COP27: outcomes for the energy sector

Posted: 06/12/2022

COP27 has been met with a mixed response; some saying it has not gone far enough to address global warming – with only 26 of the 193 countries improving on 2030 emission targets – and others criticising it for double standards given the alleged 400 private jets flown into Sharm El Sheikh by attendees. On the former, the Russian invasion of Ukraine has had a profound effect on the energy sector globally, and unsurprisingly caused many to reconsider priorities across the ‘energy trilemma’: sustainability, affordability and security. Objectively however, COP27 has been viewed as the inception of the ‘implementation phase’ - consolidating the target-setting established at preceding climate change conferences. The three central threads of the climate change conference’s approach to climate action are mitigation, adaptation and loss and damage. Here we provide an overview of the key takeaways from COP27.

Loss and damage

The most prominent development at COP27 was the proposed establishment of a ‘loss and damage’ fund, the objective of which is to provide financial assistance to developing countries in respect of damage caused by climate change (this is to include damage and loss to infrastructure, property and assets with less evidently tangible value such as cultural heritage). It is estimated that the losses of 55 countries vulnerable to climate extremes amounted to some $525 billion over the course of the last twenty years, with significant knock on effects on local infrastructure and development. This sum is expected to increase exponentially in coming years.

Although the fund has been established as a concept, many of its parameters remain unclear and it is envisaged that a transitional committee will undertake research and make recommendations for COP28. That said the big question still to be addressed in full is where the money will come from. Whereas some countries have made pledges, it is unclear to whom the burden of contributions is to fall. While it is understood the fund will be formed of contributions from developed countries, the UK has advised that it does not have the money and others appear to be avoiding any responsibility on the basis that they are not responsible for the emissions in question. Moreover, with many countries heading into recession, there is a degree of scepticism about securing necessary funding; readers may also recall funding arrangements discussed and promised at preceding conferences not having been delivered in full.

Energy industry participants are likely to have in mind future phases of the fund, which may draw on private funding. There are also questions about what makes a claimant country eligible to receive any such funding and how issues of causation, mitigation etc. will be addressed. The corollary of this is whether signatory states may ostensibly be admitting to climate related damage, and thus inviting a plethora of domestic lawsuits by affected parties.  

Coal and renewable energy

With the ‘phasedown of unabated coal’ having first been put forward in COP26, COP27 reiterates that objective but notably has not broadened this concept to include oil and gas, referring instead to a ‘transition towards low-emission energy systems’ and the development of relevant technologies with that aim. A focus on renewable energy sources was thematic to the narratives of world leaders attending the conference including Rishi Sunak and Joe Biden, who each emphasised an increased reliance on renewable energy sources such as solar and wind power in their respective countries.

While the push towards renewable forms of energy is expected and is in line with the trajectory of the broader objectives of the climate change conferences, its use and the existence of suitable infrastructure globally should not be overstated, particularly in less developed countries. In light of that, the COP27 strategy of ‘low-emission energy systems’ rather than a commitment to phase out all fossil fuels entirely allows for a transitional (and balanced) approach, which can encompass energy sources such as carbon capture applied to power stations relying on coal.

Gas

COP27’s drive towards ‘low emissions’ has broadly been understood to encompass gas, notably natural gas (cf. methane), and a tempered approach to gas appears to have been adopted. Against a backdrop of pressure on gas supply due to trade sanctions against Russia and elevated gas prices, together with broader conversations about energy market reform, (eg price caps), there are questions as to where gas will be sourced from in the short to midterm. The United States, the Nordic countries, the Middle East, or Australia are potentially suppliers of natural gas in this period.

The presence of gas reserves in these countries as well as some developing economies, particularly in Africa, is amongst several factors militating against a COP27 approach which would seek to phase out gas as an energy source. In the short term, the energy market appears likely to see increasing gas exports from these economies, although the longer-term view is that the price achievable by gas exports is likely to fall in the face of more available renewable forms of energy; effectively the market facilitating the energy transition. 

A growing appetite for gas is also anticipated internally within the borders of gas producing developing countries. Relevantly, approximately 600 million people in Africa do not currently have access to electricity and many rely on paraffin and biomass for cooking; increased production and availability of gas in these countries – especially where it is both affordable and secure – is likely to contribute significantly to the maturation and expansion of local sustainable infrastructure and consequently a reduction in carbon emissions.

Finance

COP27 emphasised investments and financial provisions to achieve its aims, stating a need for USD 4-6 trillion a year to be invested in renewable energy for the next eight years. This includes investment in the technology and infrastructure required to successfully deliver the broad transition to renewable energy. Existing technological developments in renewable energy have made it possible to harness solar power in broader circumstances, including at night! Similar advancements with regards to solar and other sustainable sources are likely to be of particular importance in the short term. Equally, carbon capture technology continues to make inroads, though the level of investment pales compared to the likes of hydrogen, solar and wind. Regional carbon credit markets would be helpful in this regard.

COP27 has also placed an emphasis on climate finance, calling for reform of multilateral development practices and priorities, effectively encouraging more widespread adoption and implementation of financial instruments to stimulate the kind of technological and infrastructure developments necessary for transition to renewable sources of energy. In effect, this encourages a shift towards increasingly ESG-focused approach to finance, which will be of note and of interest to many. Laudable as this is, with looming (or existing) recessions, war, ongoing recovery from Covid and global economical and institutional indifferences, the source of investment presents a challenge unless leading policy makers collaborate to implement a regulatory environment that incentivises more private investment. 

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