What we expect from COP28 in Dubai

COP28 will see the conclusion of the first global stocktake, designed to itemize what countries are doing (or failing to do) to realise the Paris Agreement commitments.

The European Union (EU) bloc has outlined the importance of ‘scaling up climate ambition to keep the 1.5C objective within reach’ in its position ahead of the negotiations – a notion shared with other negotiation blocs, and aligned with the 2015 Paris Agreement goals.

However, the first stocktake report (released on Sept 6^th) concluded that the global emissions trajectory is far off the 1.5C target, with current commitments by governments – expressed in their Nationally Determined Contributions (NDCs) – tracking for about 2.4C of warming. This tension, between wanting global ambition but not wanting to materially change national contributions, could be seen in the EU’s pre-COP28 meeting, where Poland, Hungary and Italy were among the nations to block updating the EU’s climate pledge.

One potentially useful outcome from the stocktake from an investor point of view would be a push for more detail in country NDCs on transition pathways. Whilst the talk about new global goals such as tripling renewable energy capacity and doubling the rate of energy efficiency improvement is worthy, such high-level targets are uninvestable without more clarity. If NDCs included more detail on sectoral pathways, this would help investors to see whether, and how, such aspirational goals are translating into reality.

Our prediction: Whilst there will remain a huge gap to the 1.5 degree target, greater clarity on national commitments could at least help investors judge the credibility of country transition strategies.   

The most celebrated outcome from CO27 in Egypt was the establishment of a “loss and damage” fund, intended to provide direct financial assistance for vulnerable nations. However, the question of where the money would come from remained open as the gavel went down in 2022.

A committee has been trying to iron out how the fund would operate but has struggled to find agreement. Some initial agreements were made in the November pre-negotiations in Abu Dhabi. Despite developing countries having strongly pushed back on the US proposals that the World Bank should manage the fund, it was agreed that the World Bank will first administer the fund, but that this will be on a temporary basis. This blueprint must now be formally adopted at COP28.

Still, much remains undecided, and a lot of work is left for the negotiating table in Dubai. The stakes are high – if loss and damage talks stall it could derail the whole conference. 

The US and EU have been keen to ensure that wealthy and high-polluting nations like Saudi Arabia and China are also on the hook to contribute. There are also major divisions over which countries would be prioritised for funding, if the fund should be voluntary in nature, how the fund’s budget will be split between different priorities, and whether the funding would be dispersed as grants or loans. In the November pre-negotiations, the US pushed back on any suggestions that developed countries will have an obligation to pay, instead advocating for it to be voluntary.  

Our prediction: There may be some minor progress, but we do not expect that a new loss and damage funding function will be fully agreed.

A UN carbon market could theoretically be a highly cost-effective mechanism that could halve the cost of meeting countries’ climate targets, saving them $250 billion by 2030. COP27 made some limited progress on creating the rulebook and governance frameworks for global carbon markets. However, most of the thorniest issues were deferred to COP28, like how to treat emissions “removals”, whether to allow credits for “emissions avoidance” and when credits could be “revoked”.

In the build-up to COP28, the hottest area of carbon markets debate has been around whether biological and/or engineered carbon removals should be permitted. The UN Supervisory Body has generally been bullish on biological removal (e.g. storing carbon in soils and forests) and sceptical of engineered removal approaches that attempt to use chemical reactions to draw CO2 out of the air.

The last year has been a torrid time for the voluntary carbon market, with a crisis in confidence around the quality of offset projects causing carbon credit values to tumble. An array of voluntary carbon market integrity initiatives are seeking to shore up market confidence, and the COP28 Presidency has pledged to support this by making the voluntary carbon market one if its priorities.

Our prediction: We expect relatively strong negotiator consensus on carbon markets to drive continued progress.

In an unprecedented move all 27 nations in the EU bloc have agreed to negotiate for a deal to phase out the use of ‘unabated’ coal, oil, and gas (there is currently no consensus on what unabated means, but it refers to solutions that can capture and store CO2 at source). The EU has also stated that it will negotiate for a phase-out as soon as possible to fossil fuel subsides.

Unilateral support for this notion looks challenging. The African group have pointed to inequities in a global phaseout, instead arguing for a phase-out of fossil fuels in developed nations before 2030, affording developing nations the opportunity to “close the global supply gap in the short term”.

Our prediction: As at COP27, international disagreement is likely to mean that any definitive language on this point is very unlikely.

As the impacts of climate change ramp up, the need for a clear framework and funding strategy for transborder cooperation on adaptation is more relevant than ever. Ahead of COP28 (2 Nov) UNEP released its flagship adaptation report, finding that the current “adaptation finance gap” sits at about US$194 – 366 billion per year. And, even more concerning, this gap between what is needed and what funding is available is growing every year.

Adaptation finance is also increasingly relevant to investors, as adaptation-tilted investment strategies could present investment opportunities, by serving the dual purpose of limiting future losses while delivering positive returns that can also benefit people and the planet.

This year governments are expected to finalise and approve a framework to operationalise the Global Goal on Adaptation (GGA). The Paris Agreement clearly underlines the need for cross-border cooperation on adaptation, and as a result the GGA was established in 2015. However, progress on what this could look like in practice has been sparse, with parties agreeing at COP26 and then COP27 to push finalisation of the agenda to COP28. In general terms, developing nations have favoured global targets, while some developing nations prefer looser frameworks with no binding targets.

The purpose of the GGA is to “enhance adaptive capacity, strengthen resilience and reduce vulnerability to climate change.” Negotiators must now agree on how to capture and categorize evidence on progress towards this goal, including the design of a monitoring, evaluation and learning systems for adaptation.

Our prediction: Discussions could lead to clearer goals on what adaptation should look like globally, but we expect any discussion on financing the operationalisation, or setting any financial targets, will be tense.