Was COP26 talkative?

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It’s easy to see why climate activists would dismiss international negotiations like the recent COP26 climate summit as a hangover. But in a world of geopolitical rivalries and significant coordination challenges, compromise – and the disappointment that can accompany it – is a reality.

Xavier Vives, Project union

November 21, 2021, 12:20 p.m.

Last modification: November 21, 2021, 12:38 PM

Xavier Vives. Illustration: SCT

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Xavier Vives. Illustration: SCT

“Blah, blah, blah.” This is how young climate activist Greta Thunberg characterized this year’s climate summit in Glasgow (COP26) – before it even started. She was right, in a way. Talking is cheap whenever international agreements lack effective mechanisms to verify and enforce commitments.

Gatherings like COP26 tend to lack credibility, even when presented as a “last chance” to prevent the end of the world as we know it. Nonetheless, such meetings help to raise awareness of the problem and potential solutions, and it is better than the denial of years past.

Admittedly, the final agreement produced at COP26 seems weak, considering that the goal of keeping global warming below 1.5 ° Celsius is now barely alive.

Instead of relentlessly phasing out “coal power”, it will now be “phased out”, a crucial change inserted at India’s insistence (and with China’s assent). While “inefficient fossil fuel subsidies” will always be “removed”, the implication is that “efficient” fossil fuel subsidies remain an option.

But, remember, talking is cheap. Given India’s heavy reliance on coal, it may be better for it to set its target of net zero emissions for 2070 rather than proclaiming a ‘mid-century’ commitment. does not intend to respect.

More generally, there are two main obstacles to achieving the world’s declared climate goals. The first is geopolitical, illustrated by Russia’s use of natural gas as a strategic tool to divide Europe between those who use nuclear energy as an energy transition technology (France) and those who use gas (Germany).

Major rivalries like the one between the United States and China are even more important. Here there is good news: COP26 appears to have led the world’s two biggest polluters to declare that they will work together to tackle climate change. (We’ll know if it’s more “blah, blah, blah” if and when bilateral military tensions increase.)

The second big obstacle is the disagreement on how to compensate less developed countries for abandoning or abandoning carbon-intensive technologies. The question is not only who foots the bill, but also how the funding should be provided.

The history of development aid is not particularly encouraging. And while it is well established that a global carbon price is necessary to address the negative externality of greenhouse gas emissions, establishing such a regime is difficult. Most carbon markets remain underdeveloped.

The agreement adopted by nearly 200 countries at COP26 will allow countries to achieve their climate goals by purchasing offset credits representing emission reductions achieved by others. This system will bring more clarity, but it is open to manipulation.

Worse, it allows countries to carry over carbon credits recorded since 2013 and created under the Kyoto Protocol, potentially paving the way for a flood of the emissions market and an artificially low carbon price.

Gatherings like COP26 tend to lack credibility, even when presented as a “last chance” to prevent the end of the world as we know it. Photo: Reuters

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Gatherings like COP26 tend to lack credibility, even when presented as a “last chance” to prevent the end of the world as we know it.  Photo: Reuters

Gatherings like COP26 tend to lack credibility, even when presented as a “last chance” to prevent the end of the world as we know it. Photo: Reuters

The COP26 agreement also encourages the public and private sectors to mobilize more climate finance and foster innovation in green technologies. To this end, a promising model is Operation Warp Speed, the U.S. public-private partnership that made possible the extremely rapid development of Covid-19 vaccines.

The role of the financial sector in transferring resources from dark technologies to green technologies will be crucial. Asset managers and financial intermediaries can act out of pure self-interest by disengaging from dirty assets that they consider too risky (either because of the effects of climate change or because of the transition that will make them obsolete).

Alternatively, they can divest at the request of others who have a green preference or a longer horizon on which to internalize climate issues. Universal owners such as large pension funds, for example, are increasingly aware of the systemic risks posed by climate change.

In any case, the financial sector is now coordinating to align itself more closely with the global climate agenda, as evidenced by new initiatives such as the Glasgow Financial Alliance for Net Zero, chaired by the former Governor of the Bank of Canada. ‘England, Mark Carney.

It has become increasingly clear that voluntary mandates for sustainable finance backed by financial intermediaries need to be significantly more stringent than they are today.

Green shareholder activism can force greater disclosure of climate risk exposure or even outright divestment; but mandatory disclosure in a clear framework will likely be necessary to control greenwashing. The new International Sustainability Standards Council is a welcome development in this direction.

Finally, financial regulation and central bank policies also have a key role to play in promoting a green economy. Central banks, especially after the 2007-09 financial crisis, have a mandate to ensure financial stability, and as climate change poses a systemic risk, they will need to integrate it into their prudential frameworks.

They will also need to foster a more transparent disclosure environment, so that climate risk is properly assessed (although this is easier said than done). Many central banks are already engaging in weather stress tests and designing prospective transition scenarios.

More controversial are questions of whether, and to what extent, central banks should favor green assets (or penalize browns) in their asset purchase programs, and to what extent capital requirements should be adjusted. to sustainability criteria.

Should brown loans have a capital surcharge beyond risk considerations (or should green loans have a haircut)? Such provisions would make no sense in a world where carbon is properly priced, but we are far from this scenario.

The climate objectives of the international community remain very ambitious, in particular for a world characterized by rivalries between great powers. Rarely do parties with divergent interests work as a team. Compromise is necessary, and “cheap talks” is the first step towards agreeing on a common course of action.


Xavier Vives, professor of economics and finance at IESE Business School, is co-author of the report “Resilience of the financial system to natural disasters”.


Disclaimer: This article first appeared on Project Syndicate and is published under a Special Syndication Agreement.


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