COP 27: Political progress but transformative climate actions remain elusive

December 20, 2022 – Two plus weeks of deliberations at the United Nations Framework Convention on Climate Change’s (UNFCCC) 27th Conference of the Parties (COP 27) in Sharm el-Sheikh, Egypt, resulted in the Parties delivering a historic decision: the “Sharm el-Sheikh Implementation Plan”. This Plan documented significant progress on “loss and damage,” working through an impasse that has weighed heavily over negotiations for more than a decade and memorializing a renewed trust and commitment to cooperation among developed and developing countries in the global response to climate change.

COP 27 served as a meaningful launch pad for demonstrating results and outlining future actions on climate financing and “phase down” of unabated coal. Deliberations further examined the rules governing market mechanisms; technology transfer and innovation; and the interrelationship between climate change and nature — all with a lens of accountability, reporting and transparency as stakeholders navigate their paths to net zero in advance of COP 28 next December in the United Arab Emirates.

Talks at COP 27 reinforced that any meaningful progress toward meeting the goals of the Paris Agreement will require historic cooperation among governments, businesses and civil society. Meaningful collaboration across constituencies appeared lacking in Sharm el-Sheikh; divisiveness and mistrust filled the air in ways absent last year in Glasgow. Despite these tensions, there was growing recognition among the state and non-state actors: The science screams out for urgent action now on mitigation and adaptation.

This article provides a summary of several of the technical outcomes and assesses the potential impact of the decisions reached on business.

Loss and damage fund: a huge political outcome

In an appropriate setting on the edge of Africa, where the Sanai Desert meets the Red Sea, the Parties agreed to the creation of a Loss and Damage Fund, a huge political outcome that allocates money to assist low and middle-income countries respond to climate disasters. A transitional committee will make recommendations about how to operationalize the first tranche of these funds at COP 28.

At first, developed countries, including the United States and European Union (EU) members, will be expected to contribute to the Fund. The decision on the funding arrangements for “adverse effects of climate change including a focus on addressing loss and damage” (Decision -/CP.27 -/CMA.4,) points to “identifying and expanding sources of funding,” suggesting that high-polluting developing nations such as China, public sources such as international financial institutions, and private entities, including businesses, eventually may contribute to the Fund.

Developed countries were careful to assure that loss and damage funding commitments made during COP 27 do not make them vulnerable to significant long-term liability for the impacts of climate disasters in developing countries. Thus, the Parties did not include admissions of liability in the final decision and specified that loss and damage contributions were voluntary. Despite these qualifications, the establishment of loss and damage funding nevertheless will strengthen, both legally and symbolically, developed countries’ ability to respond to the adverse effects of climate change.

Climate finance: under the spotlight, significant MDB reforms catalyzed

Parties agreed to additional measures which support further adaptation funding for developing countries. These include the World Bank’s Global Shield Financing Facility, which provides climate risk insurance to developing countries to recover from natural disasters and climate shocks, and a joint statement that proposed Multilateral Development Bank (MDB) reforms. Developed countries will likely point to the Global Shield Financing Facility and MDB reform as countries decide how to finance the Loss and Damage Fund.

Developing countries, especially the Africa Group, stressed that developed countries are lagging in fulfilling their commitments to mobilize billions of dollars per year to the Adaptation Fund. Countries eventually agreed to develop a framework for mobilizing outstanding amounts to the Fund. The Parties also requested that the UN Standing Committee on Finance prepare a short report tracking progress made toward the funding goal. Expect this issue to be a key topic at COP 28.

The United States initiated a new market-based financing mechanism, the Energy Transition Accelerator (ETA) program, which is intended “to retire unabated coal-fired power and accelerate the buildout of renewables.” The United States hopes to have the ETA operational by COP 28, but the details of the program are still being developed and several of the US’s key trading partners have met the proposal with skepticism.

Parties also responded to the effects of GHG emissions on the maintenance of biodiversity. Several countries committed to a 10-point Plan for Financing Biodiversity, launched this fall by Ecuador, Gabon, Maldives, and the United Kingdom, which pledges to increase financing for a variety of conservation-based activities.

Mitigation: phase down of unabated coal, lifeline for low carbon intensity gas

The Parties reiterated their call from COP 26 to accelerate efforts to “phase down” unabated coal power and “phase out” inefficient fossil fuel subsidies. Despite increased pressure to act fast on methane abatement, the transition toward “low-emission energy systems” still carves out a role in the energy transition for low-carbon intensity natural gas. Thus, it appears that the majority of near-term government energy transition policies will concentrate on reducing emissions from unabated coal, presenting opportunities for low-carbon intensity natural gas to accelerate decarbonization in the power sector across the globe.

Parties also concentrated on mitigation efforts through the Global Methane Pledge, which hit a membership of 150 countries at COP 27. Showcasing progress on their commitments, the United States and the EU proposed enhanced regulatory guidelines to reduce methane leakage from domestic drilling sites. Businesses should heed these new regulations. The focus on methane mitigation featured prominently in the minds of civil society and government throughout the deliberations.

The United States also initiated the Carbon Dioxide Removal (CDR) Launchpad in partnership with Canada, the European Commission, Japan, Norway, and the United Kingdom (UK). The Launchpad will support public-private partnerships to build +1,000 ton-a-year CDR projects by 2025, presenting new opportunities for direct air capture and other innovative removal technologies. The U.S. also announced the Green Shipping Challenge to spur the transition to clean energy across this sector.

Article 6: incremental progress on market mechanisms

Talks regarding the UN carbon market mechanism did not progress significantly at COP 27. Experts now predict that a global carbon trading mechanism will not be ready for launch until 2024 at the earliest. However, two small, but notable, developments did occur. First, Parties decided that countries would not be required to disclose confidential information about their internationally traded mitigation outcomes (ITMOs), allowing for less transparency in reporting and thus increasing the risk of “greenwashing.”

After several climate advocates expressed concern that loose oversight could lead to countries failing to meet their climate commitments, the Parties included a provision calling for further guidance on the issue for consideration at COP 28.

The Parties also partially resolved the issue of double-counting, or when two parties make a claim around the same carbon attribute, as it relates to credits created pursuant to the market mechanism established under Article 6.4 of the Paris Agreement (A6.4ERs). The Parties indicated that A6.4ERs are not authorized for use toward the buyer’s regulatory requirements and should only be used toward host country targets and not private buyer goals. According to experts, this change signals that participants in the carbon market should start shifting from concentrating on buying offsets to financing emissions reductions.

Environmental integrity: an overarching theme of COP 27

The impact of civil society in holding Parties and non-state actors accountable for pledges and commitments at COP 27 stood in stark contrast to the power that businesses wielded over the deliberations at COP 26 in Glasgow, Scotland. Several oversight organizations stressed the need for governments and businesses to strengthen the integrity of their emissions goals and reporting.

The most important of these was the UN high-level expert group report that called for integrity in climate disclosure reporting for businesses, financial institutions, cities, and regions. Governments and NGOs alike should expect increased oversight of their net zero goals and reporting and should strengthen their plans appropriately.

Governments, business and civil society now face a full agenda of unfinished business in the UAE at COP28 as the world navigates the energy transition to net zero and aspires to meet the goals of the Paris Agreement.

Kerry Mackenzie, a public policy specialist at Akin Gump Strauss Hauer & Feld, contributed to this article.

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