What is COP27?
"COP" stands for "Conference of the Parties" – that is, the countries that have signed up to the United Nations Framework Convention on Climate Change (UNFCCC). COP27 is the 27th meeting of those parties. This is essentially a global climate summit where many of the world’s leaders will meet to see if they can agree faster action to tackle climate change.
COP27 will be hosted by Egypt and held in Sharm El-Sheikh on 6 November to 18 November. See here for the COP27 main agenda.
COP27 is occurring against a very different global backdrop to when COP26 was held in Glasgow in November last year. We are seeing an energy and food crisis unfold, with spiralling inflation and an associated cost of living crisis across the globe since Russia’s invasion of Ukraine in February this year – in what some are calling a "polycrisis era". This has resulted in some countries prioritising energy security and extending the lifeline of coal and nuclear power stations, as well as investing in oil & gas, in particular LNG. In addition, many countries (including developed nations) have experienced extreme weather events this year linked to climate change, for example with record heatwaves and wildfires in Europe and the US, devasting floods in Pakistan and severe drought in Africa.
One of the key objectives of this COP will be to try and ensure that nations’ climate change commitments remain on track despite the geopolitical tensions and economic turmoil.
Another defining feature of this COP is likely to be around ensuring a "just transition" to a net zero future, not least because the climate change issues faced by Africa and the "Global South" in particular are high on the agenda, leading some to have labelled this as "Africa’s COP".
The conference is arranged around 11 thematic days, including Finance Day, Decarbonisation Day, Adaptation and Agriculture Day, Energy Day, Biodiversity Day and Solutions Day. In addition to the main events at the conference, there will also be a number of fringe events happening, including the COP27 "Green Zone" which is open to businesses and the general public.
As was the case with COP26 last year, there are also likely to be other high-profile announcements made in the lead up to and during the summit, which are not officially part of the COP27 agenda. For example, announcements are expected by the International Sustainability Standards Board (ISSB) and the Glasgow Financial Alliance for Net Zero (GFANZ).
Where did COP26 leave the discussion?
To recap, under the Glasgow Climate Pact, the 196 countries that are party to the Paris Agreement agreed that "the impacts of climate change will be much lower at the temperature increase of 1.5°C compared with 2°C, and resolve to pursue efforts to limit the temperature increase to 1.5°C".
Earlier this year, the World Meteorological Organization warned that there is a 50:50 chance of the global temperature temporarily reaching the 1.5°C threshold in the next five years, which would give the world a taste of what the impacts would be if the 1.5°C threshold were crossed long-term (see here). A small increase in global temperature may not sound like much but the experts have said that it can make a big difference in terms of the impacts (see our previous blog post for an explanation).
The Intergovernmental Panel on Climate Change (IPCC), comprised of the world’s leading climate scientists, warned in April this year that the net zero transition is still possible but time is rapidly running out. In particular, to keep global warming below 1.5°C, the IPCC believes that global greenhouse gas (GHG) emissions must peak before 2025 at the latest, reduce by 43% by 2030 (while simultaneously reducing methane emissions by about a third), and reach net zero in the early 2050s; and that to keep global warming below 2°C, emissions must peak before 2025, reduce by 25% by 2030, and reach net zero by the early 2070s (see here).
The Glasgow Climate Pact also included agreements on coal, carbon markets, finance for developing nations and national climate targets. There were also separate commitments on other topics such as methane and deforestation. For more information, see our recap of COP26 here, here and here.
What will be discussed at COP27?
Renewal of NDCs
The aim of COP27 is to "… limit global warming to well below 2C and work hard to keep the 1.5C target alive."
At COP26, all countries agreed to revisit and strengthen their 2030 climate targets and Nationally Determined Contributions (NDCs) to restrict global warming to 1.5°C. (NDCs set out countries’ national climate targets as required under the Paris Agreement.) However, as of 6 October 2022, only 20 nations had submitted an updated NDC, the remaining 173 were yet to update their targets – so most countries have not submitted revised NDCs (see here). Egypt updated its NDC in July 2022, setting quantified goals for reducing emissions by 2030, but these were conditional on getting US$246 billion in outside support and did not include a quantifiable target for reaching net zero emissions.
A key decision that world leaders will need to make at COP27 is whether countries will be able to agree more ambitious targets to reduce GHG emissions than those in their current NDCs, in order to implement the Glasgow Climate Pact’s call to review ambition in NDCs.
COP27 is also intended to focus on how decisions and pledges made at COP26 will be implemented. Nations will be expected to present the ways they will put the Paris Agreement into practice in their home countries, through legislation, policies and programs. However, some commentators, including, Emmanuel Faber, ex-Danone CEO and now head of the ISSB, are of the view that this COP is more likely to focus on "just transition" (discussed below) and that updated climate targets/NDCs will be pushed out to COP28 next year. We will have to wait and see how these discussions unfurl during the conference.
The "energy trilemma"
Given the current geopolitical tensions and associated energy crisis, discussions are bound to centre on "the energy trilemma". (For those less familiar with the topic, "energy trilemma" refers to the competing needs of delivering energy security, affordability and sustainability.) Although "Energy Day" at COP27 will focus on the transition from a global economy dependent on fossil fuels to a renewables-based and green hydrogen economy, energy security is central to the discussions. The "Decarbonisation Day" will focus on those high-emitting sectors (oil and gas, cement and steel) that are critical to mitigate global warming.
It is still too early to tell whether the current energy crisis will result in a boost to renewables and the net zero transition or whether the ramping up of (non-Russian) oil and gas production (especially LNG) and the repivot to coal in some countries will derail the net zero transition and countries’ ability to meet their climate targets. In the near term, some governments’ responses to the war in Ukraine may lead to an increase in coal use and a resurgence of investment in fossil fuels, which may increase global GHG emissions in the short term. However, some market analysts (e.g. Morningstar, Moody’s and others) have said that this is likely to be a near-term pivot and that in the medium- to long-term the trajectory is still for the private and public sectors to keep investing in the net zero transition so that we do not miss the 2050 target. One notable example is the REPowerEU package where the EU have set out a three-pronged approach to energy security consisting of: (first) increase energy efficiency to reduce energy demand; (second) ramp up renewable energy; and (last) increase LNG in the short term to deal with immediate supply pressures (see here).
"Loss and damage"
The concept of "loss and damage" under Article 8 of the Paris Agreement is expected to be another key topic at COP27. "Loss and damage" refers to the destruction caused by climate change and how it should be paid for. Lower-income and climate-vulnerable countries have long argued that industrialised nations should pay compensation for their responsibility for climate change. Many developing countries vulnerable to sea level rises and other climate impacts have asked for the creation of an international "loss and damage" finance facility, with China and the Group of 77 (a coalition of developing nations at the UN) looking to propose that loss and damage financing be included as a topic for discussion on the official COP27 agenda.
"Loss and damage" has been a contentious topic for years, with developed countries reluctant to accept financial responsibility for climate change caused by industrial activity and offer compensation to developing countries and very little progress was made at COP26 on this.
The opening speech of COP27 by the Prime Minister of Egypt is on "Climate Finance in a Polycrisis Era", which places climate finance at the centre of the COP discussions. Despite there being no official UN definition of what “climate finance” covers, the focus will be on how to make progress on this topic.
At COP26, the parties agreed that the US$100 billion per year that developed countries had promised in 2009 to help developing countries adapt to the worst effects of climate change would be mobilised “urgently” through to 2025 – but very slow progress has been made on this since then so we can expect that to be back on the agenda for COP27.
The importance of adequacy and predictability of climate finance is key to achieving the goals of the Paris Agreement, to this end there is a need for enhanced transparency of finance flows and facilitated access to meet the needs of developing countries, especially Africa, LDCs, and SIDS.
With extreme weather events from heatwaves, floods, droughts, forest fires, and failed harvests becoming an everyday reality for many developing countries and first-hand experience of extreme weather events in developed countries this year, the need for climate adaptation (as opposed to just climate mitigation) will likely receive a much greater focus.
Scaling up of financing for both climate adaptation and resilience will hopefully receive some much-needed attention, with a focus on how to increase the bankability of adaptation projects and attractiveness to investors.
At COP26, richer nations made a historic commitment to provide US$40 billion annually to low- and middle-income countries to help with "adaptation finance", from 2025 - although this is still less than what experts believe is necessary. In any event, pledges made so far do not come near this target. It remains to be seen whether progress can be made in closing this "adaptation gap" at COP27.
This is separate from the 2009 promise that developed countries would, by 2020, jointly mobilise US$100 billion per year to help developing countries with climate change mitigation and adaptation - and the related question of who pays for the "loss and damage" (discussed above).
COP27 has been given the strapline: "Together for implementation". Egyptian Environment Minister, Yasmine Fouad, has said that the COP27 conference will be held under this slogan as dealing with climate change requires solidarity - governments, the private sector and civil society need to work, in tandem.
This also chimes with theme of a "just transition" as the emphasis is on ensuring "adequate representation and participation from all relevant stakeholder in COP27, especially vulnerable communities and representatives from countries in the African region who are increasingly affected by the impacts of climate change".
Ensuring a just transition
Throughout the conference, a key theme will be on ensuring a just and equitable transition to a net zero economy, especially for communities that have relied on emissions-intensive sectors for their livelihoods.
The conference has also been dubbed an "African COP", partially due to the location but also the fact that the African continent has been severely impacted by climate change, with a focus on water security and food shortages. There is also a focus on the "Global South", with SE Asia also particularly feeling the impacts of climate change.
Not surprisingly, food security is expected to be a major topic at COP27 – as agriculture and food production are important industries for limiting climate change and are expected to join the agenda alongside energy talks. Food shortages and spiralling prices are major concerns globally, made more prominent this year by the war in Ukraine and record-breaking heatwaves, drought, and flooding.
What about carbon markets?
At COP26, the parties finally agreed the rules governing the international trade of emissions reduction units (also known as the "Paris Agreement rulebook"). Article 6 of the Paris Agreement enables voluntary international co-operation on climate action. One of the options envisaged under Article 6 is the possibility of a country that has overachieved its climate targets under its NDC to sell its "spare" achievements to another country. Another option is for the establishment of a global mechanism through which public and private sector participants can trade carbon credits generated from emissions reduction projects to count towards meeting their climate pledges. Until COP26, the parties to the Paris Agreement had not been able to agree on the rulebook for these mechanisms (e.g. because of concerns over "double counting" and whether countries should be allowed to use emissions reduction credits that are generated under the previous international emissions trading regime established by the Kyoto Protocol, to meet their targets).
Negotiations on the specific rules for carbon markets under Article 6 of the Paris Agreement are expected to continue at COP27 (see here).
Where is the private sector at this COP?
One of the significant takeaways from COP26 last year was the presence and perspective of major financial institutions and corporates at the conference in Glasgow - not just European and UK companies, but many from major economies in the Global South as well. There was also an unprecedented number of high-profile net zero announcements from the private sector in the lead up to and during COP26.
However, with only a few weeks to go to this year’s COP, is seems that the turnout and general enthusiasm from the private sector is likely to be noticeably lower this time round – maybe because of a perception that this COP will be more relevant for policymakers and the public sector, or because of concerns related to the global economic downturn and the knock-on consequences this could have on the private sector’s net zero ambitions and wider ESG agendas.
The Linklaters ESG team will be following the COP27 negotiations closely and keeping you updated on developments during the summit, with a post-summit analysis at the end of what this means in practice for corporates and the financial sector across the globe, via our COP27 page.