Prospects for climate change in 2021
Long-term carbon pledges are positive, but short-term policies will determine how plausible they are
The COVID-19 pandemic has seen much of the 2020 climate agenda reset for 2021, including the COP26 in Glasgow. US re-entry into the Paris Agreement will signal renewed climate engagement by Washington. Prospects for climate cooperation are better than they seemed a year ago, with net-zero targets being more widely adopted, alongside long-term ambition statements. Credibility will depend on substantial changes in near-term climate policies and the pursuit of ‘green recoveries’.
What next
US President-elect Joe Biden’s introductory calls with world leaders have highlighted climate among his administration’s priorities. This may help prompt a convening of major emitters to mobilise new climate pledges pre-COP26. Italy’s upcoming chairing of the G20 and the United Kingdom’s G7 presidency have both highlighted climate plans on their 2021 agendas. The timing of major political summits remains uncertain, and there is reluctance to conduct substantive climate negotiations virtually.
Strategic summary
- Battery and energy storage technology investment will increase to support the growing share of renewable electricity generation.
- Coal phase-out policies have received heavy attention so far, but oil and gas transitions will be next for scrutiny.
- Financing for carbon storage through nature conservation will be politically attractive.
Analysis
The International Renewable Energy Agency expects renewable energy growth to continue despite the pandemic. Installed capacity will rise by 7% in 2020 and is expected to increase by 10% in 2021. Renewables are set to become the largest overall electricity-generating sector by 2025, but achieving this pace of growth will depend on forthcoming policy decisions in major economies.
10%
Expected increase in installed renewable energy capacity next year
Short-term climate plans
Despite the lack of summits in 2020, momentum has gathered behind the setting of long-term net-zero targets, including by major emitting economies and large companies (see INTERNATIONAL: Pandemic will not stop climate action - November 4, 2020). The United States looks set to join this group soon, with the Biden campaign having announced its intention to pursue a net-zero-by-2050 target. This would put over two-thirds of the global economy under some form of net-zero commitment.
The credibility of these targets, however, will depend on the trajectory established by near-term policies, especially in updated Nationally Determined Contributions (NDCs) to the Paris Agreement.
Whether policies align with net-zero goals, rather than simply being an improvement on past policies, will become the main test of ambition. The UK government's newly announced 'ten-point plan for a green industrial revolution', for example, includes advancing a ban on the sale of new petrol and diesel vehicles to 2030 from 2035, but the package remains inadequate to put the United Kingdom on a trajectory that meets its 2050 net-zero target (see UNITED KINGDOM: Carbon targets face huge challenges - August 12, 2020).
The Biden administration will have to submit a new NDC following US re-entry into the Paris Agreement. Although US emissions have continued to decline under President Donald Trump, this has not been due to policy goals, and the country is not on track to reach the NDC target set under the Obama administration.
A new NDC will probably be delayed until later in the year to allow time for domestic consultation processes. Some reversals of Trump administration policies, such as on pollution standards for coal power plants and methane emissions, could be achieved relatively quickly via executive order. However, achieving Biden's 'green jobs' promise through support for electric vehicles or tax incentives for nature conservation would involve lengthier processes, and may depend on the cooperation of a Republican-controlled Senate.
Diplomatically, low-ambition countries that had benefited from political cover by the Trump administration now face greater risks of international isolation. This is especially the case for Australia over its coal mining plans, and Brazil over reducing forest protection (see BRAZIL: Global and domestic Amazon pressures will rise - September 14, 2020).
Trump's departure could see low-ambition countries isolated
China's pathway to achieving its net-zero-by-2060 target (announced in September) will become clearer in March, when its new 2021-25 five-year plan is released, shaping its own NDC update. One indicator of its energy transition plans will be the future of subsidies for onshore wind and solar energy (which end this year), and offshore wind (ending next year).
China's long-awaited national emissions-trading scheme, which has already been delayed several times, appears to have been further postponed from its planned end-2020 launch. Any steps to halt China's long coal development pipeline and investments in coal-dependent industrial infrastructure (which still exceed spending on renewables) will also be key to its short-term action.
Climate finance to be examined
Financing flows to support climate ambitions will receive greater attention in 2021, putting lending activities that support fossil fuel energy at increased risk. China's Belt and Road investments already receive criticism for encouraging continued coal projects elsewhere in Asia. South Korean and Japanese banks have also been significant fossil fuel investors, and will face pressure to show consistency with their governments' new net-zero targets (see SOUTH KOREA: Odds are against hitting 2050 carbon goal - November 5, 2020).
The US Federal Reserve has, for the first time, included climate change among risks to financial stability in its biannual report. It also signalled its intention to join a network of central banks that works to develop tools and metrics to assess climate-related financial risks. One further indication of this policy direction is a new requirement from the UK Treasury for all large companies to include climate disclosures in their financial reporting by 2025. These should detail how their businesses will impact, and be impacted by, climate change.
In many developing countries, the fiscal stresses of the pandemic will make international support via public finance especially important. A pledge that developed countries would lead in mobilising USD100bn in climate finance by 2020 will be examined at COP26, but this will continue to be fraught, amid disputes over double-counting conventional development assistance.
The Biden administration is expected to take steps to fulfil the outstanding USD2bn Obama-era US pledge to the Green Climate Fund, which was halted by the Trump administration. Given that many other developed countries doubled their contributions at last year's pledging round in the absence of US participation, an increased pledge would also be likely within the first Biden term to substantiate leadership claims.
Potential conflict in trade-climate links
Climate and trade linkages will also take on a higher profile as countries deepen their domestic climate policies, creating tensions over subsidies, intellectual property rights and other non-tariff barriers that lead to claims of unfair competition.
Climate and trade policies will become more interlinked
The first consultations on the EU proposal to introduce a carbon border tax by 2023 in its Green Deal climate package will also start in 2021 (see EU: Green deal will see increased state regulation - April 23, 2020 and see EU: Spending plans reflect green ambitions - September 9, 2020). This border tax aims to address internal concerns over carbon leakage to less climate-ambitious jurisdictions, but its implementation will also be intertwined with broader trade conflicts with both the United States and China.
While stalemate continues over appointing the next director-general of the WTO, both leading candidates have expressed an interest in guiding the body towards a more conducive set of trade rules to encourage clean technology innovation.
Outlook
The policy direction set down in the next year will shape whether long-term net-zero targets are just a political distraction from tougher choices. US re-engagement on climate holds potential to trigger a more virtuous cycle of international cooperation, but much depends on whether post-pandemic economic recoveries are used to accelerate the energy transition -- or to continue supporting carbon-intensive economic sectors.
