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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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