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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Catalyzing Stakeholder Action for Affordable and Clean Energy for All

Policy Pulse - 24 May 2021 - Kapil Narula and George Anjaparidze

This article was first published on 13 May 2021 by Development Asia under the title Catalyzing Stakeholder Action to Achieve Affordable and Clean Energy for All. Development Asia is the Asian Development Bank's knowledge collaboration platform for sharing development experience and expertise, best practices, and technologies relevant to the Sustainable Development Goals.

Introduction

Sustainable energy is key to economic development and a better quality of life. Goal 7 of the Sustainable Development Goals (SDGs), which is to ensure access to affordable and clean energy, and its five targets are critical for meeting the SDGs by 2030.

Despite multiple efforts at the international level, about 800 million people still do not have access to electricity, while 2.8 billion do not have access to clean cooking (2018). Energy efficiency improved by 1.7% but lags behind the 3% target, and the share of renewables in the global energy mix is only 17% (2018) and needs to increase substantially to meet long-term climate goals. Hence, consistent effort for scaling up action is essential.

Challenges

Many countries have adopted a cautious approach, prioritizing economic growth over aggressive action toward SDG 7. Low-income countries however simply do not have the natural, human, and financial resources to undertake the transition to clean energy on their own. National action plans look good on paper but are fragmented, and there is lack of accountability. Actions are often uncoordinated, inadequate to fulfil commitments, not backed by a legal framework, and lack citizen engagement.

International cooperation on clean energy, which is restricted by technology transfer issues, is proving to be challenging. Development of clean energy infrastructure in several low- and middle-income countries continues to be plagued by lack of finance and technology. There has been a further setback because of the coronavirus disease (COVID-19) pandemic as governments turn their attention to more pressing public health issues.

Global Momentum for Action

In 2012, the United Nations (UN) declared 2014–2024 as the Decade of Sustainable Energy for All. In 2018, 46 countries presented their progress by undertaking voluntary reviews at the High-Level Political Forum (HLPF) on Sustainable Development. In 2019, a mid-point review was undertaken for accelerating SDG 7, which was informed by various policy briefs. Key outcomes pointed to the need for catalytic actions that address interlinkages between energy and inequality and for strengthening cooperation. Recommendations included strong political commitment in the form of updated nationally determined contributions (NDCs), stepping up private financing and fiscal incentives, use of innovative tracking instruments, such as a multi-tier framework (MTF) for energy access and digitalization.

To further accelerate action on SDG 7, the UN General Assembly resolved to hold a high-level dialogue on energy in September 2021. This is the second time such an event is being convened after 1981, which signifies the importance of SDG 7. It is structured around three main themes: “energy access, energy transition, and enabling SDGs through inclusive, just energy transitions,” and supported by "innovation, technology and data," and "finance and investment" as cross-cutting themes. Within these themes, issues, such as access to clean energy services, energy system decarbonization, inclusive transition, application of big data and digitalization, research and capacity building measures, integrated energy policy making, regulation, mobilizing finance, fossil fuel subsidy reforms, climate proofing investments, risk management, and multi-sectoral interventions, will be addressed.

The preparatory process has started to prepare a global roadmap for scaling up efforts and developing concrete actions. This consists of three main initiatives: ministerial-level thematic forums, technical working groups and a stakeholder e-consultation process. For each theme, five to 10 countries act as global champions and are represented at the ministerial level. Thirty to 50 technical experts were identified for each of the five themes and have co-leads from multilateral development agencies. The groups have prepared annotated outlines that identify several gaps in their initial meetings and will hold cross-cutting discussions. They will present a final thematic report containing substantive recommendations to the ministerial thematic forum in June 2021. To mobilize citizen engagement and participation, stakeholders were invited to provide technical inputs, recommendations, and actionable examples. An inter-agency report will also be prepared as substantive background for the high-level dialogue.

The Need for Voluntary Stakeholder Action

Although national governments are the primary actors with the responsibility of setting the targets and providing an ecosystem for a clean energy transition, other stakeholders must contribute to the effort by undertaking voluntary actions. Sub-national actors, such as states, cities, and municipalities, must commit to take decentralized action, depending on their capabilities. Many cities have formulated a sustainable climate and energy action plan under the European Union Covenant of Mayors, and such efforts need to be globalized. Private businesses also need to contribute by undertaking commitments, such as participating in the UN Global Compact, a voluntary sustainability grouping of more than 12,000 companies. Lastly, citizens need to personally commit to a sustainable environmental footprint as behavioral changes supported by technology are essential for long-term changes.

There are several factors driving voluntary actions in the private sector. There is the realization that clean energy is the way ahead and makes business sense. Businesses earn mileage from projecting a green image, which can boost share prices. Shareholders also demand improved environmental, social, and governance (ESG) performance. These drivers are behind the steady increase in the volume of voluntary carbon markets.

Voluntary action by companies to purchase clean energy results is a market pull factor resulting in increased investment for renewable electricity production. For example, Google, which pledges to become carbon-free 24/7 by 2030, is financing the construction of new wind and solar plants and energy storage solutions so it can procure clean electricity from a nearby grid.

To step up voluntary actions, Energy Compacts are being formed as part of the UN high-level dialogue to get complementary commitments and amplify additional actions, key outcomes, implementation timelines, and tracking frameworks toward achieving SDG 7. Introductory and deep-dive workshops from April to June 2021 facilitate knowledge exchange and encourage member states, cities, businesses and citizen groups to register their voluntary commitments. Self-reporting is planned, and a web-based tool will be used to showcase the efforts of signatories.

Filling the Financing Gap

The overall financing requirement 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 ($800 billion) could have been filled if developed countries had met their commitments to mobilize $100 billion in climate finance annually by 2020 to cover the needs of developing countries under the Paris Agreement. This target for 2020 has been extended up to 2025. In the meantime, the annual shortfall is estimated at $67.1 billion.

Making good on this commitment has the potential to crowd in $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.

One way is to channel pension funds to finance renewable energy projects as in the case of the Government Pension Fund Global of Norway, which has $1 trillion in assets. It divested $8 billion from oil and gas companies and is investing $5 billion in renewables. Removing consumer and producer fossil fuel subsidies, estimated at $500 billion globally (2017), can also bring fresh funds for clean energy access. Such actions are particularly important at an early stage while oversight provisions on aligning finance flows with climate goals are still being developed.

Revenues from carbon credits can support SDG 7 by aligning incentives for deploying clean energy. A well-functioning international carbon market can also ensure that opportunities are pursued where they are most cost-effective.

Private and public finance hold the key for catalyzing action, and innovative low-interest financing models for clean energy entrepreneurs need to be developed.

Meanwhile, other voluntary actions for accelerating SDG 7 include peer-to-peer trading of decentralized electricity generated from rooftop solar PV, self-generation by industries, and producing electricity from biomass.

For the more challenging SDG 7 target of universal access to clean cooking, sustainable solutions include smart solar PV or hydropowered microgrids using electric induction cooking and biogas for clean cooking, and integrated business models that sell both cookstoves and clean fuel. These ensure recurring revenue streams for companies and make clean fuel easily available to customers. “Pay as you go” financing models, micro lending, and community participation have also proven to be successful for de-risking investment.

Conclusion

Global momentum on energy action is building up as part of the UN high-level dialogue on energy. Apart from governments, it is important that businesses, communities, and individuals contribute to this effort. Energy compacts offer stakeholders an opportunity to participate in effecting widespread change. Financing remains key to achieving SDG 7 by 2030 and needs to be mobilized at scale.

Resources

A. Bhattacharya et al. 2020. Delivering on the $100 Billion Climate Finance Commitment and Transforming Climate Finance. The Independent Expert Group on Climate Finance.

United Nations. 2019. Accelerating SDG 7 Achievement. Policy Briefs.

United Nations. High-Level Dialogue on Energy 2021.

George Anjaparidze is managing partner of Veritas Global, a company in Geneva, Switzerland that provides economics and strategy advisory services worldwide with expertise in climate change, infrastructure and international development.

Kapil Narula is a senior researcher at the University of Geneva, Switzerland. He holds a PhD in Development Studies with a focus on energy, economics, sustainability, and policy. He has more than 18 years of work experience in the government, industry, academics and research.