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Policy Pulse

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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.

 
 
 

Policy Pulse - George Anjaparidze - 2 April 2020

Governments plan to inject over $5 trillion into the global economy to counteract the social, economic and financial impacts of the coronavirus pandemic. This intervention is on an unprecedented scale.

In the United States, actions through the CARES Act represent a stimulus package of about $2.2 trillion, which amounts to over 10% of US GDP, multiples larger than the US government stimulus during the Global Financial Crisis. As part of this package, the US aviation sector is expected to receive a combination of grants and potential loans of about $60 billion.

Other countries have also enacted specific relief measures with targeted support for aviation. Singapore announced S$750 million in support of aviation, as have others, including Australia, China, Colombia, New Zealand, and Norway. As the impacts of COVID-19 rise, the list of governments channeling direct financial support is likely to grow.

Airline pleas for public finance have been echoed by efforts to link rescue packages to climate targets. In the US, eight Senate Democrats wanted to impose carbon emission requirements on companies benefiting from the rescue package. While this is an interesting idea, imposing company specific requirements is not appropriate in aviation when dealing with the climate challenge. An industry-wide approach is essential for ensuring financial sustainability of climate action.

In general, the airline industry is highly competitive. If one airline has a higher cost structure, all else equal, it will not be able to effectively compete against rivals. Therefore, imposing requirements that result in additional costs for an individual airline, will likely lead to financial ruin. Due to the competitive pressures from its rivals, the airline will struggle to pass on the higher cost to consumers and instead be forced to operate with a lower profit margin, which will eventual likely lead to market exit.[i]

In contrast, if the increase in cost is industry-wide, there will be no adverse impact on operating profit margin per passenger. If airlines are informed well in advance of the introduction of a policy change, they will be able to incorporate this consideration into their fleet planning and capacity deployment practices. For example, the airline industry could adopt the Delta Air Lines target of going fully net carbon neutral but with implementation starting in 2025. As illustrated in Table 1 and Table 2 below, this will not adversely impact operating profit margin per passenger. There will, however, be a small negative impact on air travel demand.

If industry fails to further scale-up global climate action, it will face a backlash of unprecedented proportions. Even before the outbreak of COVID-19, a paradigm shift in consumer sentiment could be observed. As government bailouts come under public scrutiny, there will be renewed pressure to take climate action against aviation.


A wave of new green taxes, operating restrictions and other local and national initiatives will again threaten to impose a patchwork of overlapping environmental measures on the sector. A proactive industry-wide approach to scaling-up climate action, can put at bay environmental activists without compromising financial sustainability.

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[i] Airline specific price elasticity is widely recognized to be more sensitive to changes in price compared to market level elasticities as well as national, supra-national and global elasticities. Market level (also referred to as route level) elasticities are those where price changes impact all carriers serving a route. As evidenced by the IATA Air Travel Demand study, market level price elasticities range between -1.3 and -2 within and across major aviation regions of Asia, Europe, North America and South America. The airline specific price elasticities are considerably higher compared to market level price elasticities. Meaning that if an airline tried to pass on the higher carrier specific costs, it would lead to a significant drop in passengers.


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.


 
 
 

Policy Pulse - George Anjaparidze - 25 March 2020

As of March 24th COVID-19 has killed over 16 thousand people and brought the global economy to a crawl. Aviation has been one of the worst hit sectors. IATA`s latest forecast, published on March 24, expects airlines to see a 38% fall in passenger demand in 2020 compared to 2019. As a result, aviation CO2 emissions will experience the largest annual decrease in recent history.


2020 is a special year in the context of the climate agreement on international aviation - the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The scheme is designed to use the average of 2019 and 2020 CO2 emissions to determine the level (baseline) above which the airline industry needs to offset emissions. A lower baseline implies a larger offset responsibility in the future.


Industry advocacy efforts have been exceptionally successful in securing positive outcomes in dealing with the COVID-19 crisis. Airlines have secured suspension of airport slot rules, special treatment for air cargo operations and direct financial support from governments. Therefore, if deemed an industry priority, airlines would likely also succeed in introducing adjustments to the baseline under the CORSIA scheme. However, there is more at stake for airlines than minimizing their offsetting liability. There is an urgent need to strengthen the sustainability credentials of the sector.


Before the outbreak of coronavirus, surveys suggested that 2020 would usher in a paradigm shift in consumer sentiment. Across all geographic regions majority of survey participants expressed their intention to fly less for holidays to fight climate change.


In recognition of these threats, some airlines took action. Perhaps most notably on 14 February 2020, Delta Air Lines announced a commitment to go completely carbon neutral starting from March 2020. This kind of bold leadership should be admired. However, an airline by airline approach will not change consumer perceptions on flying nor will it deliver the level of action needed to address the climate challenge.


Sustaining growth after the coronavirus requires an immediate scale up in industry-wide action to strengthen sustainability credentials.


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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.




 
 
 
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