Climate change risk

The convening of the world’s leaders in Glasgow for COP26 is a landmark gathering, coming after a year of unprecedented weather events, from record temperatures and wildfires in Europe to a ‘1,000-year’ heatwave in western Canada and the north-western US. In August this year, the UN’s Intergovernmental Panel on Climate Change (IPCC) published a landmark climate study that Secretary General António Guterres described as a ‘code red for humanity’.

Against this backdrop, the four main goals of COP26 have been framed as:

• securing net-zero global greenhouse gas emissions by 2050;
• making progress on climate adaptation;
• mobilising private finance; and
• fostering international collaboration.

Many are expecting political leaders to agree to commit to deeper cuts to national emissions as well as other measures over the two weeks of the summit.

Three things to watch in Glasgow

1. Clarifying voluntary international co-operation

The last Conference of the Parties in 2019 ended without agreement on the rules to implement Article 6 of the Paris Agreement, which is designed to foster ‘voluntary international co-operation’ on climate action. These rules of implementation are the last substantive piece of the Paris regime yet to be resolved. Article 6 outlines three dimensions for voluntary co-operation:

• establishing a centralised, UN-supervised, common market mechanism to allow countries to trade credits from emissions reductions between themselves;
• providing an accounting framework for co-operation  and transferring carbon credits bilaterally between counties; and
• establishing a framework for non-market approaches to assist with nationally determined contributions (in effect, setting the parameters for direct carbon taxes, emissions quotas, and related penalties).

Finding a negotiated solution to the rules for implementing the Article 6 commitments will be one of the key goals of COP26. If this can be achieved effectively, the alignment of incentives between countries with differing states of development and energy needs is expected to substantially accelerate the transition to net-zero emissions. The parties have been working to resolve the political and technical issues surrounding Article 6 in the run-up to COP26 with a view to agreeing the implementing rules during the conference.

2. New regulatory pressures

COP26 is focussing the world’s attention on climate action, driving stakeholders including investors, economists and citizen groups to further raise the pressure on politicians to accelerate emissions reductions.

Further commitments to cut national emissions will require new regulations, and COP26 gives business a good indication of where these rules will focus (whether by designing new measures to penalise heavy emitters, or by encouraging low-carbon energy sources) as well as how businesses should engage with governments to shape these new rules. Regulatory change is also often a driver of litigation, so any reforms that flow from COP26 will point businesses towards where future litigation risk could arise.

3. Growing net-zero commitments

There has been a steady rise in the number of companies signing up to the UN’s Race to Zero pledge in the run-up to COP26. Thousands of companies globally have committed to eliminating their carbon emissions by 2050, including significant proportions of the world’s largest publicly traded businesses.

World leaders are seeking further progress from COP26 to assist the acceleration of these commitments, influencing from improved capital flows and investment in innovation.