Last week, global leaders in Dubai wrapped up COP28, the 28th iteration of the U.N.’s climate change conference. Set against a backdrop of increased geopolitical discord and what is shaping up to be the hottest year in recorded history, participants emerged with new plans and responses to the climate problem’s thorniest issues. However, the summit’s headline takeaway – an agreement that for the first time calls for member states to begin “transitioning away” from fossil fuels – is not exactly what it seems, and other developments will require a “wait-and-see” approach. Nonetheless, continued government buy-in to renewable technology and a climate transition signals the long-term direction of global leaders and markets.
The new climate deal that emerged from COP28 – part of the summit’s Global Stocktake, a document planned for 15 years after the landmark Paris Agreement to track progress and set out new goals – has garnered headlines around the world. The key development for many is the historic inclusion of language that signals an agreement to move away from traditional energy sources and towards emission-free renewable technology; specifically, the document calls for “transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science.” While falling short of calling for the more forceful “phase-down” that climate activists prefer, the document nonetheless is the first U.N. climate agreement that has directly called for movement away from reliance on fossil fuels.
Another major takeaway from the summit was the long-awaited agreement to adopt a loss and damage fund to compensate low-income, hard-hit countries for damages from climate change and related extreme weather events, such as the historic flooding in Pakistan last year that was estimated to have caused $40 billion in damage and lost productivity. The fund has been a long-standing demand of low-income and less-developed countries, who posit that the developed, mostly Western countries that have contributed the most to climate change are often less impacted by its ill effects. The fund was preliminarily agreed to at last year’s COP in Egypt, but final implementation snagged on geopolitical complications: The U.S. and other developed countries refused to contribute to the fund if China, which often negotiates with developing countries at the U.N. and classifies itself as a developing country at the World Trade Organization, stood to benefit from disbursements, and there were disagreements about where to house the fund, who should contribute, and how the funds should be structured.
Beyond these headline issues, participating countries and businesses made several new agreements and promises, including the following:
- Participating countries committed to tripling the world’s renewable energy capacity and doubling the rate of energy efficiency improvements by 2030.
- The UAE established the Oil and Gas Decarbonization Charter as part of its overarching Global Decarbonization Accelerator (GDA); the charter prompts oil and gas companies to sign a voluntary, nonbinding agreement pledging to reach net-zero emissions (scope 1 and 2) by 2050, as well as eliminate routine flaring and reach “near-zero” methane emissions by 2030. The charter has already been signed by over 40 international oil companies, including major national oil companies.
- More than 20 countries, including the U.S., the UK, much of the EU, and the UAE, signed the Declaration to Triple Nuclear Energy, pledging to cooperate to triple nuclear energy capacity by 2050 and inviting international financial institutions to include nuclear energy in energy lending policies.
- Participating countries and businesses pledged $12.8 billion ($3 billion of which came from the U.S.) in new capital to the Green Climate Fund, which is earmarked to assist developing countries in adaptation and mitigation practices. The $12.8 billion nonetheless falls short of matching the fund’s lofty goal of $100 billion for adaptation practices every year, which expires in 2025 and has a financing shortfall of as much as $366 billion over its lifetime.
Room for Interpretation
Despite landmark agreements heralding significant progress, stakeholders on all sides remain dissatisfied with several elements of the agreements and statements produced at COP28. The Global Stocktake statement calling for “transitioning away” from traditional energy sources has drawn the most attention, both good and bad: The statement represents a compromise with oil-producing nations that reportedly vetoed the word “phase-down,” and activists and small island nations, which have called the phrasing “disappointing.” Those opposed to the “transition away” phrasing criticize it as not urgent enough, as well as taking issue with the use of the phrase “unabated fossil fuels” throughout COP28 documents, which they argue signal the intention of the UAE and other high-income nations to continue producing emissions at a similar rate while investing in carbon-offsetting technology, like carbon capture and storage, which climate activists see as a loophole.
The reception of the loss and damage fund is also mixed. Observers will have to wait and see about the final structure of the loss and damage fund, as well. Many of the issues that hampered the fund’s adoption over the last several years remain; for example, while the fund will start out with $700 million in voluntary donations from high-income countries such as the U.S., the EU, the UK, and Japan, the fund currently has no formal replenishment cycle, suggested donation, or criteria for which countries can receive payments. At COP28, signees established that the fund would be housed under the World Bank and administered by a body of 26 people (14 from developing countries and 12 from developed ones), who will make judgments about disbursements, presumably on a case-by-case basis. For observers and needy countries, the fund’s usefulness and accessibility will have to be proven.
The Year Ahead for Climate
Ambiguities aside, this year’s historic COP will have ripple effects for the climate, global and domestic politics, and global markets. Activists have been mostly critical of the scope and scale of outcomes achieved at the summit. Despite a goal to cap warming at 1.5 degrees Celsius over pre-industrial levels serving as a North Star for negotiations in this and past COPs, scientists assess that this goal now exists only on paper. While rapid advancements in renewable technology have improved the outlook for warming somewhat – International Energy Agency scientists now predict 2.4 degrees Celsius warming by 2100, rather than a “truly catastrophic” 3.5 degrees Celsius – the agreements secured in Dubai are assessed to not be enough to meaningfully alter the course of global climate change. On the other hand, pledges made at COP28 to increase renewables investment, cut methane emissions, and increase energy efficiency could account for a global reduction in energy-related greenhouse gas emissions of about four gigatons of CO2 equivalent by 2030.
Perhaps the most important takeaway for global business – beyond any concrete policy changes – is that the global community continues to signal the importance of changing the global energy mix and of climate change adaptation more broadly. Output from the summit contains precious few binding agreements for nations to change their behavior, but it demonstrates buy-in from most of the world’s leaders to take steps toward an energy transition (however qualified that may be). While the U.S. has signed virtually zero pledges that actually will compel policy changes at the domestic level, contributions and rhetoric at the meeting signal that the Biden administration will continue down its current path of increasing renewables investment, including by furthering policies that promote electric vehicle (EV) and solar power adoption, government investment in alternative energies, and building a domestic manufacturing base for green technologies. At the same time, the market itself is investing at historic levels in renewables and other clean tech; a database launched by climate research firm Rhodium Group found that investment in green technologies tripled in the last five years, with annual investment by companies in all sectors reaching $213 billion in June. That said, a change in the political landscape in the U.S. could disrupt government initiatives and market sentiment to an extent: If a Republican candidate wins the upcoming presidential election, many of the Biden administration’s regulatory green tech incentives risk reversal, and the U.S. could once again exit the Paris Agreement. Even if this dampens market sentiment, however, much investment will already continue, as global momentum towards green tech builds.