“Transitioning Away” – Vinson & Elkins Examines Key Outcomes Agreed at COP28 and the First Global Stocktake

As we reported in our V&E Insight article in November 2023 (Shaping the Future: Unraveling the Impact of COP27 and Anticipating the Path Forward at COP28), the list of goals for COP28 was extensive: including an “ambitious” energy package; and climate finance related objectives, including the operationalization of the loss and damage fund and related funding arrangements envisaged in the Sharm el-Sheikh Implementation Plan that resulted from COP27.

In this V&E Insight, we explore the GST Decision and the other key takeaways from the formal negotiations and on the sidelines at COP28.

First Global Stocktake

The GST Decision is described in the final text as the “first global stocktake” – being the first COP to conclude the formal assessment (the so-called global stocktake) to evaluate progress made towards mitigating global warming since the Paris Agreement. This process is intended to occur every five years and is therefore a significant milestone in and of itself in the context of UNFCCC summits. The Paris Agreement, being the outcome of the negotiations at COP21 in Paris in 2015, featured the headline goal of limiting temperature increases to 1.5 degrees Celsius above pre-industrial levels.

The GST Decision has caught headlines for calling on Parties to the UNFCCC to contribute to, “transitioning away from fossil fuels in energy systems [. . .] accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science.” This wording falls short of referencing the “phase out” or “phase down” of fossil fuels, as demanded by European Union (“EU”) countries, the Alliance of Small Island States (an intergovernmental organization comprised of 39 coastal and island countries), and the United Kingdom, among others, and does not set any firm targets or timeframes for ceasing the exploration, production or use of fossil fuels.

The wording agreed by almost 200 countries is the first COP decision to explicitly address all fossil fuels. Notwithstanding the reference to “transitioning away” from fossil fuels, this goal is heavily caveated in the text, such that Parties should contribute to this goal “in a nationally determined manner”, “taking into account [. . .] their different national circumstances, pathways and approaches”, and “in a just, orderly and equitable manner.”

The GST Decision also states that “transitional fuels” can play a role in facilitating the energy transition while ensuring energy security — an explicit recognition of the role of natural gas, including LNG, as a transition fuel.

Other mitigation measures called for under the GST Decision include:

• tripling renewable energy capacity globally and doubling the global average annual rate of energy efficiency improvements by 2030;
• accelerating efforts toward the “phase down” of unabated coal power;
• accelerating efforts towards net zero emission energy systems, utilizing zero- and low-carbon fuels well before or by around 2050;
• accelerating zero- and low-emission technologies, including renewables, nuclear, abatement and removal technologies (such as carbon capture, utilization and storage) and low-carbon hydrogen production;
• accelerating and substantially reducing non-carbon dioxide emissions globally, including methane, by 2030;
• accelerating the reduction of emissions from road transport, including through developing infrastructure and rapidly deploying zero- and low-emission vehicles; and
• phasing out “inefficient” fossil fuel subsidies that do not address energy poverty or just transitions, as soon as possible.

Estimates set out in the GST Decision put the adaptation finance needs of developing countries at US$215 billion to US$387 billion annually to the end of the decade, with around US$4.3 trillion per annum needing to be invested in clean energy in the same timeframe, to reach net zero emissions by 2050.

The GST Decision also emphasizes the importance of conserving, protecting and restoring nature and ecosystems, including through enhanced efforts towards halting and reversing deforestation and forest degradation by 2030, and invites the Parties to preserve and restore oceans and coastal ecosystems and scale-up ocean-based mitigation action.

Loss and Damage Fund

The operationalization of a Loss and Damage Fund (the Fund), established with the aim of providing financial support to developing nations most impacted by the consequences of climate change, was a key goal as negotiations kicked off at COP28. A major breakthrough took place on the first day of the plenary with agreement on the Fund, followed by initial pledges totaling approximately US$700 million, with the UAE and Germany each committing US$100 million to the Fund. The United States pledged US$17.5 million, with climate envoy John Kerry indicating that, while supporting the creation of the Fund, the United States will “under no circumstances” pay climate reparations. By contrast, the UN Least Developed Countries (a grouping of 46 countries) has proposed that the Fund should unlock at least US$100 billion by 2030 to address damage caused by climate change. The plan agreed at COP28 for the further operationalization of the Fund invites the World Bank to host the Fund and serve as its trustee for the first four years.

ALTÉRRA

The UAE announced the launch of a US$30 billion climate investment fund called ALTÉRRA. The investment vehicle, chaired by COP28 President Sultan Al Jaber, in collaboration with BlackRock, Brookfield and TPG, has already committed US$6.5 billion to climate- and emerging markets-related funds for global investments. A US$5 billion component of the fund is earmarked for investments in “Global South” countries. The UAE has announced that ALTÉRRA, as the world’s largest private investment vehicle for climate change-related investments, will aim to invest up to US$250 billion by the end of the decade.

Carbon Markets

Reviving the global trade in voluntary carbon credits featured heavily in the opening days of the COP28 negotiations. The GST Decision emphasized the “urgent need” for voluntary cooperation between countries in accordance with Article 6 of the Paris Agreement (i.e. the decision that was the outcome of COP21 held in Paris in 2015). Article 6.2 of the Paris Agreement created the framework for countries to voluntarily trade or exchange domestically generated emission reductions and removals through bilateral or multilateral agreements. Article 6.4 of the Paris Agreement created a mechanism, whereby a project developer in one country can reduce emissions in that country and have those reductions credited so that it can sell them to a private or public entity in another country. The buyer may then use these credits to comply with its own emission reduction obligations.

COP28 did not result in any agreement on the operationalization of Articles 6.2 or 6.4 of the Paris Agreement. This is likely to be a headline issue for the Parties to resolve at COP29, which is scheduled to take place in Baku, Azerbaijan in 2024.

International pledges

New pledges and alliances were made on the sidelines of COP28, particularly in the first few days of the negotiations, covering issues ranging from renewables and nuclear capacity to methane abatement.

• Global Renewables and Energy Efficiency Pledge – Some 123 countries committed to working together to triple the world’s installed renewable energy generation capacity to at least 11,000 GW by 2030 and to double the global average annual rate of energy efficiency improvements from around 2% to 4% each year until 2030.
• Declaration to Triple Nuclear Energy – Some 22 countries from four continents, including the United States, Canada, Japan, the UAE and the United Kingdom, launched the Declaration to Triple Nuclear Energy. The Declaration recognizes the “key role” of nuclear energy in achieving global net zero greenhouse gas emissions by 2050. Core elements of the Declaration include the participants working together to advise the “global aspirational goal” of tripling nuclear energy capacity from 2020 to 2050 and a commitment to mobilize investments in nuclear power, including through innovative finance mechanisms. The United States, Canada, France, Japan and the United Kingdom also announced plans to mobilize US$4.2 billion in government-led investments in the nuclear energy supply chain, including to enhance uranium enrichment capacity and establish a global uranium supply market without the involvement of Russia.
• New members of Global Methane Pledge – Launched at COP26 in November 2021 and led by the United States and the EU, members to the Pledge committed to working together to collectively reduce methane emissions by at least 30% below 2020 levels by 2030. This year, Turkmenistan, Kazakhstan, Kenya, Romania and Angola joined the Pledge, bringing total membership to 155 states. Partners to the Pledge also announced US$1 billion in new grant funding for methane action mobilized since COP27 to target methane abatement projects in developing economies. This is crucial, alongside the work required by the banks, multilateral development banks and governments, to ensure that emerging markets have the technology, knowledge and resources to install technologies for preventing and mitigating methane emissions.
• Cement & Concrete Breakthrough initiative – Led by Canada and the UAE, the initiative aims to enable countries to share best practices on a range of policies and other measures to decarbonize the cement and concrete sector, which is a significant source of industrial CO₂ emissions globally.
• Buildings Breakthrough initiative – Led by France, Morocco and the UN Environment Programme, the initiative launched at COP28 aims to make near-zero emissions and climate resilient buildings the new normal by 2030. Twenty-seven countries have so far pledged their commitment to the Buildings Breakthrough initiative to accelerate change in the sector, which accounts for over 20% of global greenhouse gas emissions.
• “United for Nature” – COP28’s Nature, Land Use and Ocean Day resulted in a joint statement between the COP28 Presidency and China (holding the Presidency of the Convention on Biological Diversity), which signaled a new commitment for countries to coordinate to implement nature and climate strategies. Twenty-one countries also endorsed the Mangrove Breakthrough, which has as its goal the restoration and protection of 15 million hectares of mangroves globally. Mangroves play a crucial role in climate adaptation and mitigation as they sequester significant amounts of carbon, support biodiversity, enhance coastal resilience, and sustain local livelihoods. However, only a small fraction of climate finance is directed towards marine and coastal ecosystems.

Disclosure Regimes

While perhaps not the main focus of COP28, there were also some interesting developments relating to various climate and sustainability related disclosure frameworks and regimes — notably, the Task Force on Climate-related Financial Disclosures (“TCFD”) and the Task Force on Nature-related Financial Disclosures (“TNFD”).

• In 2017, the TCFD released a series of eleven climate-related financial disclosure recommendations built around four central pillars: Governance, Strategy, Risk Management, and Metrics and Targets. Following the publication of the recommendations, an increasing number of companies began to voluntarily disclose their climate-related efforts and activities using the framework. And, notably, in March 2022, the United States Securities and Exchange Commission released a proposed rule on climate-related disclosures, largely based on the requirements of the TCFD recommendations. At the end of COP28, the TCFD disbanded. The Financial Stability Board (“FSB”) has requested the International Financial Reporting Standards (“IFRS”) Foundation take over the monitoring of the progress of companies’ climate-related disclosures. Significantly, earlier this year, the FSB announced that the new sustainability standards of the International Sustainability Standards Board — IFRS S1 and S2 — reflected the “culmination” of the work of the TCFD.
• The TNFD, modelled on the TCFD, released its final TNFD recommendations in September 2023, following a two-year design and development phase. The disclosure recommendations are also structured around four pillars, consistent with the TCFD, and include fourteen recommended disclosures. Across the two weeks of COP28, the TNFD published a range of new draft sector guidance, two new discussion papers, and the first three of five capacity building modules — “TNFD in a Box”. The draft sector guidance includes: oil and gas, metals and mining, forestry and paper, food and agriculture, electric utilities and power generators, chemicals, biotechnology and pharmaceuticals, and aquaculture, as well as additional guidance for financial institutions. The draft sector specific guidance documents provide further information on how to apply the TNFD’s “LEAP” approach (Locate, Evaluate, Assess and Prepare), specific disclosure metrics for the sector, and matrices detailing potentially material dependencies and impacts on nature specific to the sector.

These developments signal two larger overarching themes: first, the move toward consolidating climate-related disclosure regimes following the fulfilment of the TCFD’s remit and its subsequent disbandment; and second, the increasing focus on nature and its important role in progressing toward a net zero future. Several announcements were made at COP28 with respect to nature — for example, as noted above, the Joint Statement on Climate, Nature and People, endorsed by 18 countries, to affirm and commit to strengthening shared efforts to foster synergies between climate, biodiversity and land. While the TNFD recommendations are still relatively new, the recognition of the importance of nature at COP28 is perhaps indicative of a move toward increasing disclosures in this space, integrated alongside climate, as the world transitions to a low-carbon economy.

These developments also follow on the heels of the EU Corporate Sustainability Reporting Directive (“CSRD”) that entered into force in January 2023. With a phased-in timeline for initial reports due starting from 2025 to 2029, the CSRD introduces new environmental, social & governance (“ESG”)-reporting requirements for thousands of EU and non-EU entities. The transitional phase of the EU Carbon Border Adjustment Mechanism (“CBAM”) entered into application in October 2023 and also introduces new ESG-reporting requirements. CBAM equalizes the price of carbon between domestic products and imports, which disincentivizes importing carbon-intensive products as a replacement for more expensive, greener, EU-produced alternatives. The full scope of CBAM will enter into force on 1 January 2026.

The road to COP29

COP29 is set to be hosted in Baku, Azerbaijan in November 2024. The focus is likely to fall on Parties to the Paris Agreement as they prepare to submit their second national climate plans in time for 2025, which will be informed by the outcome of the Global Stocktake at COP28. Aside from building on the legacy of COP28, the issue of climate finance is likely to take center stage in Baku. Negotiations on carbon markets under Article 6 of the Paris Agreement are also set to continue at COP29 after those talks failed to conclude in agreement in Dubai.

In 2024, we expect to continue to see further policy, legislative and regulatory developments around energy transition, climate and sustainability and will be covering these here at V&E Insights.