The Finance COP in Baku, Azerbaijan, ended on Saturday, 23 November, with a new agreement on how developed nations will help developing nations address the climate crisis.
This year’s conference centred on how the world is going to collectively pay for the changes needed to reduce global greenhouse gas emissions and meet the goals of the Paris Agreement; to limit global warming to 1.5 degrees Celsius compared to pre-industrial levels.
Ultimately, while a deal was reached at COP29, many attendees and COP watchers walked away dissatisfied.
The issue – sustainable growth
Over the past decade, emerging economies accounted for 75% of emissions growth, and to meet the goals of the Paris Agreement, that growth needs to rely on low-carbon energy sources and not fossil fuels. To address this, COP29 focused on how developing countries were going to pay for the new technologies and infrastructure needed to transition toward clean energy. Afterall, to avoid the worst impact of global warming, the world will collectively need to cut global emissions by 42% by 2030.
The concept of rich nations supporting poor countries to adapt to climate change is not new. The 1992 Rio Conventions formalised this responsibility since the wealthiest countries have consumed most of the world’s carbon budget and should, therefore, take responsibility by subsidising low-carbon energy sources to support sustainable economic growth in emerging economies.
A two-pronged solution
The COP29 Agreement centred around two key areas. First, it established an annual amount developed nations would provide emerging markets to help address the climate crisis. Secondly, it renewed efforts to create a global carbon credit trading market.
- Developed nations pledged USD$300 billion annually by 2035 in financing for emerging economies to mitigate and adapt to climate change. This is triple the amount previously pledged but far short of the estimated USD$1.3 trillion that economists predict will be needed to finance the transition.
- The other key outcome from this year’s COP was the resurgence of a global carbon credit trading market framework. A global carbon credit market would allow high emitting companies or countries to purchase “credits” to emit more than their allotted amount. This would reward those who decarbonise faster as they can sell their credits to high emitters. Enshrined in the Paris Agreement, a global carbon market has proved a non-starter in the ten years since, largely due to a lack of oversight. To help remedy this, the COP29 agreement allows for stronger UN oversight on the accounting, auditing, and trading mechanisms of the carbon credits. If the new framework proves effective in facilitating an active global carbon market, it will contribute to the funding emerging markets need to address the climate crisis while also providing the incentive for large emitters to cut GHG emissions.
Corporate calls for stability
The corporate world stayed largely quiet at this year’s COP, reflecting low confidence in an impactful outcome. While businesses might not have pushed the agreements or made side-deals as at previous COPs (e.g., the Glasgow Financial Alliance for Net-Zero which formed at COP26), some members of the private sector shared their views on how to address risks arising from the climate crisis.
For example, Exxon CEO, Darren Woods, said in an interview to the Wall Street Journal, that a repeated exit of the 2015 Paris Agreement by the United States would “create uncertainty and confuse global efforts to stop the worst effects of climate change.” He compounded his point by calling on President-elect Trump to remain in the Paris Agreement for his second term.
Additionally, the majority of major oil companies (and their shareholders) are supportive of the Paris Agreement and have been working to lower their emissions with the expectation that regulations would support this. The IEA reported in 2023 that, under today’s policy settings, the energy supply has structurally shifted to the point that peak oil and gas demand can be expected by the end of this decade, indicating that irrespective of politics, clean energy is the future.
In an open letter shared ahead of COP29, more than 100 companies pushed governments to reinforce supportive policies, incentives, and streamlined processes to spur the wider ‘green’ market, facilitate uptake, and reduce green premiums for low-carbon technologies. Reinforcing the point, the head of the UN Climate Change department, Simon Stiell, said the outcomes from the annual COP negotiations have the potential to unleash huge benefits for countries, with new jobs, more affordable energy, and massive opportunities for businesses.
The growing divide
COP29 was shockingly contentious, even among COPs, as negotiations approached the agreed deadline (Friday night) and developed countries had still not laid their cards on the table. Once their hand was revealed, developing nations voiced deep unhappiness with the financing figures provided. India’s delegate, Chandni Raina, noted the figure as “a paltry sum, little more than an optical illusion that will not address the enormity of the challenge we face.”
Saudi Arabia made negotiations even more fractious by flat out refusing to sign any agreement which contained mention of further transitioning away from fossil fuels (wording which was considered a win at last year’s COP28). The global discussion on the part fossil fuels play in the low-carbon transition was pushed to next year’s COP30.
What’s next?
COP30 is set to be hosted in Brazil, a country with a progressive government looking to position itself as a global climate leader. The negotiations will be heavily influenced by Marina Silva, Brazil’s environmental minster and an experienced global climate diplomat. If the United States does exit the Paris Agreement and participation in COP, China may step up its influence with its growing renewable energy industry in mind.
After two years of COPs hosted by petrostates, pundits are expecting – and hoping – for more aggressive goal-setting and potential outcomes to come.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.