Climate change and the four goals of COP26: what it all means for industry and business

On 31 October 2021, the 26^th Conference of Parties to the United Nations Framework Convention on Climate Change (UNFCCC) opened with a call from Executive Secretary Patricia Espinosa for inclusivity in addressing the climate emergency, signalling the need for collaboration among governments, business and civil society to deliver the goal of net zero. 

“Total inclusion must be the foundation upon which this process is built… We are all facing the same climate emergency. We must all be part of the solution.”

COP26 is set to be the most pivotal gathering of the parties since COP21 in Paris in 2015.  

Following the Conference’s procedural opening, the World Leaders’ Summit opened by UK Prime Minister Boris Johnson took place, with world leaders including US President Biden and Indian Prime Minister Shri Narendra Modi making statements on their respective nation’s ambitions and pledges on climate action. 

Proceedings over the remainder of COP26 will see discussions and negotiations on mobilising finance for mitigation and adaptation measures, the global transition to clean energy, youth and public perspectives and nature and sustainable land use. Discussions will then move to address adaptation, loss and damage, zero emission transport and action in cities, regions and built environment with the Conference closing on Friday, 12 November 2021. 

In this Insight we identify the key goals for COP26 and possible implications for business and industry arising from agreements reached between the parties attending. 

COP26 goals

Four overarching goals have been set for COP26 which will guide the course of negotiations and drive the key outcomes:

• secure global net zero by mid-century and keep warming to 1.5 degrees Celsius within reach;
  
  
• adapt to protect communities and natural habitats;
  
  
• mobilise finance; and
  
  
• work together to deliver.

The agreement and outcomes in relation to each of these goals will have implications for industry and business. 

Secure global net zero by mid-century and keep 1.5 degrees Celsius within reach

The first and most critical goal of COP26 is to ensure that Article 2 of the Paris Agreement -  which seeks to limit global warming to 1.5 degrees Celsius - remains achievable. 

The Paris Agreement is an international treaty which was the product of negotiations at COP21 held in Paris in 2015. In addition to the 1.5 degree Celsius target, the Paris Agreement contains a series of strategies for reducing and limiting the impacts of climate change including the Nationally Determined Contributions (NDCs), provision for possible emissions trading mechanisms, as well as financing for transition in developing nations. 

At present, the world is not on track to meet the 1.5 degrees Celsius goal. Released only days before the start of COP26, the United Nations Environment Programme Gap Report findings confirm that taking into account current NDCs and mitigation measures, the world is on track for a global temperature rise of 2.7 degrees Celsius by the end of the century.

One of the goals of COP26 is to address this ‘mitigation gap’ through a combination of tactics which span across the various pillars of the Paris Agreement including: 

• encouraging countries to strengthen and exceed their 2030 NDCs;
  
  
• ensuring targets are translated into action by implementing mechanisms for countries to formulate and communicate long-term strategies to achieve net zero in accordance with the best available science; and
  
  
• finalising outstanding elements of the “Paris Rulebook” to support the 1.5 degree target.

Adapt to protect communities and natural habitats

With rising global temperatures comes a plethora of direct physical effects and extreme weather events. This inevitability results in downstream loss and damage to life, livelihoods and natural habitats. 

The second overarching goal of COP26 is to drive action plans for adaptation to avoid such loss and damage, including by protecting and restoring ecosystems, building defences, warning systems and resilient infrastructure and agriculture. 

Areas of focus for discussion around these goals will include:

• assisting nations most vulnerable to climate change;
  
  
• implementing and tracking progress of the Global Goal on Adaptation, a concept created under Article 7 of the Paris Agreement to broadly enhance adaptive capacity, strengthen resilience and reduce vulnerability to climate change; and
  
  
• developing National Adaptation Plans and Adaptation Communications - being nation-specific plans and summaries of what nations are currently doing and planning to do, to adapt to climate change. 

Mobilise finance

The third goal of COP26 recognises that funding is required in order for countries to manage the impacts of climate change and propel the transition to a climate-resilient future. For this to happen, finance must be mobilised. 

There are several components of this goal. First, developing countries need support to ensure that the climate transition is just and equitable for all. In order to ensure this, developed countries agreed at COP15 in Copenhagen in 2009 that they would commit to raising at least $100 billion every year from 2020, a target which is currently not being met. 

The UK has announced that it will double its International Climate Finance commitment to at least £11.6 billion over the next five years up to 2025/2026, in order to both bolster movement towards the $100 billion goal and encourage other nations to follow suit.

On 1 November 2021, Australia announced that it would increase its international climate finance commitment to developing countries from AU$1.5 billion to AU$2 billion over the five years up to 2025, with at least AU$700 million targeted at Australia’s Pacific neighbours. The World Resources Institute estimates that developed countries must contribute 0.22% of their gross national income to satisfy the $100 billion goal. 

Based on data from the World Bank, this means that Australia currently falls short of the approximate US$3 billion required. Second, there are a variety of targets for climate finance including public finance for green infrastructure and private finance for green innovations and technology. Green investment will also form part of various countries’ COVID-19 economic recovery. 

The final component is an increased focus on the role of business, banks, insurers and investors in shifting the global economy to a net zero future. 

Work together to deliver

The final goal of COP26 is to ensure that all goals are met by creating the ‘Paris Rulebook’ which will set out the rules and logistics required to implement the goals of the Paris Agreement.

Key aspects of the Paris Rulebook to be agreed are:

• Carbon markets: This will be one of the most significant topics of discussion at COP26 as parties seek to reach agreement on the workings and implementation of various mechanisms to transfer and trade ‘mitigation outcomes’ under Article 6 of the Paris Agreement. This will include negotiations in respect of an international carbon price, carbon accounting under a global carbon market, bilateral cooperation between nations and also as between nations and corporations;
  
  
• Common Time Frames (CTF): This will require countries to implement their 2031 NDCs within a certain period of time. While at COP24 in Katowice it was agreed that NDCs beginning in 2031 should have a CTF, whether that CTF would be five or 10 years was not agreed upon and is currently unresolved; and
  
  
• Enhanced Transparency Framework (ETF): Outlined in Article 13 of the Paris Agreement, this is a mechanism for ensuring nations are transparent about their tracking against NDCs by putting in place procedures and requirements for the disclosure of progress and how it is measured. While many aspects of the proposed ETF were progressed at COP24, there are a number of outstanding technical aspects of the framework to be settled at COP26.   

Key insights

A number of issues subject to negotiation at COP26 should be keenly observed by industry and business given the potential implications. These include:

Nationally Determined Contributions

Parties to the Paris Agreement were required under Article 4 to make a pledge known as an NDC indicating that party’s national climate action plan and how it intended to achieve the NDC.  

In 2015/16, Australia made its NDC pledge to reduce greenhouse gas emissions by COP26 to 28% below 2005 levels by 2030. Australia released an update in 2020 and outlined its plan to achieve the NDC through new and emerging low-emissions technologies. A further updated NDC communication released just days before COP26, indicated that Australia is forecast to exceed its NDC target by reducing emissions by 35% by 2030. Australia has also confirmed that it will adopt a target of net zero emissions by 2050 but that the target will not be legislated. 

At the time of the making of the Paris Agreement, a ‘ratchet mechanism’ was put in place to provide for participating countries to accelerate greenhouse gas emissions targets should that be necessary.  

As a result, and given the predicted gap between current pledges and the ability to globally achieve the 1.5 degree target, increased NDCs are being heavily encouraged at COP26. While an increase to Australia’s NDC seems unlikely, changes to other countries’ NDCs may result in policies that could impact on Australian businesses, for example, the imposition of carbon border levies similar to the Carbon Border Adjustment Mechanism proposed by the European Union. 

Carbon market mechanisms

With a variety of carbon market and other non-state mechanisms for emissions trading to be negotiated at COP26, it is anticipated that there may be increased certainty for business and industry. 

It is possible that following COP26, there could be an expansion of the ‘safeguard mechanism’ under Australia’s Emissions Reduction Fund scheme to require a broader range of industries to offset an exceedance of annual baseline emissions, including through the purchase of Australian Carbon Credit Units.  

Transparency

Changes to the Enhanced Transparency Framework (ETF) at COP26 are likely to result in increasingly robust domestic greenhouse gas emission disclosure regimes for emitting organisations, for example, via amendments to the National Greenhouse and Energy Reporting Act 2007 (Cth). 

Disclosure regimes may begin to extend into broader facets of a supply chain. This will cast the net wider to capture businesses and industry that have otherwise not previously been subject to disclosure requirements.   

Green finance and investment

There will likely be increasing pressure on and from financiers and investors to support the transition to a low carbon future. For example, the Glasgow Financial Alliance for Net Zero has been launched by the COP Presidency, the UN High Level Climate Champions and Mark Carney. 

The Alliance brings together over 160 firms responsible for over US$70 trillion in assets to drive net zero initiatives backed by science-based guidelines across the financial system.  

Optimism, challenge and insight ahead

Many remain optimistic that COP26 will result in significant progress towards ensuring the attainability of the 1.5 degree target and cementing the Paris Rulebook. Equally, the challenges of reaching agreement between hundreds of State parties on such a broad agenda hold strong among sceptics.  

In any case, regardless of formal outcomes reached, the goings-on of COP26 will provide business and industry with insight into future market trends and nation-specific appetites for change.