What should investors expect from COP 30?
This week countries are meeting in Brazil for the 30th climate change conference. The aims are to strengthen targets and achievements in reducing CO2, and to provide much more money for developing countries to afford the transition. This is the thirtieth annual gathering, and the tenth since the 2015 Paris Climate Treaty. Despite all the efforts so far, the backdrop for COP 30 is news that world CO2 will hit another new high this year. Whilst the governments and lobbyists can look back on a substantial increase in renewable energy, the need for more fuel for growth has meant many large industrial countries have also opted for more coal, oil and gas to power their economies.
In 1992 in Brazil the UN brought together countries to establish the UN Framework Convention on Climate Change, UNFCCC. This gave international recognition to the idea that burning fossil fuels creates CO2, which acts as a warming gas when released into the atmosphere, affecting future temperatures. Countries acknowledged this effect and resolved to take action to limit man-made CO2.
In 2015 in Paris the regular meeting on climate change created the Paris Treaty, signed by 195 countries. This stated an objective to keep the rise in global temperature down to 1.5 degrees C above pre-industrial levels, with countries taking action and adopting targets to cut their use of fossil fuels. The aim was to get to a peak of greenhouse gas emissions by 2025, and to see a reduction of 43% by 2030, moving towards net zero emissions by 2050. These targets will now not be met.
The UN established an annual meeting or Conference of the Parties (COP) to monitor progress and strengthen targets. It has also added a major transfer of wealth from developed to developing countries to assist them with the high costs of transition from an energy system based on fossil fuels to one based on renewable electricity. This adds substantially to the financial burden on the developed countries who are incurring large costs for their own transition.
Before the start of COP 30, each country was meant to have submitted a memo setting out its "Nationally Determined Contribution". This sets out promises of cuts in CO2, with details of progress and future plans. Only one third of the countries have done this, so this will turn out to be the implementation conference when more are urged to do so.
COP 29 tried to increase the money paid to developing countries to help them. It ended badly with insufficient pledges, and with big disagreements over the extent of the proposed financial transfers. The current aim is for the developed countries to provide $100bn a year to the developing for climate change investments. This takes the form of a mixture of grants and loans, and of public and private sector money. At COP 29 the developed countries promised to increase this to $300bn by 2035, with the developing countries dismissing this as "paltry" and demanding much more. COP 30 will revisit this sensitive issue at a time when the leading developing countries are seeking to curb their public spending as they battle large deficits. They will at best be trying to find more ways of leveraging private sector money, and at ways of providing loans rather than grants.
Brazil wishes to showcase the Amazon rainforest, a big carbon sink for the world, and gain wider financial help in maintaining and extending forests as absorbers of CO2. Unfortunately, they have cut a way through their forest to produce a new four-lane road for the conference, which has attracted adverse comment from environmental interests… The Conference suffered a protest with people also complaining about Brazil's plans to expand its oil and gas output.
CO2 emissions have continued to surge throughout the last 33 years under the UNFCCC/ COP regime. Even since the 2015 Paris Agreement and its reduction targets, world CO2 output has increased from 35.4 G tonnes a year to a new peak of 37.8 G tonnes in 2024. The increases have been led by China and India as they use more coal and gas to accelerate growth. The UK has led the reduction, now down by 50%, with the EU also down. The UK closed all its own coal power stations and tried unsuccessfully to get coal out of power generation elsewhere through these conferences. Some of the UK and EU reductions however have been achieved by closing industrial plants, only to import more from Chinese and other overseas locations, with an inevitable corresponding rise in their domestic carbon dioxide emission.
The big emitters India, Russia, Indonesia and Iran are unlikely to offer major changes to start cutting their output. The USA has changed policy to actively promote more and cheaper fossil fuel extraction and use, as it does not accept the theory behind the UN work. China could make stronger announcements about starting to reduce its output of CO2 after years of big increases, which would be an important change. Germany could seek to make faster progress with shutting down its coal fired power stations and switching from imported gas to more renewable electricity. Most countries start by decarbonising their electricity generation, as it is a big source of CO2 controlled by a few large companies, easier to regulate and tax, to help change their behaviours. Progress is much slower to get the public to decarbonise, as most people find gas or solid fuel boilers more affordable than heat pumps, and most still prefer diesel and petrol cars to battery ones.
The Conference is likely to confirm to markets that climate change is no longer the priority issue it was a few years ago. However, there is still a considerable focus on how to satisfy overseas aid requests by the developing countries. It now looks very unlikely that the world will take all the actions agreed at Paris in 2015 and subsequent conferences, making emissions and temperature targets impossible to meet. There will however be continuing pressure to spend more on renewable energy and on shifting more industry and heating from gas and coal to electricity. We will see substantial further global investment in decarbonising technologies with investment opportunities as a result. Fossil fuel-based activities will attract higher taxes and tariffs, with the EU carbon border tax coming in, whilst renewables will be supported by subsidies and guaranteed prices.
About the author
The Rt. Hon Sir John Redwood has been a long-standing member of the EPIC Investment Partners Advisory Board.
John is a well-known commentator on governments and economies, with long experience of investment markets. Trained as an analyst at Robert Flemings, he moved to N.M. Rothschilds where he became a Manager and Director of pension and charitable funds and Head of Equity Research. He was seconded to become Head of the Downing Street Policy unit before chairing a large, quoted UK industrial business. He served as an MP and a government Minister.
In 2007 he set up Pan Asset with a colleague, an investment management business that pioneered active/passive funds and models in the UK. Following the sale of the business to Charles Stanley, a quoted investment manager in the City, he became their Global Chief Strategist advising on non-UK markets and economies. He also ran a demonstration fund for the FT, writing articles about it and illustrating the use that can be made of ETFs in portfolios.
He is now an adviser to EPIC, providing insights into the big investment issues of the day from the debt and spending problems of the major governments to the green and digital revolutions which have so much impact on equity markets. He is a Distinguished Fellow of All Souls College, Oxford, where he helps with their Endowment investments and gives occasional lectures on modern economics and politics.