What does COP26 mean for Australian business?

Glasgow shines a spotlight on tackling climate change 11 min read

The United Nations Framework Convention on Climate Change (UNFCCC) recently concluded its 26^th Conference of Parties to the Paris Agreement (COP26) in Glasgow, which placed a major spotlight on climate issues. Together with the Glasgow Climate Pact, a suite of announcements signal important changes and opportunities.

In this Insight we unpack some of the key outcomes from COP26 and what they mean for Australian businesses.

Key takeaways 

• COP26 did not produce the major breakthroughs that many climate activists (and some countries) had called for. Post-COP26, the emissions reduction pledges made by countries still leave a 15-17% 'emissions gap' that would see end-of-century global warming at 2.4°C, well above the Paris Agreement goal of limiting warming to 1.5°C.
• The Australian Government attended Glasgow with a fresh ambition of reaching net zero by 2050, but retained its existing interim target of reducing emissions by 26-28% by 2030. This target remains out of step with the 1.5 degree goal, suggesting it may ultimately need to be tightened. In any event, it is eclipsed by the 2030 targets of most Australian states and territories.
• New ground rules have been set for an international carbon trading market (the 'Paris Rulebook'). This provides clarity on the future of projects currently generating tradeable units under the Kyoto Protocol mechanisms, paves the way for those mechanisms to be replaced and may create opportunities in future for the export of units. It also means Australia's carbon market rules will now need to align with the Paris Rulebook to ensure that emissions reductions are verified as eligible for international trading.
• Agreement has been reached to accelerate efforts to phase down unabated coal power. While there has been some criticism of the move away during Glasgow from the 'phase out' to the 'phase down' of unabated coal power, this decision is nevertheless significant. Not only is it the first time the COP has supported a stronger pathway away from reliance on coal, it also sends a strong signal about future policy on coal power globally.
• Deforestation and its consequences for carbon storage is firmly on the climate change agenda. The newly signed Declaration on Forests and Land Use, to which Australia is a signatory, includes a commitment to work collectively to 'halt and reverse forest loss and land degradation by 2030', although it remains to be seen what domestic legislation Australia will enact to give effect to this commitment.
• The newly announced International Sustainability Standards Board (ISSB) will develop and launch global Sustainability Disclosure Standards, to standardise sustainability reporting with existing financial reporting standards. Australia will need to consider its approach to integrating the new standards and guidance into existing legal frameworks for financial disclosures.
• Climate finance continues to be a focus, although whether forward-looking climate finance targets will be met remains to be seen. Broadly, these targets relate to supporting developing countries to achieve their nationally determined contributions under the Paris Agreement, and funding developing countries' adaptation and remediating loss and damage sustained as a result of climate change.

Overview of key COP26 outcomes

The UNFCCC and its related agreements, the Kyoto Protocol and the Paris Agreement, have long formed the pillars of the international legal framework on climate change. As political pressure around the global response to climate change continues to grow, the 26^th conference of parties in Glasgow from late October to mid November this year drew extensive attention from around the globe. The conference concluded with 197 countries agreeing to a new (but non-binding) climate deal, the Glasgow Climate Pact. The COP26 platform was also used to launch a number of ancillary pledges, agreements and initiatives.

1. Keeping 1.5 alive

Every five years, signatories to the Paris Agreement must pledge actions, known as 'nationally determined contributions' (NDCs). These are intended to ratchet up their efforts to reduce emissions so as to achieve the ambitious goal of the Paris Agreement to limit global warming to 1.5°C, compared to pre-industrial levels. While countries are required to commit to, and pursue measures to achieve, their NDCs, actual achievement of NDCs is not a legally binding or enforceable commitment.

According to the IPCC Special Report, to keep the possibility of 1.5°C alive, countries need to cut emissions by 45% below 2010 levels by 2030.¹ Against this backdrop, countries were expected to present at Glasgow substantial updates to their NDCs to reduce emissions by 2030. However, the NDCs presented at Glasgow still leave a 15-17% 'emissions gap' that would see end-of-century global warming at 2.4°C.²

Australia's Long-Term Emissions Reduction Plan, released in October this year, presents a moderate approach to reaching net-zero emissions by 2050, with an intermediate target of reducing emissions by 26-28% below 2005 levels by 2030 (unchanged since Australia submitted its first NDC in 2015). Australia's updated NDC, submitted before COP26, suggests this goal may be exceeded by up to 9%, and commits Australia to seven low-emissions technology goals. However, according to recent comments by the Federal Energy Minister, there is no plan to force emissions cuts, eg by tightening the Safeguard Mechanism baselines.

2. International carbon trading

The interaction between countries' NDCs and international carbon trading is important because carbon trading allows countries to 'import' carbon offsets, thus achieving their emissions targets more cost effectively. Since it was adopted in 2015, article 6 of the Paris Agreement has raised difficult questions around how emissions reductions should be tracked and reported to assist countries to meet their NDCs, and the rules for the international carbon market.

This makes the rules of Article 6 of the Paris Agreement, finally agreed at COP26, among the most significant outcomes for carbon trading markets. This 'Paris Rulebook' provides a governance framework for international emissions trading, to be further developed in 2022 and at COP27 in Egypt. The Paris Rulebook provides clarity on the future of projects currently generating tradeable units under the Kyoto mechanisms, and paves the way for existing and proposed projects to generate credits under the new Paris mechanism. It will also enable Australia work with other countries (eg in the Pacific and Southeast Asia, with the Australian Government’s Indo-Pacific Offsets Scheme as one recent example) to reduce emissions there, and to share the resulting emissions reductions between countries.

There is even potential for this to pave the way for carbon trading as an export opportunity for Australia, because unlike Kyoto mechanisms, the locus of emissions reduction activities can be a developed or developing country. With a large land mass and vast potential for cost effective renewable energy, Australia could in fact set its sights on becoming a net-negative emissions economy, exporting excess abatement, in the long term.

3. Strong move toward coal power 'phase-down'

In a first for a COP, the Glasgow Climate Pact includes an agreement to accelerate efforts towards the phase down of unabated coal power (ie coal power produced without the use of technology, such as carbon capture and storage, to capture the emitted carbon). Countries can of course act more ambitiously than the wording in the Glasgow Climate Pact. This seems likely, given the strong preference for 'phase out' expressed by a number of countries before final agreement on the more moderate language.

China recently pledged to reduce its reliance on coal power and stop building coal-fired power stations abroad. A joint declaration announced by China and the US at Glasgow also broadcasts those countries' intention to cease support for unabated international thermal coal power generation.

4. Deforestation, or rather sustainable forest management

COP26 also saw two major announcements concerning deforestation, which is broadly accepted as contributing to climate change by depleting forests that absorb CO₂.

The first was the Declaration on Forests and Land Use, which gained a total of 141 signatories including Australia, covering 90.94% of the world's forests. The declaration includes a commitment to work collectively to 'halt and reverse forest loss and land degradation by 2030'. 

The second was a new Forest, Agriculture and Commodity Trade (FACT) Statement jointly led by the UK and Indonesia, aimed at supporting sustainable trade between commodity producing and consuming countries, which was signed by 28 countries (of which Australia was not one), representing 75% of global trade in key commodities that contribute to deforestation. However, the FACT Statement appears to place more emphasis on sustainable forest management, rather than an end to deforestation.

5. The call for global uniformity of financial disclosure protocols

In the realm of financial disclosures, sustainability data has long been a grey area, with companies adopting informal and often inconsistent practices for disclosing how their businesses are responding to ESG issues like climate change. This is about to change following the announcement at COP26 of the International Sustainability Standards Board (ISSB), an important addition to the International Financial Reporting Standards (IFRS).

Charged with establishing a comprehensive global baseline of sustainability disclosures for financial markets, the ISSB will develop and launch the IFRS Sustainability Disclosure Standards (SDSs). While there is no firm timing for the launch of the SDSs, following the appointment of board positions, a period of public consultation is expected prior to the SDSs being finalised. These standards will provide much-needed standardisation to sustainability reporting and elevate its importance to the same level of acceptance and rigour as financial reporting.

6. Access to climate finance

Another pressing topic at COP26 was climate finance, with discussions taking place against the backdrop of a failure to meet the US $100 billion annual climate finance target for 2020, a goal set over a decade ago. Negotiations centred around three key issues.

• First was financial support for developing countries to achieve their NDCs. A recent assessment by the UNFCCC’s Standing Committee on Finance concluded that these nations would require nearly US$6 trillion up to 2030, including domestic funds, to support just half of the actions in their NDCs.
• Second was funding for developing countries' loss and damage sustained as a result of climate change, which have historically been underfunded.
• Third was funding for adaptation, an issue faced disproportionately by the Asia-Pacific region which is prone to weather extremes.

Actions you can take now

Model the implications for your business of Net Zero by 2050, both on the more leisurely '28% down by 2030' path and on the more aggressive '50% down by 2030'. What would these scenarios mean for your operations, costs and competitive landscape?

Start building a carbon trading strategy, both domestically and internationally. Planning ahead will mean you can access the liquidity of carbon markets while reducing the considerable red tape and friction costs.

Develop a clear strategy on coal production and use. With many countries moving to a 'phase out' strategy, it will be increasingly difficult to remain ambiguous on coal. Companies will either need to be clearly 'in coal' or 'ex coal'.

Consider the direct and indirect risks and opportunities arising from fresh commitments to halt deforestation by 2030, and take the tightening of deforestation into account in corporate strategy. How will this shift impact your operations and your value chain?

Revisit your financial disclosure protocols. While the standardised disclosures being prepared by the ISSB will likely take several years to mature, the direction of travel has been established. Companies that are ready to act early to adopt the new standards may have a competitive and compliance advantage in the future.