Can COP29 deliver a ‘quantum leap’ in climate finance?

Welcome back to the Net Zero Roundup from the Carbon Trust’s Net Zero Intelligence Unit.???

There’s less than a month to go before COP29, and although this year’s conference will be a relatively pared-back affair, the stakes are still high for the climate. Scientists have confirmed that climate change intensified the deadly hurricanes that tore through the US this month, driving home the need for urgent action. In this edition, we unpack the biggest opportunity for COP29 to accelerate change.?

We also provide our usual quick intelligence on key Net Zero developments and share a parting thought on the Net Zero transition in action.?

??Policy: China brings heavy industry into the scope of its carbon market, but tighter rules will be needed to drive deep cuts in emissions.

?? Business: VCMI’s new proposal for a Scope 3 claim needs to encourage rather than distract businesses from tackling Scope 3 barriers

?? Finance: Net Zero Banking Alliance progress report points to the need for banks to ensure climate targets drive real world decarbonisation

?? Parting thought: What can the world learn from the UK’s exit from coal power?

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Under the spotlight

COP29’s focus on finance makes it an important test for the intergovernmental climate system

UNFCCC Secretary, Simon Steill, has described the need for a ‘quantum leap’ in the scale of climate finance provided and COP29 is the moment governments need to put a number to it.

World leaders and negotiators are set to convene in Baku, Azerbaijan from 11-22 November 2024 for the annual UN climate conference, dubbed the ‘Finance COP’. Under the terms of the Paris agreement, world leaders need to agree a New Collective Quantified Goal (NCQG), setting out the amount of finance that will be provided to support climate mitigation and adaptation activities around the world from 2025 onwards. As with most COPs, negotiations are likely to be fraught until the eleventh hour, and three key elements of the NCQG are likely to be major sticking points.

1. The sum of money??

While the NCQG must be more than the previous target of $100bn per year, meeting the true climate finance need will be a colossal task. Estimates vary, but the amount of climate finance needed annually to support the Net Zero transition is certainly in the trillions not billions. Climate Policy Initiative estimates that US$6.2 trillion is needed annually between now and 2030, rising to US$7.3 trillion annually by 2050. National climate targets (Nationally Determined Contributions or ‘NDCs’) also help to illuminate the scale of challenge: 91 developing countries have provided estimates of financial need in their NDCs, totalling $4.5 trillion.?

Some developed countries, including the US, are putting forward a figure of around $1 trillion for the NCQG, but developing countries are calling for multiple trillions. If the NCQG is perceived by developing countries as insufficient, the international trust that the architecture of the Paris Agreement hinges on could be at risk.?

2. Who needs to pay?

When the UNFCCC was created in 1992, categories of countries (known as ‘parties’ to the UNFCCC) were created to reflect the varying levels of responsibility for causing climate change and the interlinkages of this with levels of development. That categorisation was baked into the terms of the previous climate finance target, which straightforwardly outlined that developed countries needed to provide $100bn annually to developing countries.??

Some parties, including the EU, now argue that the list of ‘developed’ countries no longer reflects the global economy or responsibility for climate change, and that rapidly expanding economies such as China should bear more responsibility for international climate finance (China does already contribute some finance through its ‘South-South Climate Cooperation Fund’). China is the world’s largest emitter of greenhouse gas emissions today, but historic emissions data shows that the US is still overall the largest contributor to climate change, responsible for a 20% of total greenhouse gas emissions to date. The EU insists that the UNFCCC categorisation should recognise how responsibility for emissions has changed over time, and EU officials are warning that agreement on the NCQG is contingent on China contributing.?

3. What kind of finance??

Another sticking point for the NCQG negotiations will be the definition of climate finance itself. Should it refer solely to grants? Or should loans count??

The majority of the original $100bn target has taken the form of loans, drawing criticism from developing countries, many of which are already saddled with sky-high debts and repayment obligations, and are reluctant to increase their debt-burden. Indeed, recent data suggests that the world’s least developed countries spend twice as much servicing debts as they receive in climate finance.?

The Bridgetown Agenda, brainchild of Prime Minister of Barbados, Mia Mottley, has a host of recommendations for how the international financial system can be reformed to ensure vulnerable states and developing countries can access debt-relief and the climate finance needed to realise their development goals. Developing countries and a strong cohort of NGOs are pushing for the NCQG to avoid ‘vague commitments’ by specifying the need for grants, rather than loans.

COP29 will shine a light on the trust-based system of the Paris Agreement

While media reports of the COP29 build-up have been awash with stories of limited attendance and limited expectation, it would be wrong to dismiss COP29 as merely a checkpoint on a steady road to a more meaningful COP next year. The negotiation on the new climate finance goal is an inflection point for global climate action.?

World leaders need to prove they will provide the fundamental enablers of the Net Zero transition: money and trust. COP29 needs to deliver not just an incremental step on the road to COP30 but a significant leap.

Read more about the climate finance negotiations and other critical priorities at COP29 in our full insight below.

Quick intelligence

Policy: China brings heavy industry into the scope of its carbon market, but tighter rules will be needed to drive deep cuts in emissions?

The world’s largest carbon market is set to become even bigger by the end of the year, as steel, aluminium and cement companies in China will fall under the scope of the country’s emissions trading scheme (ETS).?

Although the expansion is a step in the right direction (bringing the ETS’ total coverage to 60% of national emissions) it is not likely to drive down emissions immediately. China’s ETS works by permitting companies to generate a certain volume of emissions, and sell any ‘unused’ emissions within their allowance. Since its introduction in 2021, the ETS, which currently only applies to the power sector, has had a limited effect on emissions as companies received more than enough allowances to cover their footprint. Likewise, steel, aluminium and cement companies will receive an uncapped number of ‘free allowances’ until 2027, to allow companies time to get used to carbon reporting and other aspects of the scheme.?

To strengthen the scheme, China should reduce the number of free allowances in order to increase demand (and therefore drive up the carbon price) and introduce an absolute cap on emissions, rather than using carbon intensity benchmarks. Bolstering China’s ETS in these ways could be an effective response to the EU’s Carbon Border Adjustment Mechanism (CBAM), a carbon tax on imported products. By reducing the emissions intensity of Chinese industry, and shrinking the gap between EU and Chinese carbon prices, Chinese manufacturers could reduce their exposure to CBAM fees.??

Business: VCMI’s new proposal for a Scope 3 claim needs to encourage rather than distract businesses from tackling Scope 3 barriers?

As businesses across the board struggle to reduce Scope 3 emissions, the Voluntary Carbon Markets Integrity Initiative (VCMI) has introduced a new green claim for businesses which it hopes will distinguish companies putting in the effort from those that are not.?

VCMI’s proposed Scope 3 claim, which is currently under consultation, aims to recognise companies that are taking steps to overcome Scope 3 barriers and with an emissions gap (between actual emissions and where they should currently be on their Scope 3 target trajectory) of less than 24%. Under the claim, these companies would be allowed to purchase carbon credits to the value of their emissions gap, provided they can demonstrate a plan for phasing out use of carbon credits before 2038 by tackling systemic barriers to Scope 3 decarbonisation.?

The credibility of VCMI’s Scope 3 claim hinges on whether companies are genuinely trying to tackle Scope 3 barriers and get back on track to meet targets, or just paying lip service. VCMI should introduce strict criteria to evaluate whether companies are engaging sufficiently with these barriers – through supplier and industry-wide collaboration and engagement with consumers and policymakers – to ensure the use of the claim (and voluntary carbon markets) does not distract from taking ambitious climate action.?

Finance: Net Zero Banking Alliance progress report points to the need for banks to ensure climate targets drive real world decarbonisation?

Record numbers of banks are joining the Net Zero Banking Alliance, but questions remain around whether their commitments are translating into actual progress towards Net Zero emissions. The Alliance has tripled its membership since its launch in 2021, and so far 97% of members have followed through on commitments to set targets. However, these targets are often difficult to compare or link to real world progress to reduce emissions, arguably due to their wide variety of target-setting methodologies and poor design (such as not aligning with 1.5C scenarios or not including all sources of emissions). This makes it all the more important for banks to follow up with transition plans outlining how they will use financing to scale climate solutions and support their clients to decarbonise in order to reach Net Zero.?

Target-setting issues are not unique to banks – according to Net Zero Tracker , there has been limited improvement in the credibility of corporate Net Zero targets generally since COP27 cemented what ‘good’ looks like. However, a solution tailored to financial institutions is on the horizon. The SBTi’s upcoming Net Zero Standard for Financial Institutions (FINZ) will place more pressure on financial institutions to set clear commitments and policies that drive transformation consistent with reaching Net Zero. For example, ahead of target validation, SBTi will require companies to publish fossil fuel policies including, among other requirements , committing to immediately ceasing new financial flows to coal projects and phasing out coal financing altogether.??

From the Net Zero Intelligence Unit

Catch up on the latest publications from the Net Zero Intelligence Unit:??

?? Cash, credits and country-level plans – our latest insight unpacks the three biggest topics of COP29 ??

??? Discover more about how to overcome Scope 3 hurdles in a new insight from Carbon Trust Director, Aleyn Smith-Gillespie ??

????How can governments deliver on climate goals while managing all the different activities taking place at sea, from fishing and shipping to marine conservation and offshore wind development? The latest policy briefing in our offshore wind series explains how?

??? From discovering ‘greenstalling’ to launching a podcast, check out the Net Zero Intelligence Unit’s highlights from the past year in the Carbon Trust’s 2023 impact report ????

Parting thought?

What can the world learn from the UK’s exit from coal power?

Once home to the world’s first coal-fired power station, the UK became the first G7 nation to exit coal on 30 September, as the country’s last remaining coal power plant closed its doors for good.?

Coal power in the UK has largely been replaced by renewable forms of electricity in recent years. Between 2012 and 2023, coal dropped from 39% to 1% of the UK’s electricity supply, while solar and wind shot up from 6% to 34% over the same period, slashing three quarters of the UK’s power sector emissions in the process. The next milestone will be to deliver a zero-carbon electricity system by 2030. The UK may be the first major economy to phase out coal, but new analysis from the International Energy Agency indicates that growth of renewables under current policies and investment flows will be enough to push global coal power into decline from 2030 onwards.?

As other countries strive to accelerate coal phase-out, the UK’s journey, alongside emerging Just Transition frameworks , offer useful insights. Since 2000, government policy has helped establish long-term market signals and create a flourishing renewable energy industry, while making coal plants increasingly uneconomical to operate. Notable interventions include carbon pricing and energy efficiency standards for power plants, an obligation for energy suppliers to source renewable energy, and long-term contracts for low carbon energy generation (Contracts for Difference).

Thanks for reading. This edition of the Net Zero Roundup was written by Chloe St George and Nina Foster . To ensure you don’t miss out on future monthly Net Zero Roundups, click subscribe.?