The Leadership Vacuum
COP 24 has just begun in Poland and will finish on 14 December. There is a vacuum of leadership internationally on climate change right now. The US is occupying the place of Camus’s “The Outsider”.
Moreover, it’s still not clear, for all their domestic action on the environment and their burgeoning renewables sector, whether China is really prepared to don the mantle of a global leader. Ever since China became a super economic power, this question of global stewardship has circled uneasily above them. There are in fairness good reasons to argue that China is steadily moving towards being a global leader on climate and clean energy: witness for example their recent publication on Green Investment Guidelinesis seen as a game changer for ESG adoption by Chinese asset managers, and there is the sense they will want to go further on this agenda.
But it’s not clear if China’s leadership can at this stage summon up the political will to step up without reservation. So that leaves Europe as the only feasible contender right now properly to fill the vacuum.But can the EU seize its chance?
The Glass Half-Empty
From a glass half-empty perspective, the auspices are not good. First, Germany is no longer showing the leadership that it did when Merkel was once called the climate Chancellor. Dieselgate, and the German Government’s half-baked response to it, was something of a watershed for German environmentalists. Since then, the administration has continued to prevaricate over whether it can set a date to phase out coal; and the finger has been pointed at the Germans for not supporting sufficiently strong CO2 limits on cars and vans.
Poland also continues to lead the awkward squad from eastern Europe. They may be about to host (bizarrely) their third COP in a decade, but this is a country that still depends overwhelmingly on coal power for its electricity and has been crying foul about the startling rise of the EU carbon price over the last 18 months. The faultlines – along a broad western/eastern European split that has been in place for a long time – of European climate change policy have not faded away.
To compound Europe’s difficulties on climate, on present plans the UK is leaving the EU on 29 March next year. Whatever the increasingly fraught politics and the rights and wrongs of the 2016 referendum, a lot of European policymakers (in Brussels, Berlin, Paris, The Hague, the Scandinavian capitals) say quite openly how much UK expertise and commitment on climate change policy will be missed. At a time when European climate leaders need to come to the party, the Brits are heading for the exit door and won’t be able to exert the same influence from the outside.
The Glass Half-Full
On the other hand, to look at it through the glass half-full, there are some promising signs. Perhaps the most significant is the push coming from the European Commission on a longer-term goal. Last week, as promised, the Commission’s Climate Commissioner Canete published the Commission’s long-term strategy for a climate neutral economy by 2050. Under the shadow of the recent IPCC 1.5oC Special Report, the Commission emphasizes its concern about the impacts of climate change, such as flooding and drought, on Europe (physical impacts are often overlooked in the European context, compared with the focus on developing countries). The communication does not propose any new policies or targets for 2030; rather, it considers – through a number of scenarios and building blocks – the longer-term direction of travel and how Europe can contribute to meeting the Paris Climate Agreement targets in line with the Sustainable Development Goals (SDGs), recognizing that the existing 2030 targets are insufficient to achieving Paris outcomes.
There is nothing new in the analysis and policy detail of this communication, but it is in our view significant for two reasons:
- It contains the strongest linkage to date that the Commission has made between climate change and the finance and investment agenda, making a point of highlighting the Commission’s Action Plan on Sustainable Finance. (NB: we analyse European progress on sustainable finance further on in this article);
- its concluding remarks about the EU’s global leadership, where it talks about “leading by example”, “enhancing its energy and climate diplomacy”, and “stepping up its efforts, leading worldwide”. These are statements which are now on the public record.
Having published the strategy to delineate a roadmap for 2050, the challenge for the Commission next is to secure the support of EU member states. The latter are in the process of submitting their draft national climate and energy plans (NCEPs) which will be central to achieving the 2030 goals. The strategy itself will then be considered during 2019, with the view to it being the foundation of an “ambitious” (the Commission’s word) new nationally-determined contribution (NDC) plan in 2020 under the Paris timetable, while also expanding international co-operation in this period.
It is worth recording the doubts about the Commission’s ability to deliver over the next 12 months since, following the EU parliamentary elections in May, the Juncker Commission will step down next summer. Juncker and Canete in particular have therefore been very aware of their climate legacy, and the newly-published strategy is therefore a good opening shot. But they will now have to sell this – above all to member states.
There remain, as we have detailed above, doubts over the political will of some EU member states; however, there are positive developments too. France, despite Macron’s evident domestic difficulties (which we should acknowledge are in part linked to his energy and climate policies), have grasped the baton of prime EU climate power that Germany and the UK are passing on. Paris 2015 clearly sealed the deal, but the French have continued to press on: they have been at the forefront of linking the European climate and finance agendas; and their corporates and financial institutions are providing the essential private sector support that public policymaking needs.
Other bright lights include Spain, where the new Socialist government has instigated a step-change in its approach towards climate change. Sensibly combining energy and environment under one roof, It has formed a Ministry for Ecological Transition, headed by well-known environmental activist, Teresa Ribeira. Consequently, driven by Ribeira, the Spanish are promoting more ambitious emissions reduction targets, a new climate law, support for solar, and action on coal. As a testament of their new-found pro-activity, Spain have joined a number of northern and western European countries in signing the Carbon Neutrality Coalition, a group or progressive countries that came together at the UN in New York this autumn. In terms of whether Europe can step up to the plate globally, this grouping could play an important role – and Germany is a member, so maybe there is hope for their domestic ambition yet!
The anti-coal agenda is also becoming more prominent in the European policy debate. The UK Government’s political weakness has not, to its credit, stopped it from driving (in conjunction with Canada) the Powering Past Coal Alliance, a movement of nation states, regions and companies dedicated to phasing out coal power. Although comprising mostly the usual suspects (and of course neither Poland nor Germany), this body is having an impact internationally and its arguments – the impacts of coal on CO2 emissions and air quality; the need therefore for the OECD and the EU28 to phase out coal power by 2030 – are inevitably affecting policy discussion inside the EU. So much so that, even in Poland, the future of coal is being questioned and the new power station Ostroleka C (at present under construction) is now being talked of as Poland’s last ever coal plant. More generally, as the Carbon Tracker Initiative is emphasising in its research, coal generation in Europe seems to be becoming commercially unviable.
There is also the startling rise in the EU carbon price over the last 18 months. Is the EU Emissions Trading System finally going to have a meaningful impact on emissions reduction over an enduring period?
Sustainable Finance Gathers Momentum
By common consent, the EU’s approach in the earlier part of the decade towards sustainable finance lacked intent and urgency by comparison with their front-foot approach towards decarbonisation. But that has changed over the last two years, since Dombrovskis became Financial Services Commissioner. The step-change came in the establishment of the High-Level Expert Group on Sustainable Finance (the HLEG); the political commitment was left in no doubt when Dombrovskis’s Financial Services Directorate-General followed up the HLEG report this year with an Action Plan which the EU institutions are now in the process of delivering.
There is an important legislative measure in train in the form of a directive concerning disclosure on sustainability risks, notably climate, and investor responsibilities in relation to fiduciary duty. But the most important measure under consideration is the creation of a green taxonomy for Europe. This will be highly relevant to creating an environment which scales up investment in the low-carbon economy. Moreover, despite the departure from office of the current Commission in 2019, the institutions seem right behind pushing through the Action Plan to fruition by the end of 2019. In addition, policymakers are talking about taking the green taxonomy global (perhaps linking with China’s ambitious Green Investment Guidelines?), recognizing that the low-carbon international investment climate needs common standards and a universally accepted language if the challenge of scaling-up is to be met.
This move by European financial policymakers is being reflected by EU central banks and regulators. The Greening the Financial System, bringing together several central banks (mostly from Europe), was launched at the 2017 One Planet Summit, with the aim of strengthening the global financial system’s response to meeting the Paris Agreement goals, to manage risks and mobilise private capital. At last week’s Climate Finance Day – another example of France and specifically Paris leading the way on sustainable finance – some of the European central banks reaffirmed their commitment to this agenda, and how they can help deliver a coherent public/private response that makes the low-carbon transition a reality.
To complete this more joined-up picture, national financial regulators are pushing climate risk higher up their list of priorities. The UK’s Financial Conduct Authority recently launched its first ever consultation on climate change, to complement actions that have been taken in France, the Netherlands and Nordic countries. In addition, there is a sense that some of these progressive regulators are contemplating – depending on how the private sector deals with the climate risk disclosure agenda that has been set by the Taskforce for Climate-Related Disclosures (TCFD) – further strengthening (perhaps even making disclosure mandatory) their national corporate reporting framework on climate change and associated issues.
All this combines to present a picture which, even though it would still be premature to say that there is complete unanimity at EU member state level, is one of growing commitment to the low-carbon economy and – crucially – actively using policy frameworks to accelerate the transition. Perhaps the tipping point has been a realization that, to quote Lord Nick Stern, low-carbon is the “growth story of the 21stcentury”.
The question for the most immediate future is if this momentum can convert into political commitment at COP 24 in Katowice over the next two weeks. This latest gathering is being described, correctly, as the most important COP since Paris 2015. This is primarily because of the aspiration (which will probably be unfulfilled) to agree the Paris rulebook at Katowice, especially in terms of how to measure progress against NDCs. However, beyond the technical discussions, the goal of cementing the political conditions for greater climate ambition into the next decade is in reality the prize. At a time, when these international negotiations are looking somewhat wobbly, it is time for Europe to cast aside its divisions and size the opportunity that global leadership can provide.
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