Matters of climate change and carbon bargaining
Plan "Net-Zero Emissions": a mission impossible?
Global warming is already causing destruction in every region across the globe, the Intergovernmental Panel on Climate Change (IPCC) noted in its most recent report (AR6), saying “urgent action must be taken immediately” to mitigate its effects. As IPCC outlined, the impacts of human-caused climate change are severe and widespread, and that while there is still a chance to limit that warming, some impacts will continue to be felt for centuries.
To limit global warming to 1.5°C and to stay in line with the Paris Agreement, we need to cut current greenhouse gas emission (GHG) levels in half by 2030 and reduce them to net zero by 2050. The message is clear however — emissions must be reduced in order to stabilize climate change. It is a global challenge. The longer it takes, the more climate change will occur and it will become much more expensive for us to resolve this issue.
The “net-zero” target plan
Let’s begin by looking at how the planet has warmed. GHGs can be categorised into four categories: carbon dioxide, methane, nitrous oxide, and fluorinated gases. One of the principal feedback greenhouse gases is water vapour. In the same way a greenhouse traps heat, the earth’s atmosphere is insulated by greenhouse gas emissions. Since pre-industrial times, global average temperatures have increased by more than 1°C. It is important to monitor global average temperatures, but we should also know how the warming is distributed across the globe — in some regions, the impact is much more extreme.
Recently, national governments, companies and industries have set a skyrocketing number of net zero targets. Nearly 80% of the global economy has now pledged to reach this ambitious goal. There are, however, differences between targets. India, for example, the world’s 4th biggest emitter of CO2 after China, the US and EU, has promised to cut its emissions to net zero by 2070 — missing a key goal of the COP26 summit for countries to commit to reach that target by 2050.
Initially, emissions must be reduced. Although there is no one right way to accomplish this balance, there are several things that distinguish a firm target from an overambitious one. As reported by United Nations Environment Programme (UNEP) in May 2021, the world will need to invest about $8.1 trillion in nature by 2050 if it wants to deal with the interconnected climate, biodiversity, and land degradation crises. According to Martijn Wilder, founding partner of climate advisory firm Pollination Group, policymakers and investors need to recognize nature as a new asset class to facilitate investments in nature-based solutions. “We need to think of nature as the world’s critical infrastructure that holds the economy together, and we need to be able to place a value on doing that,” he said.
The Climate Action Ticker, which introduces the methodology for assessing national net zero targets, created by non-profit institutes Climate Analytics and New Climate Institute, contains ten good practice principles that fall into three categories: scope, transparency, and accountability. When it comes to scope, net zero targets differ in terms of the greenhouse gases and emissions sources they address. A robust net zero target separates out reductions and removals. Legislation can also establish a clear framework for accountability: “Will they continue to examine the target?”; “How to keep track of the desired target?”; or “What happens if they’ll fall short?”
Navigating the next carbon market context
Carbon dioxide is the only GHG that can easily be absorbed from the atmosphere. It can be extracted in two ways: by stimulating nature to absorb more of it, or by building technology that does it for you. Today, investments in nature-based solutions are largely driven by carbon offset projects.
Additionally, the goal of zero emissions is likely to be beyond the reach of some sectors, such as aviation and agriculture. Agricultural activities produce nitrous oxide and methane as primary GHGs emitted by the sector. The amount of carbon dioxide we need to remove from the atmosphere to achieve net zero overall will have to equal out the residual emissions. So, what are the chances that corporate net zero emissions pledges will actually result in a net zero impact on climate change mitigation?
Nature-based solutions focus on protecting, managing and restoring forests, wetlands and other ecosystems. As such projects soak up carbon from the atmosphere, they also produce carbon credits — which can then be sold to companies looking to offset their emissions. Carbon credits can be exchanged in the so-called “voluntary carbon market” by any individual or company wanting to offset their greenhouse gas emissions outside of established compliance markets. These voluntary activities are intended to offset emissions and lower a company’s or individual’s carbon footprint. For developing countries lacking in financial resources, innovative finance products (like forest bonds) allowing investors to opt to be paid in carbon credits rather than cash, and debt for nature swaps — could help unlock sufficient capital to invest in nature.
It is clear, carbon credits will swiftly enter our everyday life. According to the Institute of International Finance (IFF), trading the type of credits you could buy when booking a trip could be a $100 billion-a-year market by 2050. It is a business opportunity, and the finance industry has been using carbon markets as a proxy for investing in it. Somewhat short-sighted interpretation, to see nature’s value only in the size of its CO2 footprint?
For example, the transition to sustainable farming requires conventional farmers wanting to learn about new equipment, practices, and regulations that advocate sustainable growth in the long run. Additionally, while the government has established some cost-sharing programs for farms seeking to grow more sustainably, large conventional farms usually receive the vast majority of national farm support. Governments and investors should account for the ecosystem benefits of nature beyond carbon capture and see the true value in nature. Proper valuation of nature’s benefits requires inputs from not only investors, but also scientists, communities and NGOs.
Pledges: practice what you preach!
Right now, amid pandemic, the markets are more complex, too. Governments have moved their focus to medium-term issues, increasing early relief efforts and adopting economic recovery plans. In light of this, promising to reduce carbon emissions to net zero by 2050 might seem a mission impossible. While it is encouraging that many governments are committed to this goal, the timeframes, GHG emission types, economic sectors covered, as well as whether the country intends to rely on removals and reductions outside its borders, legal status, and other criteria, all differ greatly. This has significant consequences for the strength of net zero ambitions and whether they will contribute enough to achieving these goals.
Even so, supporting and promoting sustainable development is another question. A package deal of 17 sustainable development goals (SDGs) were outlined by the UN in 2015 to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030. These goals are integrated and recognize that action in one area will affect outcomes in others, and that development must balance social, economic and environmental sustainability – important aspects not to be forgotten in the middle of emission trading.