Vasuki Shastry

As national governments gear up for the 26th United Nations Climate Change Conference (COP 26), this article analyses the current challenges facing countries in achieving their net-zero commitments, especially developing countries, and argues for newly-industrialised countries like India playing a broader role in tackling climate change.

Introduction

As India struggles to recover from a deadly pandemic, the Indian Government will soon have to focus attention on this November’s Glasgow Climate Summit, where developed and developing countries are expected to reaffirm and renew their commitments to the 2015 Paris Climate Accord. As a large newly-industrialised country, India has the voice and the influence in shaping global climate goals and in advocating on behalf of other, less powerful nations. However, for complex reasons outlined below, the Indian Government will be forced to make difficult policy choices in defining, designing, and articulating its climate ambitions.

This is happening against a backdrop of a dramatic climate push by developed countries, and companies domiciled there. It is the season for net-zero in the European and American corporate sector as major companies, some under pressure from regulators, investors, and NGOs, have been forced to disclose their net-zero commitments. In a nutshell, net-zero refers to quantifiable targets set by countries and companies to achieve a balance between the amount of greenhouse gases produced and the amount removed from the atmosphere. Ahead of the Glasgow Climate Summit, many developed countries and China have outlined their net-zero commitments: Europe in 2050, China in 2060, and the U.S. likely to follow in 2050. The pressure is now on developing countries to do the same.

Unresolved Concerns

There is, however, fierce pressure from the developing world to outline net-zero commitments for two reasons:

First, the developing world has demanded “climate space” in terms of being allowed to burn coal to meet developmental needs.

Second, many developing countries are demanding financial assistance from rich countries to help with climate mitigation and adaptation.

In preparation for the Glasgow Summit, the G7 and the G20 are expected to unveil ambitious plans in the next few weeks on the latter, but are likely to demand that all countries submit to a unified deadline to achieve net zero emissions by 2060. The developing countries to watch in this tussle are India and Brazil, who are said to be pushing for a staggered net zero deadline of 2070.

As this diplomatic tussle plays out, national governments, investors, and NGOs are not showing any forbearance toward the corporate sector, a major player in net-zero efforts. The pressure on corporates is originating on four primary fronts:

First, the financial sector is on the frontline of regulatory changes and carbon disclosure requirements which will substantially alter the shape of their balance sheet. Here regulators, investors, and NGOs are working in concert to demand that the financial sector stops funding fossil fuel and forestry projects and decarbonises its operations.

Second, for non-financial corporates, the net-zero campaign is focusing attention on other issues which will ensure compliance. Regulatory standards governing ESG are being tightened, although there is no immediate prospect for harmonised rules.

Third, connecting the financial and non-financial sectors is the planned development of carbon trading markets, with sufficient depth and liquidity, which will enable companies to trade in carbon offsets and enable them to start decarbonising their operations. A private sector proposal to develop carbon trading will be discussed at Glasgow, but implementation will depend on enthusiasm from companies to disclose and actively trade their emissions.

Fourth, the final piece of the puzzle is on the price of carbon. The economics profession has long called on countries to set a price on carbon and to take fiscal action by raising taxes on activities which are polluting the environment. The only problem is that the implied price of carbon set by many countries – at $2 per tonne – is too low to make meaningful fiscal policy calculations. While carbon pricing is in its infancy, most economists estimate that to be taken seriously, countries need to set a floor of at least $60-70 per tonne. This will cascade down to developing countries and corporate sector tangibly by changing behaviours and incentives.

In the absence of a full resolution of any of these issues, net zero commitments made by countries and companies should be taken with a pinch of sustainable salt. There has been a slew of reports by multilateral agencies in recent weeks which warn, in dire terms, that failure to articulate firm net-zero targets will represent a major setback to the goals of the Paris Agreement. The direst of them all came from the International Energy Agency (‘IEA’), which warned that the world has a viable pathway to building a global energy sector with net zero emissions in 2050, but it is narrow and requires an unprecedented transformation of how energy is produced, transported, and used globally.

The Climate Pledges: Are They Enough?

Climate pledges made by governments to date – even if fully achieved – would fall well short of what is required to bring global energy-related CO2 emissions to net-zero by 2050 and give the world an even chance of limiting the global temperature rise to 1.5 degrees Celsius.  The IEA’s “pathway” toward a net-zero future, according to its Executive Director Fatih Birol, will “bring a historic surge” in clean energy investment that creates millions of new jobs and lifts global economic growth. “Moving the world onto the pathway requires strong and credible policy actions from governments, underpinned by much greater international cooperation”, he said.

The IEA’s Roadmap for net-zero sets tangible pre-conditions which include:

1. No investment in new fossil fuel supply projects and no further final investment decisions for new unabated coal plants.
2. By 2035, there are no sales of new internal combustion engine passenger cars, and by 2040, the global electricity sector has already reached net zero emissions.
3. IEA also describes a net zero pathway that will require the “immediate and massive” deployment of clean and efficient energy technologies, combined with a major global push to accelerate innovation.
4. The pathway calls for annual additions to solar PV to reach 630 gigawatts by 2030, and those of wind power to reach 390 gigawatts. Together, this is four times the record level set in 2020.
5. A major worldwide push to increase energy efficiency is also an essential part of these efforts, resulting in the global rate of energy efficiency improvements averaging 4 % a year through 2030 – about three times the average over the last two decades.

The Monetary Authority of Singapore (‘MAS’), Singapore’s central bank, has been ahead of other regulators in articulating a policy path on carbon pricing and carbon trading. MAS Managing Director Ravi Menon recently noted that globally there are 61 carbon pricing initiatives in place, half of them carbon taxes and the other half emission trading systems. He added that Asia’s priority must be to reduce carbon emissions through abatement efforts, acknowledging that it may be challenging for some sectors (e.g., steel and utilities) to significantly reduce emissions in the short-term. Specifically, Menon listed advantages of having a carbon market in the region as follows:

First, carbon credits are essentially tradable certificates that represent the reduction, avoidance, or removal of a certain number of emissions from the atmosphere.

Second, firms can buy these credits to offset hard-to-abate emissions.

Third, to efficiently match the demand for carbon credits with the supply of these credits, the world needs a robust carbon market.

Fourth, in doing so, the carbon market becomes an important mechanism to channel funds to the emission reduction and removal projects that generate the carbon credits.

Conclusion

There are roadblocks and policy hurdles before initiatives such as the Singapore one gain scale and momentum in Asia and indeed all over the world. While Singapore has the market depth and regulatory capacity to implement innovative approaches and insist on corporate compliance, the key question is whether India and developing countries in the region are open to introducing bold decarbonisation initiatives and align with any new global agreement at Glasgow. Two sticking points are likely to be: a) on providing developing countries with “climate space”, i.e., forbearance on net zero and other climate targets on a more extended timeframe, and b) to ensure that the financial commitments made by developed countries at Paris, for example, in providing $100 billion a year in aid to developing countries to help with the transition has not flowed at meaningful levels. In this context, India has an opportunity to advocate climate justice for the developing world and in establishing its own aggressive pathway and timeline for decarbonisation. The world will be watching.

Vasuki Shastry is an Associate Fellow for the Asia-Pacific Programme at the Royal Institute of International Affairs (Chatham House) in London, United Kingdom. He was previously with Standard Chartered Bank, the International Monetary Fund, and the Singaporean Central Bank. Shastry is the author of ‘Has Asia Lost It? Dynamic Past, Turbulent Future’.