The 27th Conference of the Parties of the United Nations Framework Convention on Climate Change (COP27) has opened in Sharm El-Sheikh, Egypt, against a global backdrop of massive hikes in energy prices, inflation, increases in interest rates and uncertainty about the robustness of the implementation of the ESG regulatory agenda (particularly in the US). In 2022, heat waves in Europe killed more than 15,000 people and nearly 1,700 died as a result of flooding in Pakistan. Hurricane Ian caused widespread devastation. A recent report by economist Nicholas Stern stated that $2 trillion (£1.75 trillion) per year will be needed by 2030 to help developing countries cut their greenhouse gas emissions and cope with the effects of climate breakdown —switching away from fossil fuels, investing in renewable energy and other low-carbon technology, and coping with the impacts of extreme weather.

With existing commitments to climate finance yet to be met and national policies not yet consistent with the objective of limiting global temperature increases to 1.5 degrees Celsius, this year’s COP has its work cut out. What can realistically be hoped for as outcomes of COP27?

Loss and damage

This has long been a contentious area for climate negotiations. It was an issue highlighted yesterday by the prime minister of Barbados, who stated that developing countries “were the ones whose blood, sweat and tears financed the industrial revolution … Are we now to face double jeopardy by having to pay the cost as a result of those greenhouse gases from the industrial revolution? That is fundamentally unfair.” 

The UN Framework Convention on Climate Change (UNFCCC) defines “loss and damage” as “the actual and/or potential manifestation of impacts associated with climate change in developing countries that negatively affect human and natural systems.” The need to address loss and damage has been reflected in the negotiations for some time. The Paris Agreement (at Article 8) itself provides:

Parties recognize the importance of averting, minimizing and addressing loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events, and the role of sustainable development in reducing the risk of loss and damage… Accordingly, areas of cooperation and facilitation to enhance understanding, action and support may include: (a) Early warning systems; (b) Emergency preparedness; (c) Slow onset events; (d) Events that may involve irreversible and permanent loss and damage; (e) Comprehensive risk assessment and management; (f) Risk insurance facilities, climate risk pooling and other insurance solutions; (g) Non-economic losses; (h) Resilience of communities, livelihoods and ecosystems.

Developed countries have long argued against “reparations” for climate damage and have skirted around accepting liability for the consequences of past emissions. However, many developing countries are pushing for the creation of some kind of loss and damage finance facility. Addressing loss and damage more fully is likely to be a key test for the “success” of the outcome of COP27, in the same way that enhanced climate ambition was seen as a test for the outcome of COP26 last year. Former UK Prime Minister, Boris Johnson, has already suggested that the UK “simply doesn’t have the financial resource”. This begs the question, who does?

Market mechanisms

Although many important matters were resolved at COP26, there remain a number of important steps that need to be taken to fully operationalise market mechanisms under the Paris Agreement. This year the focus is likely to be on the rules applicable to the use of Internationally Transferred Mitigation Outcomes (ITMOs) in order (broadly speaking) for parties to the Paris Agreement to trade/transfer emissions reductions.

Voluntary markets

The Integrity Council for Voluntary Carbon Markets (ICVCM) has been working on how to improve the quality of voluntary carbon credits and the voluntary carbon market overall, to which so many are turning in order to help achieve climate neutrality. Though ICVCM’s work will sit alongside that of the COP27 discussions, we hope that the work of voluntary carbon markets is facilitated by the COP27 negotiations. In particular, it would be helpful for there to be more clarity on whether “corresponding adjustments” will be mandatory and whether the principle will be applied to voluntary credits. Corresponding adjustments are the mechanism to ensure that any carbon unit “exported” from the country where it was generated is only counted by the buyer of that unit rather than being “double counted.” 

In an important, parallel move, US climate envoy John Kerry is trying to garner support to develop a new framework for carbon credits whereby regional governments or state bodies would earn these credits by reducing their power sector’s emissions. The credits would be certified. Companies would then be able to sell these credits, which would generate money for investment in low-carbon energy projects.

Although similar structures have been in place for many years now, important matters to be determined include to what extent participation in the initiative is voluntary, how the number of credits that can be generated would be determined, and how this mechanism would interact with existing cap and trade mechanisms that apply to the power sector. As ever, it will be important to ensure that any credits are “additional”/require reductions to go beyond “business as usual.”

Strong competition

For some time, a characteristic of COPs has been the announcement of significant private sector initiatives to reduce emissions, change investment strategies, etc. One such initiative is the Glasgow Financial Alliance for Net Zero (GFANZ). Alliance members include more than 550 firms belonging to seven sector-specific net-zero alliances from across the global financial sector. They include banks, insurers, asset owners, asset managers, financial service providers, and investment consultants. All members have independently committed to the goal of net zero by 2050 in addition to setting interim targets for 2030 or earlier and reporting transparently on progress along the way. However, a United Nations initiative mandates the phasing out of fossil fuels. Under the Race to Zero UN initiative, organisations taking part must commit to a minimum pledge to halve carbon emissions by 2030 and reach zero by 2050. The recent GFANZ announcement was made on the basis of antitrust (competition law) concerns. We expect competition law to be invoked more broadly by a variety of stakeholders over the coming year in the context of climate and broader ESG regulation, similarly to how fiduciary duties have been central to the discussion about requirements in respect of ESG investing.