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Ahhhhh climate change… The CEO of talking in circles, drafting lengthy documents, and then doing absolutely nothing towards a viable solution with measurable enforcement.
And we all know the four most dangerous words in all of finance:
“This time is different”
But is this time really different? Or do we have more of the same?
From October 31 to November 12, leaders from across the nations descended onto Glasgow to try to come up with a real plan on how to un-fuck the planet.
However, in the early days of the conference, policy changes didn’t dominate headlines. The fact that these leaders were taking private jets to and from a climate change conference did.
But near the end, we had a glimmer of hope as there were advancements made in both country-level policy and certain components of the carbon credit market, which we covered here before.
Is it more virtue signaling and grandstanding? Or are there going to be incentives built into policy that a rational Homo Erectus would willingly participate in?
Lets take a look at what happened during COP26, why it matters, and what needs to happen next.
This week, in <5 minutes, we’ll cover COP26:
What is the Conference? 👉Who, what, where, when?
Current Agreements in Place 👉 Paris Agreement + Ratcheting
Key Takeaways from the Conference 👉 International Agreements, Watered-Down Language
Voluntary Carbon Market 👉 Will Uniform Rules Lead to Enforcement?
How GRIT’s Playing it 👉 How Do we Make Money From Doing Good?
Let’s get started!
1. What is the Conference? 👉 Who, what, where, when?
The 2021 United Nations Climate Change Conference, more commonly referred to as COP26, was the 26th United Nations Climate Change conference, held at the SEC Centre in Glasgow, Scotland, United Kingdom.
The conference was the first since COP 21 that expected the parties to make enhanced commitments towards mitigating climate change. Twenty-five thousand delegates from 200 countries attended, and around 120 heads of state.
The mandate of COP26 going into the meeting focuses on the following:
Secure global net-zero by mid-century and keep 1.5 degrees within reach. Countries are being asked to come forward with ambitious 2030 emissions reductions targets that align with reaching net zero by the middle of the century.
Adapt to protect communities and natural habitats. Enable and encourage countries affected by climate change to: protect and restore ecosystems, build defences, warning systems and resilient infrastructure and agriculture to avoid loss of homes, livelihoods and even lives
Mobilize finance. developed countries must make good on their promise to mobilize at least $100bn in climate finance per year by 2020.
Work together to deliver. Finalize the Paris Rulebook (the detailed rules that make the Paris Agreement operational)
Under the Radar
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2. Current Agreements in Place 👉Paris Agreement + Ratcheting
The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, in December 2015 and entered into force in November 2016.
The goal of the agreement is to limit global warming to 1.5 degrees Celsius, compared to pre-industrial levels. To achieve this long-term temperature goal, countries aim to reach global peaking of greenhouse gas emissions as soon as possible to achieve a climate-neutral world by mid-century.
If the name of this agreement rings a bell, it’s because you’ll remember back in November 2020 when President Donald Trump announced that the US would be the first nation in the world to formally withdraw from the agreement. Pretty backwards thinking…Except The US would then re-join it in February 2021 under Biden.
Under the Paris Agreement, countries submitted pledges called nationally determined contributions (NDCs), to limit their greenhouse gas (GHG) emissions. Each country is expected to submit enhanced NDCs every five years, to ratchet up ambitions to mitigate climate change.
When the Paris Agreement was signed at the 2015 United Nations Climate Change Conference, the conference of 2020 was set to be the first ratcheting up. Even though the 2020 conference was postponed to 2021 due to the COVID-19 pandemic, dozens of countries still had not updated their pledges by early October 2021.
Collective progress towards implementation of the Paris Agreement in mitigation, adaptation and finance flows and means of implementation and support will be measured by global stocktakes, the first of which is due to be completed in 2023.
So what we’re starting to get here is direct accountability and measurability, but what came out of the conference itself?
But first, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. Key Takeaways from the Conference 👉 International Agreements, Watered-Down Language
The most efficient way for real change to occur is through measurable and enforceable policies that are made on an individual country level. Think globally, but solve locally. This New York Times article highlights the key policy changes that occurred at the conference:
U.S. and China: The two countries announced a joint agreement to do more to cut emissions this decade, and China committed for the first time to develop a plan to reduce methane, a potent greenhouse gas. The pact between the rivals, which are the world’s two biggest polluters, surprised delegates to the summit. The agreement was short on specifics and while China agreed to “phase down” coal starting in 2026, it did not specify by how much or over what period of time.
Deforestation: Leaders of more than 100 countries, including Brazil, China, Russia and the United States, vowed to end deforestation by 2030. The agreement covers about 85 percent of the world’s forests, which are crucial to absorbing carbon dioxide and slowing the pace of global warming. Some advocacy groups criticized the agreement as lacking teeth, noting that similar efforts have failed in the past.
Methane: More than 100 countries agreed to cut emissions of methane, a potent planet-warming gas, 30 percent by the end of this decade. The pledge was part of a push by the Biden administration, which also announced that the Environmental Protection Agency would limit the methane coming from about one million oil and gas rigs across the United States.
India: India joined the growing chorus of nations pledging to reach “net zero” emissions, setting a 2070 deadline to stop adding greenhouse gases to the atmosphere. One of the world’s largest consumers of coal, India also said that it would significantly expand the portion of its total energy mix that comes from renewable sources, and that half of its energy would come from sources other than fossil fuels by 2030.
Right at the end of the conference, a deal was ultimately agreed upon by all attending parties - but with last-minute disappointments from coal-producing countries. India and China both watered down the language around “phasing out” coal to merely “phasing down.”
Nevertheless, the pact was the first climate deal to explicitly commit to reducing the use of coal. It did include wording that encouraged more urgent emissions cuts and promised more climate finance for developing countries to adapt to climate impacts.
4. Voluntary Carbon Market 👉 Will Uniform Rules Lead to Enforcement?
I believe that human beings are (mostly) rational and self-interested. In that respect, there has to be an incentive in place in order to carry out specific actions. This simple contract between work in and payment out is as old as time. But there always has to be an incentive.
You can sit back and say, “well, the planet is falling apart, lets just wait for people to realize this, then they will correct it because it’s the right thing to do.” This laissez-fair attitude is the same one that has put us in this mess in the first place because of the free-rider problem.
A more viable solution is creating incentives for each individual to take action. This is where the carbon market comes in. It creates a marketplace that provides incentives for people to take action.
At COP26, Article 6 provided the rules necessary for a more transparent and accountable carbon market. What this agreement set out to do was set out specific and stringent standards for trading emissions in bilateral deals across all exchanges.
It used to be the case that individual governments would decide on the stringency behind these credits, but with a more uniform set of rules, the market just got ALOT more efficient.
Let’s put it this way - if you’re trading gold on an exchange, the homogeneity of the good creates a much more dependable and liquid market. No one wants to buy a contract for one purity of gold and receive a much lower purity. Any commodity market needs to have certain grading standards of the underlying good.
What this agreement essentially does is line up the quality of the underlying carbon credit so that we know it will be doing the same thing in terms of reducing the overall carbon footprint.
The COP26 decision creates unified and internationally-controlled standards, and includes provisions to avoid a situation where the same emissions reductions are claimed by multiple companies or countries.
A specific example of this, is the global offsetting system for airlines known as CORSIA. In this system, airlines need to submit emission-reduction credits to offset any growth in CO2 discharges above 2020 levels.
The COP26 deal will make the CORSIA program stricter, which will influence airlines’ investments in sustainable aviation fuels and their fleet renewal.
This sounds like measurable change to creating more confidence and liquidity in the carbon market. But as always, there are hurdles to overcome.
The first is that activists are worried that the consent by negotiators to allow transfer of some credits from the old market will undermine the rigor of the new program. The more credits that are out and existing in the system, the more wiggle-room for heavily polluting companies.
The second is that while the deal sets rules to avoid double-counting of emission cuts, implementing that will require scrutiny. It’s not clear there’s enough formal scrutiny in place.
In order to have a backbone to this change, regulations and governing bodies need to keep up with this adapting marketplace.
5. How GRIT’s Playing it 👉 How Do we Make Money From Doing Good?
For those that follow my paid newsletter, you’re familiar with the direct play that I’m invested in as well as my breakdown of the business. For those not yet following the paid version of this newsletter, you can sign up here.
With a maturing market, and pricing carbon now the clear path forward to fighting climate change, there are more and more ways to play this theme.
One name that I put on my paid user’s radar quite a while ago is Carbon Streaming (NETZ-NEO). NETZ is an investment vehicle that offers investors exposure to the carbon credit market by participating in both the compliance and voluntary credit markets.
By managing a basket of projects and streams, this could be a great way to play the space from a professionally managed portfolio of credits. Not a bad debut on the market either…
I think any time you can get the big picture right - you win. COP26 and other policies are actually starting to drive real change. Not from slaps on the wrists and empty promises, but by putting in place incentive structures whereby rational people will actually profit and WANT to help the decarbonization of the planet.
There are view times in the history of investing where you can actually DO GOOD for the planet and your pocketbook - but this is one of those times.
Be an optimist, be on the right side of change, but also make money doing it.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S Citadel CEO Kenneth Griffin Outbid a Group of Crypto Investors for Copy of U.S. Constitution. Now those same investors want to take-over Citadel. It’s war!
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