The COP28 Climate Conference – Key Implications for Businesses

Roman Dubczak: Hello everyone. I’m Roman Dubczak, Deputy Chair of CIBC Capital Markets. The 28th Conference of the Parties to the UN Framework on Climate Change, also known as COP28,is wrapping up in Dubai on December 12th, 2023,the day of this recording, This year’s event takes stock of the world’s progress towards achieving the 2015 Paris Agreement goals to limit global warming to 1.5ºCcompared to pre-industrial levels by mid-century. To be on track with this goal, science tells us we must half our global emissions by 2030, and we only have a few years left to get there. A number of recent authoritative reports informing the discussions at COP28 found that while some progress has been made globally, much more needs to be done. Leaders in business, policymaking and society at large have been urging for a clear turning point at COP28, not only to agree more ambitious goals such as emissions reduction plans, climate finance commitments, renewable energy targets and more, but also to demonstrate how these would be implemented. So, did COP28 go far enough on ambition? What are the key outcomes and what implications will this have on businesses in their transition to a low carbon economy? Here to provide further insights are Roy Choudhury, Managing Director and Senior Partner in the Financial Institutions Practice at Boston Consulting Group, based in New York, but joining us today from London. And Tom Heintzman, Managing Director and Vice Chair, Energy Transition and Sustainability at CIBC Capital Markets. Thank you both for joining us, today. There are many COP28 agenda themes we’d like to cover however like us to focus on five key themes with implications for business, which includes climate finance, emissions reduction, the future of fossil fuels, carbon markets and nature. So Roy, let’s get started with you. A key issue with this year’s COP28 was not only about accelerating climate action, but how to manage its costs. At BCG you’re the lead for climate sustainability for financial institutions clients. I’m sure you have an interesting perspective on the role of climate finance. Can you please highlight some of the key decisions at COP28 that will help unlock climate finance at scale and how these outcomes might impact clients?

Roy Choudhury: Absolutely. Good to see you Roman. I think this COP was very exciting I would say there were 90,000 people in attendance and the general feeling is that we’re at an inflection point and really mobilizing finance. BCG did a study about a few years back on the need for climate finance, and we estimated that to be around $3 to $5 trillion a year between now and 2050. So that’s a very sizable amount. To give you a sense of where we our today we are roughly around trillion dollars a year in finance being mobilized and the majority of that is being mobilized for renewable energy. So we still have a significant financing gap, between a trillion today vs we need 3 to 5 trillion to really get to net zero. On top of that, if you add nature and biodiversity which are now very closely related to climate action. Whether that’s a nature based solutions think there is a further financing gap of around a trillion dollars and private sector participation and nature and biodiversity is not where it needs to be. Majority of the financing today is driven by public sector. So, there is a significant financing gap, I think, this COP has really been well attended by many sort of financial institutions globally banks, asset managers, insurance companies and there is a willingness to really mobilize capital not just in the developing markets but also in the emerging markets as well. And an area that received a lot of focus was transition finance. As we all know, there has been a significant mobilization of capital for renewable energy and I think that’s now a mature technology. and it’s well on the way to being called but an area that has been more challenging it’s really transition finance i.e. the area that lies between green and brown with a specific focus on the hard to abate sectors and this an area where the COP made some progress think there was launch of the industrial decarbonization accelerator which is really focusing the efforts around mobilization of capital for these hard to abate sectors. so if you take hydrogen as an example, I think there’s been a lot of focus on the hydrogen production, but maybe not as much effort on the demand for hydrogen which is really going to come from the industrial sectors. So what this initiative is trying to do is really bring together some of 1300 companies across major industries to really drive that demand for some of these technologies like hydrogen, biofuels to really accelerate the transitions. So it’s in that area. And transition finance more broadly, I think has made great progress at this COP.

Roman Dubczak: Thanks Roy. Tom, in the early days of the conference, we saw a number of pledges and announcements made by businesses and countries to advance the key COP28 agenda themes. For instance, on emissions reduction, some 50 oil and gas companies backed what’s called an oil and gas decarbonization charter pledging to deliver net zero operations by 2050. Similarly, additional countries have now joined the global Methane Pledge, which was first launched at last year’s COP27, and which commits pledgees to methane emission reductions of 30% by 2030, from 2020 levels over the last decade or so. Canada further picked up on these themes with announcements of their own during COP28, unveiling a proposed oil and gas greenhouse gas emissions cap and draft oil and gas, methane emissions regulations. Can you briefly provide a summary of what all of these announcements are and importantly, what that means for our clients?

Tom Heintzman: Happy to Roman. So, first of all, as you point out, there were two announcements in this sector at COP, the first 50 oil and gas companies representing 40% of global oil production committed to net zero operations by 2050 at the latest, and to also end routine flaring by 2030. In Canada, we picked up these two themes the methane and the oil and gas caps. The federal government announced ambitious emission reductions… So first of all, on December 7th the Government of Canada released draft regulatory framework for the oil and gas sector, and it’s really a greenhouse gas emissions cap. The proposed policy aims to create a national cap and trade system. Under the system, 2030 emissions from the sector would be capped at 35% to 38% below 2019 levels. The cap would apply to all upstream oil and gas, meaning industries involved in the exploration, drilling and extraction of crude oil and natural gas. It would also extend to LNG facilities. The framework includes provisions for emissions reductions through carbon capture, utilization and storage investments. So you’ll get credit for CCUS and you’ll also be able to have a reduction of your emissions 20% for carbon offset credits. And similarly, you can make a contribution to a decarbonization fund which will reduce the effect of reducing emissions by 10%to get underneath the cap. The Federal Government is consulting on the proposed framework until early February and the regulations are targeted to come into force in 2025. And then at COP28both Canada and the US reinforced their commitments to methane and VOCs, volatile organic compound emissions and the reduction of those from the oil and gas sector, by putting in place more stringent methane abatement rules. On December 4th so that’s in COP and here in Canada on December 4th, environment and climate change. ECCC in Canada have published draft methane amendments to its existing methane regulations. Under the new draft methane amendments, the Government of Canada is enhancing the emissions monitoring requirements. So what that really means is facilities are going to have to undertake more frequent inspections. And there’s also going to be an audit requirement that’s proposed to be introduced. From 2027 to 2040 the draft methane regulations will aim to reduce the methane emissions by about 217 megatonnes, which is about 75%. So, that’s a big, a big reduction. It’s proposed that the methane requirements will come into force in 2027and the US EPA methane requirements are broadly comparable to what Canada is proposing.

Roman Dubczak: Thanks Tom. Roy, back to you. As you know, our clients are all managing an energy transition a transition to a lower carbon future for all of us You know,  one of the topics that is as we speak right at the top of the discussion pile, so to speak, is the transition from current hydrocarbons to cleaner energy and the discussion centers is focusing rather, on the words phase out phase down of fossil fuels and a commensurate increase in clean energy. What’s your read on where that stands right now and what are the real implications of that for our clients?

Roy Choudhury: Yeah, great question. And Roman as you know, there’s been a lot of discussion around the phase out of fossil fuels. The draft text, as we know, is still being worked on and it will go down to the last minute to really have all of the parties to agree to the draft language from the stock take. I think there’s areas in which there’s a lot of consensus on the clean energy. I think at this COP there was a commitment to triple the installed capacity for renewable energy by 2030. I think that’s a very positive momentum. I think there has been broad consensus on doubling energy efficiency improvements from a rate of 2% to 4% every year by 2030, again that’s an incredible achievement. I think at the COP, I think there is broad consensus around the phase down of unabated coal and also restrictions on new unabated coal powerplants. We think that is going to make it to the final text. And also, as I think Tom mentioned, there’s been progress around operational really being a good operator in the fossil fuels industry specifically the reduction of methane emissions by 2030. again I think that was a landmark achievement in this COP. Some stakeholders may be disappointed that we did not get to the full language around phase out of fossil fuels. But I see that as glass half full. I think there has been significant there’s been commitments around renewable energy, energy efficiency phase down of unabated coal restrictions on new power plants, methane reduction. So there’s a lot of positive momentum. I think the reduction in fossil fuel language is going to be balanced with energy security and just transition, especially in some of the developing markets where the people that are least able to afford, may be faced with a higher sort of energy cost, if fossil fuels go down drastically without alternate options. We also expect there to be language around phasing out of fossil fuel subsidies, which again is a very positive momentum. in this years, sort of COP. So, not fully there in terms of the language that maybe some stakeholders expected around the phaseout of fossil fuels itself. But definitely the right momentum around some of the more high emitting areas of fossil fuels. So I’m very positive with the outcome of the COP this year.

Roman Dubczak: Thanks Roy. Tom, carbon markets, obviously, another very key theme at COP28. The carbon markets themselves have been an important source of climate and transition finance, especially with growing interest from the buy side, as well as sell side participants trying to scale high quality, high integrity carbon credits. Under Article 6 of the Paris Agreement, the use of such mechanisms will also help the implementation of countries Nationally Determined Contributions, NDCs, a UN sponsored Article 6.4 Global Carbon Market, has been in the works awaiting key decisions at COP28. In these discussions at COP28, specifically around rules governing the standards for high quality credits, what’s the latest that you’ve heard from COP28 about operationalizing these carbon credits, voluntary carbon markets specifically? And how do you think that affects our clients, and what does that do for the nascent voluntary carbon markets?

Tom Heintzman: Great question, Roman. And I’ll start off by saying that the discussions are going down to the wire and probably won’t get concluded during COP. It may feed in afterwards, but there are really two provisions that are being addressed. Article 6.2, which allows the exchange of, they’re called “ITMOs”, internationally transferred mitigation outcomes. They, it’s a bilateral provision, so lets trade amongst countries of ITMOs. And then the second provision is Article 6.4, which is a new centralized UN mechanism that’s being created for countries and companies to trade emissions anywhere in the world. Companies in one country would be allowed to reduce emissions domestically and have all of those reductions sold and credited to another country or another company. So in the lead up to COP28, there was a lot of discussion about Article 6.4 and a supervisory body, so an entity created to help manage the discussions, finalized recommendations on key technical rules governing the standards for high quality credits that would help operationalize the mechanism. However, at COP28, negotiators remain divided and haven’t landed on final text for 6.4. The main sticking point involves essentially two things. First of all, what constitutes a legitimate removal? And it’s the permanence of carbon storage in nature based and technology based removal activities. And second of all, whether reductions in addition to removals would qualify as a carbon unit. It’s important that any future framework be flexible enough to attract investment, but also credible enough to avoid the credit quality concerns that have held back the market. So you’re seeing this tension between these two objectives, and I anticipate that the discussions between these two objectives, and I anticipate that the discussions will extend after COP and we may have a resolution shortly. Then turning to Article 6.2, negotiations have focused on the authorization of these ITMOs, and the interoperability and connection between 6.2 and 6.4 registries, and the reporting of transactions Here to discussions have stalled. There are a few outstanding points, largely related to different views on streamlining of the text and exactly how it’ll get operationalized and work with respect to 6.4. So discussions are continuing. It doesn’t look like we’ll have a consensus on 6.4 coming right out of COP, but there may be one shortly thereafter.

Roman Dubczak: Yeah, thanks Tom. I suspect we’ll be talking about the carbon markets in subsequent months, weeks and webcasts as well. So thanks for that. Roy, back to you. A lot of other topics covered at COP28, most notably where they intersect with climate change being health, biodiversity, food systems and agriculture. What stood out to you as the key outcomes from the event and importantly these discussions? What implications than they have for our clients?

Roy Choudhury: Yeah, I think great question, Roman. And I think this COP really stood out for me for an acknowledgment around the importance of nature, biodiversity, health and also there is increasing realization that the topic of climate and climate mitigation is closely linked to nature and biodiversity. I think Tom mentioned carbon markets where obviously nature based solutions play a critical role. There are also other areas like mangroves, where we know it’s critical for adaptation and resilience for coastal communities so that there is an acknowledgment and increasing convergence across the topics of climate mitigation, adaptation, nature, biodiversity. I think we’re expecting some notable commitments, I think in the final language around the importance of protecting, conserving and restoring nature and nature ecosystems by 2030. Language around reversal of deforestation I think is going to be important and will make its way hopefully into the final language. That’s agreed. There’s also an acknowledgment on the role of oceans and coastal ecosystems as carbon sinks. I think is another notable mention that we are seeing. And nature and biodiversity has been an area where the mobilization of private capital has been minimal. I mean, so far in nature and biodiversity, about 140 billion a year capital has been mobilized, but most of that is funded by the public sector and multilateral development banks rather than the private sector. I think these commitments will potentially create a signal for the private sector to really get involved. In financing, I think the agriculture sector is likely to be the first sector that is impacted, but we are hopeful that the nature and biodiversity focus will extend to many other sectors beyond agriculture and forestry. Some of the other sectors would be chemicals, metals and mining. These sectors have a heavy dependency on nature and also impact nature. And I think it’s in those areas, when you combine that with some of the disclosure requirements that are coming down the pipe, like TNFD, where we will start to see corporate action on nature and that corporate action will then lead into financing needs where banks and other financial institutions are very well placed to really get involved and move the meter on that. So a lot of positive developments and momentum around nature and biodiversity this year at the COP.

Roman Dubczak: Great. Thanks. Roy and Tom, just to wrap up. You know, obviously a lot to discuss. A lot has been discussed. Quite a few open items as we’ve discussed, conversations on fossil fuels, carbon markets, nature based solutions, etc. But I think my takeaway is that the conversation is moving in the direction of coming to a solution. And if you think of the complexity of what COP means and all the individuals involved, and all the nations involved, you know, progress is being made in fits and starts, but it’s being made. So, you know, thank you for your contribution today to the conversation. Clearly, there’s a lot that’s going to be resolved in the coming weeks, months. But these are very, very existentially important conversations. And, you know, we’ll be following and implementing these changes going forward. At CIBC, we aspire to be the leaders in the discussion on paths to decarbonizing our environment and our economy with a focus on the implications and opportunities for our clients within this very complex issue. I’d like to thank our clients for spending some time with us today and we’ll continue to bring you the insights you need to manage and transition your business. Hope to see you soon. Thank you.