Cautious optimism after the Lima Climate Conference

Negotiators at the Twentieth Conference of the Parties (COP-20) in Lima finally agreed on a text (Lima Call for Climate Action) that prepares the ground for a global climate deal at COP-21 in Paris next year. The good news is that consensus was reached at all, as late in the day on Saturday it looked as if talks might end without any kind of agreement. The bad news is that after the optimism created by the recent bilateral deal on emissions between the US and China, COP-20 has revealed that many of the long-standing rifts between developed and developing countries remain open. This means that the foundations for a deal in Paris next year are neither as deep nor as solid as it was widely hoped they would be after two weeks of negotiations at COP-20, as is clear from the opening lines of the final Lima text itself:

 “[With the COP’s] noting with grave concern the significant gap between the aggregate effect of Parties’ mitigation pledges in terms of global annual emissions of greenhouse gases by 2020 and aggregate emission pathways consistent with having a likely chance of holding the increase in global average temperature below 2 °C or 1.5 °C above pre-industrial levels”.

Divisions between developed and developing countries remain significant

Nobody ever claimed that reaching a global climate deal next year was going to be easy, but our reaction to the outcome of COP-20 is that there is still a lot of basic spadework to be done over the next 12 months before the architecture can be finalized and the structure of a new global climate edifice raised in which both developed and developing countries can live comfortably side by side.

In particular, we think that achieving a meaningful deal at COP-21 next December hinges above all on resolving disagreements over the two main issues:

1. 1. Responsibility for achieving mitigation: How should the burden for achieving the emissions reductions required under a future agreement be shared between developed and developing countries?

1. 1. Responsibility for financing mitigation and adaptation: How will the cost of reducing emissions and adapting to a warming world be borne?

Timeline to Paris from here

COP-21 will take place in Paris over 30 November-11 December 2015, and as set out in the Lima text, there are three key events to watch out for ahead of COP-21:

1. 1. All Parties are invited “to communicate their intended nationally determined contributions well in advance of the twenty-first session of the Conference of the Parties (by the first quarter of 2015 by those parties ready to do so) in a manner that facilitates the clarity, transparency and understanding of the intended nationally determined contributions”.

1. 1. The aim is then to have a negotiating text to serve as the basis for an agreement at the Paris COP “before May 2015”, so that the hard diplomatic work ahead of Paris can begin in earnest seven months ahead of the COP itself.

1. 1. The Secretariat of the UNFCCC is then to “prepare by 1 November 2015 a synthesis report on the aggregate effect of the intended nationally determined contributions communicated by Parties by 1 October 2015”.

Broader signals showing that a global energy transition is already underway

Beyond the final text that emerged from the Lima COP there have been a number of other interesting developments in the last two weeks, both on the fringes of COP-20 itself, and in the wider world beyond. All of these developments are important indications of a major transformational shift in the global energy system, a shift that is being driven by a combination of policy measures on the one hand, and economic and technological forces on the other We would highlight seven in particular:

1. 1. Although it did not make it into the final Lima text, one of the proposals that was discussed at COP-21 was the complete phasing out of fossil fuels by 2050, or allowing such fuels to be used but only if the emissions from burning them could be entirely offset.

1. 1. Saudi Arabia’s chief climate negotiator, Khalid Abuleif, was quoted as saying in Lima that “climate-change policy will affect our future and we are working very hard to raise our resilience”. He went on to say that “inevitably, oil producers are going to face huge liabilities if the implementation of the convention is advocating a move away from fossil fuels”.

1. 1. Just as the COP in Lima was about to begin, the Governor of the Bank of England announced that his institution would examine the risks to financial stability posed by “unburnable carbon”, the idea first put forward by Carbon Tracker in its 2011 study of the same name.

1. 1. At the beginning of the second week of the Lima COP, the Institutional Investors Group on Climate Change published a study entitled Investor Expectations: Oil and Gas Company Strategy. This study is designed to investors engage with fossil-fuel companies on carbon-asset risk, and is another sign of how closely many of the world’s largest institutional investors are now monitoring the strategies and capex plans of fossil-fuel corporations.

1. 1. Ed Davey, the UK Minister for Energy and Climate Change, said in Lima that there might be a case for requiring all institutional investors, insurers, banks and other financial institutions to disclose their holdings of fossil-fuel investments.

1. 1. While the Lima COP has been in progress, the oil price has continued its precipitous drop, with Brent prices falling to $61.8/bbl last Friday, 46% below this year’s peak of $115/bbl at which it traded in June. This is putting huge pressure on the industry, not least on the oil majors, and in our view the majors should see this sharp drop as a wake-up call regarding the potential longer-term price consequences of a global climate deal (as per point [ii] above).

1. 1. Finally, the decision by E.ON to split itself into two companies from 2016 announced on 30 November, one concentrating on the legacy business of fossil fuels and nuclear, the other on the growth business of renewables and energy services, shows that some companies are not waiting for a global climate deal to be struck before taking action but have decided to start adapting to the new energy reality now.

Conclusion: Fossil-fuel companies can no longer ignore the signs of change

The lack of clarity with regard to so many of the substantive points discussed at COP-20 evidenced in the text of the Lima Call for Climate Action shows that most of the hard work for achieving a positive outcome at COP-21 in Paris remains to be done. The scale of this work remains huge, and the risk that a deal might not be forthcoming real.

The key to a successful outcome will be the question of financing, as without adequate guarantees for developing countries on this front, we do not believe they will be willing to commit to emissions reductions of their own (and some of them may not be willing to commit to emissions reductions by next December even with the assurance of adequate financing).

On balance, however, we remain cautiously optimistic that a meaningful deal can be reached at COP-21 next year, which would then take effect from 2020 and thereby allow five years for countries to start preparing for the obligations they commit to.