate concerns. For example, projects that would have brought pipeline natural gas from the Caspian to Europe were not sufficiently supported. In part because of this indecision, coal is making a strong comeback in Europe. In 2021 power generated from coal increased by about 20%. Generating electricity from unabated coal emits about twice the amount of carbon dioxide compared to conventional natural gas. European reliance on coal has intensified further in 2022, as the Russian invasion of Ukraine and its consequences uncloaked the pitfalls of having poorly diversified energy supply.

Europe has an immediate need to strengthen energy security by enhancing access to Caspian energy resources, in particular to diversify its natural gas supply. Natural gas can play an important role in enabling greater renewable energy deployment by offering a viable solution for balancing capacity to manage fluctuations in renewable energy supply. In addition to being an immediately deployable low-carbon alternative to coal, natural gas can be used in a way that has its emissions neutralized through carbon capture and storage, carbon offsets, or increasingly cost-competitive direct air carbon capture processes. Meaning that when a broader perspective is considered, use of natural gas can be fully compatible with EU’s 2050 net zero emission target.

The ugly

In the absence of scaled-up access to climate finance, net zero emission targets risk condemning socioeconomically vulnerable groups to poverty for longer. Net zero targets can lock-in more costly development trajectories and slow economic growth. In developing countries, especially where access to modern energy remains a challenge and poverty rates are high, access to scaled-up climate finance is critical to limit the adverse effects of more costly development.

However, even inflated estimates of climate finance, where systematic overestimation has been documented, confirm that developed countries have not provided the promised $100 billion per year. Realistic assessments suggest that less than half of the committed amount has materialized. There is an immediate need for developed countries to meet existing climate finance commitments. In the longer-term, further scaled-up access to climate finance will be critical for ensuring that the transition to net zero emissions does not slow the rate of poverty eradication and subdue economic growth in developing countries.

Developing countries with a significant proportion of population in poverty should not be faced with the choice of either taking climate mitigation action or reducing poverty. If faced with this choice, poorer countries are likely to pull out of climate protection programs, which may lead to a collapse of the global climate agenda.

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Implementing climate finance commitments in 2022 will make-or-break climate policy

Policy Pulse – 26 January 2022 – George Anjaparidze

Key messages:

• Implementing climate finance commitments in 2022 and scaling-up flows from developed to developing countries will make-or-break international climate policy

• For future mitigation plans to be more ambitious, current climate finance flows from developed to developing countries need to scale-up

• Making good on developed countries’ climate finance commitment of $100 billion has the potential to crowd-in an additional $600 billion in financing per year from other sources

Photo by Visual Stories || Micheile on Unsplash

The upbeat tone in our last year’s 2021 outlook on international climate policy proved to be justified. The UK COP 26 presidency delivered a successful outcome at last year’s annual UN Climate Conference as part of both formal negotiations and momentum building initiatives organized on the side-lines. Crucially, COP 26 also agreed on rules on how countries can cooperate across borders to achieve Paris Agreement goals (also known as Article 6 negotiations). Having Egypt as the COP 27 incoming presidency bodes well for the negotiations process in the year ahead. Egypt has the trust and confidence from a broad range of countries combined with very strong capacity and excellent knowledge of climate negotiations, especially on climate finance issues.

We expect the focus of international climate policy in 2022 to be on implementation. There will of course continue to be calls by some to focus on policy development, for example to scale-up mitigation pledges as the gap between individual actions and collective ambition persists. However, given that the exercise of updating Nationally Determined Commitments (NDCs) was just completed at COP 26, we think a focus on further scaling-up of individual mitigation plans in 2022 is not productive. Instead, the focus will need to shift to implementation of climate policies at the national level but also on implementation of existing international commitments. Particularly pressing is the need to achieve the existing target on climate finance flows from developed to developing countries.

Climate finance is essential for enabling greater climate action in developing countries. Developed countries did not meet their existing commitment to provide $100 billion in climate finance by 2020 to address the needs of developing countries in the context of meaningful mitigation actions and transparency. The climate finance gap is much larger than officially reported by OECD because of flawed accounting methods used for reporting climate finance. The shortfall in reaching the $100 billion target is about $67.4 billion, meaning that in 2019 only $32.6 billion of climate finance has supported developing countries.

The $32.6 billion figure includes climate finance provided for adaptation. If we remove adaptation specific finance but retain mitigation and cross-cutting support, we estimate that only $27.2 billion of climate finance was provided by developed countries in the context of meaningful mitigation actions and transparency. (Technical note: the $27.2 billion estimate is generated by subtracting the proportion of finance provided specifically for adaptation from total climate finance, the calculation is performed based on the ratio of adaptation specific finance in principal climate finance activities reported under the bilateral channel for 2019.)

As demonstrated in the chart below, the shortfall in the ambition of NDCs mirrors the shortfall in climate finance. The chart presents the status of communicated NDCs as reflected in the latest UNFCCC synthesis report from 17 September 2021. Some additional abatement measures were announced at COP 26 that are not reflected in the figures presented in the chart and it is important to note that the abatement target corresponds to both developed and developing countries. Nevertheless, the analysis presented in the chart captures well the correlation between globally planned emission reductions and delivered climate finance from developed to developing countries.

To have a realistic chance for the next round of updated NDCs to be significantly more ambitious, current climate finance flows need to scale-up. While new and more ambitious climate finance targets will also be necessary, there is an urgent need for developed countries to meet existing commitments and scale-up delivery of climate finance.

Climate finance is also critically important for meeting Sustainable Development Goal (SDG) 7 which aims to ensure access to affordable, reliable, sustainable, and modern energy for all. The overall additional financing required to meet SDG 7 is estimated at $1.3 trillion to $1.4 trillion per year, but current financing is approximately $514 billion. However, much of this gap could have been filled if developed countries had met their climate finance commitments. Making good on their climate finance commitment of $100 billion per year has the potential to crowd-in an additional $600 billion in financing per year from other sources, assuming leverage ratios of existing channels for climate finance. However, some mitigation actions will not fall within the scope of SDG 7, and hence, additional financing will be needed for SDG 7.

Below is a list of events in 2022 that could potentially serve as opportunities for developed countries to announce how they intend to follow through on their existing climate finance commitments:

• 2-3 June 2022: Stockholm, Sweden Stockholm+50 https://www.stockholm50.global

• 26-28 June 2022: Elmau Castle, Germany G7 Heads of State https://www.g7germany

• 30-31 October 2022: Bali, Indonesia, G20 Summit https://g20.org

• 7-18 November 2022: Sharm El-Sheikh, Egypt UNFCCC COP 27 https://unfccc.int

Other key policy trends to watch in 2022:

• Carbon pricing initiatives are likely to continue to gain momentum in 2022. The best mechanisms will create fiscal space, support the post-pandemic recovery while simultaneously set long-term development incentives in a climate conscious way.

• Private sector financiers are increasingly mainstreaming climate change related considerations into business decision making. There is growing evidence that corporations that have adopted more environmentally conscious practices (particularly as it relates to corporate reporting) have been able to command a higher price for their stocks. Key developments to watch in 2022 relate to the regulatory interventions and voluntary actions that may be taken to make it attractive for capital providers to support climate friendly investments at sufficient scale.

• The EU proposed Carbon Border Adjustment Mechanism targets heavy industry importers and will continue to be a focus of attention in 2022. Sectoral approaches can play an important role in scaling-up climate action. However, appropriate representation of stakeholders from industry and government is critical for ensuring schemes have the needed buy-in and impact. In 2022, it will be important to see whether the World Trade Organization could potentially create the space for deliberation on sectoral initiatives, for example those launched through bilateral and plurilateral approaches, to feed back into the multilateral system.

• Due to travel restriction linked with the pandemic, the aviation industry had another difficult year in 2021. The year ahead is also filled with uncertainty. Despite the challenging business conditions, in 2021 the airline industry continued to show climate leadership by committing to net-zero CO2 emissions by 2050. For the target to be operationalized it will require development of a global scheme through building on the existing Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Moving from an existing net-carbon neutral growth target to a net-zero carbon emissions target will require technical recalibration of the scheme design, some of these aspects are highlighted in the concluding section of the Policy Brief from the Harvard Project on Climate Agreement. If the sector starts to recover to its pre-pandemic levels in 2022, it will become a target for environment taxes and climate change related restrictions. Therefore, elaborating on how the sector will operationalize its new climate targets is likely to become increasingly urgent.

• Important elements will also advance in 2022 under the UNFCCC, both through the inter-governmental process and the work program of the secretariat. In the context of the inter-governmental process the ministerial dialogue on climate finance, workshop of on loss and damage and activities related to fully operationalizing Article 6 will be some of the key developments to monitor in the year ahead. The work coordinated by the secretariat also promises to support greater transparency on how the convention is implemented.

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Unprecedented opportunity for climate policy in 2021

Policy Pulse - George Anjaparidze - 14 January 2021

2021 promises to be a defining year for international climate policy. There is an opportunity to build on the positive momentum from the 2020 Climate Ambition Summit and accelerate the transition to a climate conscious economy.

Positive momentum in 2020

In 2020, COVID-19 impacts on mobility and economic activity led to the largest annual drop in greenhouse gas emissions, which contracted by about 5%. Despite the drop in emissions, concentration of greenhouse gases in the atmosphere continued to rise, in terms of CO2 equivalents, we estimate an annual increase of about 0.7%. In absolute terms, the rise in atmospheric concentration in 2020 will be among the ten largest annual increases on record.

The disparity in growth profiles in 2020, between emissions and concentrations, is because the two measures are different. Emissions can largely be thought of as a flow measure, meaning it quantifies the amount of greenhouse gases released each year. Concentrations can largely be thought of as a stock measure, meaning it quantifies the accumulation of greenhouse gases in the atmosphere.[1] While there is a linkage between the two measures, they are fundamentally different.

In the context of climate change, it is the atmospheric concentration of greenhouse gases that is the more important measure as the flow of emissions in any one particular year has a relatively small aggregate influence on the planet’s climate system. In recognition of this dynamic, more governments in 2020 announced plans to align their long-term targets with stabilization of greenhouse gases in the atmosphere to levels more consistent with temperature goals of the Paris Agreement. In addition to announcements from western European states, other major economies, including Argentina, Brazil, China, Japan and South Korea, also communicated mid-century carbon neutrality targets. In the United States, the incoming Biden administration was elected on a platform of achieving net zero emissions by 2050. A win for Biden is a win for climate, with immediate implications for international climate policy.

2021 could be breakthrough year for climate policy

A breakthrough year does not mean that there has to be a new climate treaty. Strengthening the existing international climate policy architecture and identifying a clear pathway to scaling-up actions within it, can potentially have a bigger positive impact.

There are three champions, or sources of optimism, for achieving progress on international climate policy in the year ahead:

• The UN Secretary General, António Guterres, has demonstrated a strong commitment to the climate issue and will help ensure it remains a top priority in international fora.

• The incoming presidency – the United Kingdom – of the Conference of the Parties of the United Nations Convention on Climate Change (UNFCCC) has a well-resourced team and detailed consultation schedule for the year ahead. The postponement of the conference from November 2020 to November 2021 may prove to be a blessing in disguise. Furthermore, the UK political leadership may be willing to expand a significant amount of political capital internationally to ensure the conference is a major success, as it could help demonstrate UK’s relevance on the global stage in a post-Brexit world.

• Changing global public sentiment has led to increased pressure for action as climate change and environmental issues are emerging as top priorities of public concern. A survey by the UN of more than 1.5 million people in 195 countries found that, across all regions, climate change and environmental issues was identified as the number one long-term global challenge.

On the policy front, there are three key developments in 2021 that have potential to be transformational for international climate policy.

1. Climate finance could get back on track

2020 was planned to be the year when climate finance flows were supposed to reach $100 billion per year from developed to developing countries. Instead, developing countries experienced the largest absolute capital outflows recorded in recent history. One of the challenges in assessing performance against the climate finance target is that governments have not agreed on how to count climate finance flows. Our assessment, carried out prior to COVID-19, analyzed performance on the basis of net finance flows and concluded that while there was increase in finance flows there was also a significant shortfall in reaching the $100 billion per year target. An independent expert group, assembled by the UN, also concluded that the $100 billion target was not reached in 2020.

At the political negotiations level, meeting climate finance targets are important for sustaining an environment of trust. At the implementation level, climate finance flows support scaling-up of climate action. The incoming presidency of the next UNFCCC conference has identified priorities for climate finance related issues in the year ahead, which offer a good starting point for relaunching the climate finance discussions. A key challenge facing the presidency will be to prioritize the agenda.

At the end of the day, finance is about restoring trust. To do this, there needs to be a recognition that the $100 billion per year target was not achieved. The point of that would not be to lay blame but rather to encourage countries to bridge the shortfall in climate finance in a way that leaves no doubt about future climate finance flows. Crucially, climate finance pledges need to be scaled-up and mechanisms may need to be put in place to make the flows more predictable. Achieving all of these goals in 2021 may not be realistic, but countries could start by announcing significant increases in public finance contributions to multilateral institutions such as the Green Climate Fund. In addition, setting a clear pathway for scaling-up finance flows and making them more predictable will greatly help forge a conducive environment for all countries to contribute to raising the level of ambition for climate action.

2. Raising ambition of climate action

It is now unequivocally clear that the measures communicated by governments through their nationally determined contributions under Paris Agreement are not enough to achieve their collective ambition, which is to limit the rise of average global temperatures to within 1.5°C to 2°C. Instead, the planned climate actions would put the world on an emission trajectory consistent with about a 3°C warming.

There are reasons to be cautiously optimist that the momentum from the 2020 Climate Ambition Summit will carry forward into 2021 and more economies will target carbon neutrality by mid-century. There is a real opportunity for 2021 to be the year that sets the mid-century vision for the global economy (at least in terms of greenhouse gas emissions). However, in addition to long-term targets, policies need to provide clarity over how short- and medium-term measures will set the emission trajectory on a desired path. Otherwise, there is a risk of “baking in” undesired levels of warming that eventually lead to missing the Paris Agreement temperature goals.

3. Clear rules for international collaboration under the Paris Agreement

The last two UNFCCC annual climate conferences have not been able to agree on clear rules for international cooperation on mitigating climate change. Having said that, there is already scope for countries to pursue bilateral cooperation, however, not having multilaterally agreed rules still poses an impediment. Perhaps the biggest shortcoming is a lack of a centrally agreed mechanism. If negotiators fail to agree again, it will significantly undermine confidence in the ability of the UNFCCC negotiations to deliver. This pressure could serve as a motivation for negotiators to try harder to converge on a solution. But in itself, this reputational pressure, is unlikely to be sufficient. Greater political leadership is need to champion resolution on securing clear rules for international collaboration.

The lack of a multilaterally agreed mechanism for promoting international cooperation on mitigation has resulted in the development of instruments outside the scope of the Paris framework. If negotiators want to avoid diluting the Paris framework, they should do more to develop solutions within it. For example, the aviation sector was left with no choice but to identify other carbon offsetting mechanisms for meeting future offset demand under its Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Plans to source offsets from outside the Paris Agreement framework has led to a perception, among some, that the aviation sector will not adequately contribute to achieving the Paris Agreement goals of keeping global temperature rise to within 1.5°C to 2°C. In Europe, this perception has increased the pressure to introduce other more costly measures targeting the aviation sector.

Other key policy trends to watch in 2021:

• The COVID-19 pandemic has led to the deployment of large fiscal support, with the recovery phase expected to have even greater resources mobilized. A key focus of policy makers and development partners will be to identify ways that climate friendly policies can be deployed to support a green recovery.

• Global debt levels have risen sharply and reached all-time highs. According to the International Monetary Fund, global public debt stood at 83% of GDP in 2019 and is estimated to have made an unprecedented jump to about 100% of GDP in 2020. OECD countries and official finance providers (such as China) may have different perspectives on how borrowers should manage the debt burden and in application of conditions associated with new financing arrangements. Differences in approach could be a source of tension between finance providers, which may spill over unfavorably into climate negotiations and could also potentially impact the overall financing environment.

• The aviation industry is currently the only sector with a global cap on net CO2 emissions. However, the targets adopted under the CORSIA scheme are not in-line with an emission trajectory that would be consistent with Paris Agreement temperature goals. Some airlines have adopted more ambitious individual targets. However, in order for climate action to be financially sustainable, especially in the medium and long term, action at the industry level is essential. Coherent and ambitious industry level action can help the sector avoid being subject to a patchwork of more costly measures and prevent creating competitive distortions.

• An initiative to impose a carbon boarder adjustment mechanism is being considered by the EU. A conceptually similar approach was used with some success in motivating greater climate action for managing international aviation emissions. While a carbon boarder adjustment mechanism is unlikely to be implemented in 2021, developments during the year will shed more light on the extent to which such an initiative can become part of the EU climate policy tool kit for incentivizing greater international climate action.

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[1] The established practice is to quantify atmospheric concentrations through direct measurement. Estimating concentration requires one to take into account a number of complex natural phenomena such as the planet’s absorptive capacity, decay rate of exiting stock of greenhouse gases as well as several other complex interactions in the earth system.

About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics andinfrastructure.