Our attention is firmly on Europe for this month’s newsletter a day after the announcement of the Fit for 55 package, an action plan for the European Union’s Green Deal. It’s a proper tsunami of policy detail, and today’s edition will zoom in on the implications for COP26 of the new and already contested carbon border tax adjustment mechanism, and why the ambition to increase carbon sinks is very, very tricky.
Highlights from Green and Sustainable Finance
Released yesterday, the “Fit for 55” package is the “How” of the European Green Deal - a set of ambitious legislative proposals designed to implement the EU’s new climate target agreed to reduce GHG emissions by 55% by from 1990 levels by 2030.
It’s a mix of old and new, with a big goal to decarbonize via sectors.
The plan contains revisions to existing directives (renewable energy, energy efficiency, carbon market, energy taxation), regulations (climate effort sharing between countries, land use and forestry, vehicle emissions standards) and new instruments such as the carbon border adjustment mechanism (CBAM) or the Emissions Trading Scheme for transport and buildings.
Yesterday’s announcement marks the start of a 2-year cycle of political negotiations which will be the real test of whether the EU can walk the talk of setting the global bar on high climate ambition.
Among the many potential roadblocks, here are some of the standouts:
International trade + climate action is awkward
The proposed carbon border adjustment tax will impose tariffs on the greenhouse gas emissions associated with products imported from outside the EU and would effectively protect European companies from goods made in countries with less-stringent climate policies. But aligning international trade with climate action is no simple task.
👉 Trade and climate policy have traditionally been handled separately at the international level through the WTO and UNFCCC respectively. This new tax could open the door to protectionist disputes at the WTO and a become new faultline at the COP26 climate conference in Glasgow.
I talked about this in an interview last month with Sebastian Treyer, Executive Director of France’s independent policy research think tank Institut du Développement Durable et des Relations Internationales (IDDRI). Here’s an excerpt:
The UNFCCC is not supposed to discuss trade because it is the sovereign mandate of the WTO. But Europe’s vision for ambitious decarbonization requires some kind of carbon border adjustment which does not mean a tariff barrier, but something that might be norms, standards or tariffs.
There are a lot of discussions among climate negotiators about whether we should import the conflicts of trade in climate or should we avoid them.
For the moment nobody is trying to use trade as a discussion platform on climate, because that would be too complicated with China.
China has their own internal ETS system on the carbon markets, and we need a conversation on how do we make that work in parallel in a way that is coherent rather than diverging.
And what we advocate at IDDRI is that there is a parallel diplomacy in bilateral discussions, particularly in the European Union to facilitate a conversation about trade and sustainable development that is not directly going into the main battlefield with China that are about how foreign companies can invest in China.
And Europe could open up a discussion on trade and sustainable development with Latin America, with Africa as a way to facilitate and avoid being presented as a protectionist power at the next COP.
The trade argument could become a blocking factor at COP26 if China wants to use it.
More carbon sinks
Another key aspect of the Fit for 55 is a more ambitious target for carbon removals via forests and wetlands. The Commission wants to build up the amount of carbon stored to 310 million tonnes by 2030, up from 268 million tonnes currently.
The number is the net total once the amount of carbon captured is balanced against the carbon released by land use practices.
A push to sequester 310 million tonnes of CO2 could see Europe’s net emissions reduce by around 57% by 2030 – just shy of the 60% reduction the European Parliament was calling for.
Across Europe, the increased ambition will require a huge turnaround to grow carbon sinks, which are set to decline to -225 million tonnes under a business-as-usual scenario.
👉 Carbon sinks are a very hot topic right now, and it is critical that governments are clear-sighted and rigorous on how they assess and monitor the carbon removal potential of such sinks.
Julia Pongratz, a leading expert on land use systems at the LMU in Munich, told me in an interview that the scientific knowledge in this field is advancing rapidly, but cautions that many studies can rely on assumptions that are unrealistic and lead to debate that is oversimplified.
We have this additional pressure on the NDCs (Nationally Determined Contributions in the UN climate negotiations) that is just increasing from year to year, as we are not making the substantial cuts on the fossil emissions side that we are supposed to take in view of the Paris Agreement.
So it’s very natural that each year, again, more attention will be turned to such carbon dioxide removal technologies, and most of those readily available are currently found on land.
I think what has changed over the last few years in science that has made impact on policy is that we’ve gotten away from simply estimating the carbon uptake potential of these methods and realizing that there’s a difference also between what potentially can be taken up versus what actually is taken up when you consider all kinds of additional constraints. One important aspect is public acceptability.
Often it’s a matter of who owns the land that could be potentially forested. You need rules to convince or incentives to convince the land owner.
We need to use the land for many different purposes, and there’s a lot of ethical and normative considerations, and economic considerations.
From and beyond the podcast
We were thrilled to see the latest news from David Barnden, who was a guest on the podcast episode #15, as he has pulled off a spectacular legal victory on behalf of a group of children.
In a landmark ruling known as the “Sharma case”, the judge decided that Australia’s environment minister had a duty of care to “avoid causing personal injury or death” to all Australians under 18 arising from emissions of carbon dioxide into the Earth’s atmosphere.
Climate litigators say this case has done something that none of the 1,800 or so cases around the world since 1986 have managed, which is to acknowledge the existence of a government duty of care to avoid climate harms based in the law of negligence.
👉 If you missed the interview with David, you can catch up here.
We talked about another important case that’s still ongoing, a world first involving a Melbourne student suing the government on the climate risk to her pension fund. You’ll also learn more about why Australia is breaking new ground on many of these cases.
And one more thing…
🗞️ The numbers on ESG investing just keep growing - according to Bloomberg Intelligence an estimated $53 trillion of global investments could be ESG by 2025, compared with a current $40 trillion.
So if you’d like a quick refresher on ESG, I wrote a primer for PWC’s Strategy + Business magazine that looks at where it all started, what it is and isn’t today, and where it might be headed.
Wishing you all a safe and restful summer.