COP26 preview: The new energy economy, Chinese coal and standards with impact

#Newsletter 18

Glasgow Science Centre. Photo by Fredrika Carlsson on Unsplash

Welcome back to our freshly rebranded The Zeroist, a finance newsletter for the net zero revolution.

With COP26 just two weeks away, the avalanche of noise is building, fast.

Will the UK Presidency be able to claim credit for a political victory such as “the COP that put an end to coal”? Or will it be a rout like the 2009 Copenhagen COP15 that’s blamed on China?

This month’s edition features an illuminating paper on sustainability standards, and how to transform the common race to the bottom dynamic. We also look at the just-released IEA’s World Energy Outlook - custom-framed for COP26 as a ‘guidebook’, and touch on the confusing question of whether China is the solution or the problem in international climate action.

And don’t miss this spectacular confrontation between youth climate activist Lauren McDonald and the CEO of Shell on stage yesterday (go to 17m) at TED Countdown in Edinburgh. I think this is a moment of reckoning for the youth movement, which faces serious challenges of tokenism, not being listened to, being instrumentalized as a box-check on multiple panels at major events. What they deserve is to be present and influential in structures of power and decision-making, to have real policy impact, and to be offered safe spaces to be heard, rather than to be talked down to as “emotional”, or needing “translation”.

Highlights from Green and Sustainable Finance

Sustainability standards are in the spotlight.

A new research paper from Andreas Rasche and Patrick Haack that focuses on the legitimacy of proliferating sustainability standards is a welcome blast of clarity in a world where too often accountability and greenwashing cancel eachother out.

The paper describes the dilemma facing all standard-setters: they call it the Diffusion-Impact Paradox.

On the one hand, standard setters depend on low entry requirements in order to grow the number of adopters and thereby create perceptions of success and inevitability due to the wide prevalance of the initiative (a key source of cognitive legitimacy, or taken-for-grantedness).

A major concern is that weak requirements attract firms performing rather poorly in the realm of sustainability, promoting adverse selection and free-riding behaviour.

On the other hand, they need to ratchet up entry requirements as critical stakeholders demand higher levels of impact. (a key source of moral legitimacy).

Enforcing stricter control and higher entry barriers, however, makes it more costly for organizations to join the standard, thus slowing down its diffusion.

According to the authors, this paradox is more relevant in later stages of growth, and they provide a case study of the UN Global Compact, which faced a barrage of greenwash charges around a decade after its inception. The response? It brought in a more stringent policy of annual reporting, and this led to de-listing of thousands of companies for failure to comply.

👉 So can the paradox ever be resolved? While the UN Global Compact is a principles-based standard - unlike most standards which are designed to monitor production facilities and to verify compliance; the case study outlines a new engagement model for such bodies that is about enhancing diffusion through impact.

The IEA's World Energy Outlook was released as a ‘guidebook’ for governments at COP26.

The report says if governments fully deliver on their climate pledges, it would limit global warming to 2.1 C. This is enough to change energy markets, including oil – which would peak by 2025 – and solar & wind, whose output soars.

Approvals of new coal power plants will fall sharply if governments follow through on their pledges. China’s announcement that it will stop building new coal plants abroad could result in further cancellations, saving 20 gigatonnes of emissions through 2050.

👉 Noteworthy is the mention of the emergence of a “new energy economy” alongside the “stubbornness of the status quo”.

That stubbornness was on display this week in comments from Standard Chartered CEO Bill Winters, who said it was unreasonable to expect banks to stop financing the fossil industry, in part because this would undermine transition efforts in emerging markets.

We can’t have simple edicts like: No more fossil fuels. It’s just not practical.

We’re going to be dependent on fossil fuels for the next 15 or 20 years, unless there’s some miraculous technology breakthrough.

Standard Chartered is one of the members of the UN-convened Glasgow Financial Alliance for Net Zero (GFANZ), an initiative to encourage financiers to stop funding fossil fuel companies. The Financial Times reported this week that many of the 59 banks in the initiative are reluctant to agree to the IEA’s recommendation that they end financing of all new oil, gas and coal exploration projects this year.

Is China the problem or the solution in international environmental negotiations?

Chinese Premier Wen Jiabao addresses COP15 in 2009. Photo: IISD ENB

In 2009, media headlines declared COP15 in Copenhagen an epic failure, with most blame going to China. Will we see a repeat of this in Glasgow? Analysts are scrambling to parse statements from Xi Jinping and Prime Minister Li Keqiang about the response to energy shortages in China’s northeast to understand whether it will add up to a backtrack on emissions pledges.

A round-up from Carbon Brief published yesterday points to a likelihood that the current energy shortages could actually accelerate China’s climate action. HK-based David Fishman of Lantau Group:

Based on the events of the recent weeks and months, I think there’s a strengthened case for coal playing an even smaller role than previously planned. The annual renewables growth targets were already incredibly ambitious; they might have to get even more ambitious.

This recent podcast with Michael Davidson, a US expert on China’s environmental policy, is a helpful explainer of how China intends to meet its emissions reduction targets. An important caveat which Davidson repeatedly notes is that it’s hard to flesh out a policy based on a few words from Chinese leaders.

This article from Bloomberg Green breaks with the either/or frame and looks at how China seeks to reconcile its long-term international commitments on emissions reductions with its short-term energy security concerns.

President Xi Jinping and Premier Li Keqiang painted a portrait of a country that plans to put national security — including from energy shortages — and development first, even as it pursues a green transition. The country will put huge investments into its world-leading renewable energy sector, while also continuing to support polluting fossil fuels that provide the bulk of its energy.

China also hosted the first part of COP15 in Kunming this week, and President Xi Jinping, joining by video conference, announced a new Kunming Biodiversity Fund, into which it would invest 233 million USD. The fund will be used to support biodiversity protection in developing countries.

From and beyond the podcast

The Nobel Laureate for physics Giorgio Parisi stunned his audience of Italian MPs the other day by warning that growth is incompatible with the fight against climate change.

If gross national product remains the center of attention, our future will be grim. Politicians, journalists, economists who plan our future and monitor the progress that has been made, must use an index. that considers other aspects besides the gross national product.

The latest podcast episode is an excellent primer for the growth debate. This conversation should be front-and-centre in Glasgow.

I interviewed Julia Steinberger, who is Lead Author for the IPCC’s 6th Assessment Report with WG3, and Malcolm Fairbrother, Professor of Sociology at Umeå University.

Degrowth is getting a lot of attention, and the academic literature is proliferating. That rise is being driven by increasing concern at the inertia and fossil lock-in of business as usual, which is based on the assumption that green growth can and will suffice.

Here’s a brief excerpt from Julia:

When we communicate on the basis of saying we don't need to change our economic systems, we can just keep doing what we're doing now, which is throw a bit more money at research and development and innovation, at modern technologies. And we'll be fine. What policymakers hear is you don't have to do anything.

If you missed this one, you should catch up here.

A transcript of the interview is available at climatenarratives.co.

And one more thing…

🌲🌳🌴🌴🌴 If you’ve been feeling confused about the pros and cons of large-scale tree-planting, I recommend this short interview with Julia Pongratz from LMU Munich and Stephen Woroniecki from Linköping University. It gives a behind-the-scenes view of the scientific conflict that was set off by the original 2019 science paper which spurred thousands of headlines, and the ensuing back and forth within the scientific community that was not covered in the media.

Here’s an excerpt from the interview from Julia.

The statement about reforestation/afforestation being “our most effective climate solution to date” was subsequently removed from the paper because it is not true – obviously, reducing anthropogenic emissions from fossil fuels and carbonates as well as from land use are the solutions. But the damage in public perception of research in this field had already been done. 

See you all on the other side of COP26.