Pete Betts, Former Lead Negotiator on Climate for the EU and UK, and Senior Advisor to IPR reflects on the post Glasgow outlook

The follow up to COP 26 in Glasgow brought claims that the world is on track to hold global temperature increase as low as 1.8 degrees. Such claims were treated with some scepticism given the heroic assumptions many of them made.

However, the 2021 Forecast Policy Scenario (FPS) commissioned by the UN PRI and published pre COP26 by IPR in October, reached a similar conclusion, forecasting a 1.8C outcome at 50% probability, based on rigorous forecasts of policy and technological developments which IPR assess are likely to happen, and which investors can use to guide their decision-making.

The investor value drivers database underpinning forecasts encompasses 500,000 data points and importantly IPR includes an extensive land use model which interacts with energy.

The FPS conclusions are grounded on intensive bottom-up analysis, including consultations with two hundred key global experts and policy makers on how they judge policy will evolve in key jurisdictions, pushed both by technological advances and growing concerns about the impacts of climate change. The results are then subject to rigorous modelling by Vivid Economics.

Acceleration to 2025 pivotal

IPR sees policy acceleration up to the pivotal 2025 Paris Ratchet, with governments under continual pressure from institutional investors, civil society and evolving international norms. Just Transition and addressing developing nations’ emissions paths will increase in prominence. Although the policy route map will be bumpy and even staccato at times, it will happen. Impacts of this acceleration underpin post 2030 reductions and result in a below 2C outcome becoming a global possibility.

In broad terms the 2021 FPS concludes that Nationally Determined Contributions (NDCs) for 2030 across most of the developed world are broadly consistent with 1.8 degrees and, crucially, will to a large extent be met. The OECD will then largely get to near zero emissions by 2050.

A challenge remains in the developing world where NDCs are not aligned with below 2 degrees, but we assess even here that emissions will peak before 2030 and fall sharply thereafter, driven by technology and other trends. NDCs will be ramped up at the 2025 Paris ratchet, if not before.

This sounds like good news, but there are two broad challenges to this analysis:

  • Firstly, given that the developing world is the lion’s share of emissions, how can this picture be compatible with below 2 degrees outcome?
  • Secondly is it really credible that action will happen as fast as this, given political and delivery challenges?

Let me take each of those challenges in turn.

Carbon Budgets and 2050

The combination of rapidly falling OECD emissions, and initially rising, but then falling emissions in the developing world imply aggregate carbon emissions over the next 3 to 5 decades compatible with a 50% chance of 1.8%.

This may seem surprising, especially when you factor in that countries’ current NDC targets for 2030 are in aggregate terms disappointing.

This is the picture the 2021 Forecast Policy Scenario for investors confirms: global emissions in 2030 are much higher than they would ideally be and are only slightly below today’s level in 2030.

Decisions to 2025 drive 2030s reductions

But thereafter they fall very quickly: driven by technological improvement; and crucially because policy decisions in the 2020s deliver their big emissions dividends only in the 2030s as stock replacement accelerates, especially in power and transport. This drives overall CO2 reductions of around 7% a year globally in the 2030s, getting to around 8Gt by 2050.

The FPS also calculates around 3.5 Gt of fossil emissions captured by CCUS: and around. 6.4 Gt of negative emissions primarily in mass afforestation by 2050, reductions that are less than in many hypothetical ‘optimised’ scenarios and, crucially, are anchored in our bottom-up analysis of what we forecast will happen.

Will NDCs and Net Zero Goals be delivered?

There is much understandable concern that some NDCs will not be met: even though NDCs in the OECD are mostly compatible with around 1.8 degrees, the policies to deliver them are nowhere yet in place.

IPR examined, with global experts, five key jurisdictions (US; EU; UK; China and Japan) and made evidence-based judgements about how key sectors would evolve in each in the coming years.

Power: Globally we assess that emissions from power have already broadly peaked and will roughly halve by 2035. Thirty percent of electricity generation will be from wind and solar in 2030, against 10% now.

This is driven by coal bans in some countries like the UK and France. In others such as the US and Japan, it will be a combination of policy decisions on carbon pricing and emissions, coupled with the fact that coal will no longer be economic.

In China and India, IPR’s outlook is conservative. We assume that China continues to use unabated coal for power out to 2045, and India to 2060, but even here the relative role of coal will decline sharply, driven by falling costs of renewables and storage, concerns about local air quality, and growing global norms and expectations around climate change.

Transport: Global emissions from transport will continue to rise until the mid 2020s but will then fall by about a third by 2035, driven by similar factors as in power: bans on sales of new ICE cars in some key jurisdictions, coupled with falling costs of electric vehicles.

Freight vehicles will lag behind cars, but the same trends will drive reductions here too. By 2030 over a quarter of vehicles on the road will be electric.

Industry: Emissions will broadly plateau through the 2020s, but then will gently decline as hydrogen becomes more affordable and efficiency increases. The prospects of border tariffs will also play a growing role.

Buildings: Emissions will decline from around 2030, but only gently, reflecting the slow turnover of building stock compared to other sectors.

Land Use: GHG emissions broadly halve by 2035. On the face of it, this declining trend may look surprising given current high deforestation in the tropics. But temperate forests are huge and stable, and in some case increasing fast, China is an example.

In tropical rainforests we assess that growing consumer and supply chain pressures, coupled with falling demand for meat (which we believe will peak globally by 2030 as substitutes become ever more widely available) together with large flows of offset finance, will shift the incentives for deforestation dramatically over the next decade.

None of the above outcomes are a cause for complacency. The potential for a below 2degree outcome does not give room for Governments to duck or delay difficult decisions or bow to domestic push back. Every tonne and every year now count.

Coal: The biggest key to a 1.5 future

To achieve a 50% chance of 1.5 degrees is much more challenging and requires a much faster rate of policy acceleration and adjustment action from the developing world, exacerbating existing issues of equity.

This is the core assessment of IPR’s 1.5C Required Policy Scenario (RPS). of what should happen to limit temperature increase to the least damaging level that the Paris Agreement ultimately is aiming for.

The key policy differences between FPS and RPS are above all in coal: China’s coal-based energy generation fleet on its own represents 12% of global emissions, bigger than those of the entire USA. If China were to retire a substantial portion of its fleet earlier than 2045, or to fit CCUS, the global trajectory would improve markedly.

Similarly, if the developed nations were to help coal dependent countries like India and Indonesia to hasten their inevitable transition away from high cost and high polluting coal that would put the world on a safer trajectory.

Acceleration and then intensification

As Glasgow accurately reflected the world is not on track for 1.5 degrees.

Holding at 1.5C requires a level of policy intensification, coordination and implementation between the developed and developing world that is yet to emerge.

For investors, all this presages a landscape to 2030 littered with pricing risks and big upside and downside calls, albeit with a clear direction of travel.

 

For more information on the Inevitable Policy Response please visit the IPR resources page.

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