Countries will gather in Bonn, Germany June 5-15, for the United Nations’s mid-year climate conference (SB58), a precursor to this year’s main climate summit in December — COP28, which will be held in Dubai, United Arab Emirates (UAE).

Mitigation — the act of reducing greenhouse gas emissions so as to prevent further global warming — is a crucial pillar of climate action, covering entire economic sectors from power, industry, and transport, to even forests and land.

Mitigation at COP27

At the 27th Conference of Parties (COP27) to the United Nations Framework Convention on Climate Change (UNFCCC) in 2022, India proposed language on the “phasedown of all fossil fuels”, calling for attention on oil and gas, in addition to coal. And while the European Union and United States seemed onboard with this, major oil and gas producers like Saudi Arabia, Iran, and Russia were not.

The COP27 outcome document instead reiterated previous calls “towards the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies” and also called for a just transition to renewable energy.

Outside the negotiations, the First Movers Coalition — a voluntary alliance of companies “using their purchasing power to create early markets for innovative clean technologies across eight hard to abate sectors” and governments — showed progress, growing from 25 to 65 members within a year.

They announced the joining of the cement and concrete sectors to the coalition. The group pledged to purchase at least 10 per cent of near-zero carbon cement and concrete by 2030 and also committed $12 billion to scale up green technologies and cut emissions.

The issue of a “just energy transition” gained traction at COP27 as well, since Indonesia announced at the parallel G20 summit, that it would be a recipient of about $20 billion in starter funding through a Just Energy Partnership (JET-P) deal to reduce its coal dependence.

Everyone’s talking about the (just) energy transition

Since the UK COP Presidency made “coal, cash, cars, and trees” their crude slogan for COP26 in 2021, the discourse has shifted globally.

Developed countries are still calling for higher mitigation ambition from developing countries (which one could argue requires their climate finance commitment to be met). Meanwhile, the focus has shifted to encompass “all fossil fuels” and a just energy transition, rather than phasing out just coal.

This has certainly brought the oil and gas sector into the spotlight. Decarbonising the oil and gas industry is on the agenda of the UAE COP28 Presidency, although Scope 3 emissions — accounting for 78 per cent of emissions from the oil and gas sector — are not ambitiously addressed. A May 2023 report by the International Energy Agency (IEA) put forth a pathway that could lead to 60 per cent reduction in oil and gas emissions by 2030.

On the energy transition, renewable energy is flourishing in many parts of the world, helping the European Union reduce its dependence on Russian piped gas, for example. Clean energy investment has risen faster than fossil fuel investment in recent years, says the IEA.

About $2.8 trillion is set to be invested globally in the energy sector this year, of which more than $1.7 trillion is expected to go to clean technologies — including renewables, electric vehicles, low emission fuels, grids, storage, they add.

Yet this is not distributed equally across the world, with most of the increase in clean energy investment between 2019 and 2023 taking place in China, the US and the EU — amounting to an increase of $435 billion.

Poor and vulnerable countries are not seeing a clean energy boom in line with their needs.

About 97 per cent of South Africa’s $8.5 billion JET-P package comprised of loans. So, the energy transition is underway. But its nature is not exactly “just”. It will take time for progress on this front. These are issues that the UNFCCC mitigation negotiations must spotlight.

The Mitigation Work Programme

At UNFCCC forums, the prominent space to negotiate on mitigation is the ‘work programme for urgently scaling up mitigation ambition and implementation’ (also known as the Mitigation Work Programme or MWP). Established in 2021, it was proposed to address the insufficiency of Nationally Determined Contributions (NDC), and bridge the gap by increasing ambition in pledges to cut emissions.

At COP27 in 2022, developing countries emphasised that the programme should not be a replication of the Global Stocktake, and should not set new targets and obligations for developing countries.

It should also be guided by the UNFCCC’s principles of CBDR (common but differentiated responsibility) and equity. Over the past year however, the MWP has shifted from a space viewed with hesitation by developing countries, to one where they can possibly lay out constructive demands for international financing and technology support to accelerate domestic mitigation ambition.

In Bonn this month, the MWP’s co-chairs have announced that “accelerating just energy transition” will be the topic of focus in 2023. Centre for Science and Environment (CSE) and Down To Earth (DTE) spoke to Lola Vallejo, a co-chair of the MWP.

Deliberations will begin with a Global Dialogue, followed by an Investment-Focused Event. The Intergovernmental Panel on Climate Change is clearly setting out what needs to happen at a collective level, but the MWP ought to advance multilateral discussions on the “how” and  dive in deeper into countries’ experiences — the good and the bad, Vallejo specified.

“These first events aim to provide a new setup, broadening the participation beyond traditional negotiation circles to make space for the practitioners in charge of the domestic energy transition, civil society experts and financiers,” she said. “They also innovate in terms of facilitating matchmaking to help countries get their projects off the ground or providing space for regional discussions.”

But developing countries face specific barriers which must be brought to the fore. Discussions around the falling costs of renewable energy around the world often neglect the high cost of capital, for example, that makes it unaffordable in many developing countries.

For example, one estimate suggests that unsubsidised solar power costs ~140 per cent more in Ghana than in the US solely because of differentials in cost of capital. According to the IEA, financing costs can be up to seven times higher in emerging and developing economies compared with the US and Europe.

“Financial barriers to the energy transition, including cost of capital, will be discussed in specific breakout groups on the second day of the Global Dialogue, to allow more interaction between participants,” Vallejo said.

“These discussions will be reflected in reports under the MWP, but there is nothing preventing us from connecting the dots with efforts led in other fora — for instance highlighting the IRENA-led work on cost of capital for clean energy for India’s G20 Presidency, or other ideas discussed in the run-up to Summit on a New Global Financial Pact taking place in Paris in June”. 

Vallejo outlined three markers of success for the MWP discussions: A shared understanding of the energy transition challenge rooted in the best available science, bringing country practitioners on board to engage more deeply, and demonstrating to developing countries that the MWP can support tangible outcomes in terms of investment.

Road to COP28

While the focus on a just energy transition is a good start to the year’s first major climate negotiation, there is scope for agreements to deviate away from equity considerations once we start discussing pathways, financing packages, and collective goals.

First and foremost, the energy transition itself must be equitable. Many rich countries, who are also historical polluters, have transitioned from coal to natural gas — which is cleaner but is still a fossil fuel. Developed countries must rapidly reduce their use of coal, oil, and natural gas, and also reduce energy demand through efficiency measures and appropriate behaviour change.

Large developing countries like India, South Africa, Vietnam, and Indonesia derive more than 75 per cent of their primary energy from fossil fuels today. It is not easy to transition away from them, especially when energy demand is still growing.

Moreover, these countries have lower per capita energy use than the developed world and must balance their need for economic development with their commitment to reducing emissions.

The challenge is to find a way to accommodate energy needs without compromising development goals or exacerbating climate change. For this, they must domestically create sectoral pathways for decarbonisation, for not just the power sector, but also for hard-to abate industrial sectors and transport. This will enable the creation of clear ‘asks’ or projects where international financing can be demanded and directed.

CSE-DTE support the setting of a global renewable energy target. The developed world needs to take the lead and add vast amounts of RE capacity while simultaneously phasing out fossil fuels.

The developing world cannot sit back — it needs to scale up RE as well, but to make that possible adequate finance and technology support is required from developed countries.

Concessional financing — with as little dependence on debt-creating instruments as possible — is needed to accelerate the transition in developing countries. This will help developing countries reduce fossil dependence, and also cushion their economies from taxation regimes like carbon border taxes that can reduce the competitiveness of commodities made from dirty power.

Thus, rather than primarily placing demands or “sticks” on phasing out coal, JET-P deals must become the “carrot” to grow clean energy infrastructure in the developing world.

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On 7 March 2023, just as the European Council was preparing to vote on a ban on the sale of new internal combustion engine cars in Europe from 2035, something went wrong: Germany, whose vote was essential for the measure to be approved and a coalition of six other European countries blocked the vote on the text, pushing the legislation back indefinitely.

A few days later, the European Commission, representing all the member countries, unveiled its response to the US Inflation Reduction Act (IRA), the Net-Zero Industry Act, a competitiveness plan based on accelerating the green transition.

Amid all the political back-and-forths, one would be forgiven for asking oneself whether Europe is making any progress with the green transition.

It would appear the European Union (EU) has become Janus, with a pro-transition face and a procrastinating face, just as a pro-competition face contrasts with a protectionist face. The consequence of such contradictions is a loss of credibility when it comes to achieving its objectives and a delay in the race toward ecological transition.

A lead to maintain

Yet the EU seemed well on the way to establishing itself as a world leader in the transition, with its dynamic green ecosystem made up of innovative businesses supported by the “European Climate Bank”, as the EIB (European Investment Bank) likes to call itself.

At the end of February, the EIB reaffirmed its intention to champion green initiatives by channelling the vast majority of its funds toward the transition, beyond the already honourable level of 60 per cent achieved by 2022.

The EU also seems to be particularly ahead of the game on green hydrogen, boasting a number of important projects of European interest (IPCEI), the world’s leading number of patents (ranking last January by the International Energy Agency) and an embryonic hydrogen bank.

You can find more infographics at Statista.

This position is confirmed by foreign investors who find themselves attracted to the bloc’s green policies and regulatory clout.

Take the latest Border Carbon Tax Mechanism (CBAM), which is set to place a carbon price on imports entering the European single market from non-EU countries from this autumn: It is a textbook example of how to take into account negative ecological impacts while respecting competition thanks to the price signal. The recent revaluation of the price of a tonne of CO₂ above 100 euros suggests that it will be very effective indeed.

That’s if we don’t undermine it with exemptions and deferrals sine die, or disguised pollution subsidies such as France’s energy “tariff shield”). According to the IEA, Europe spent nearly 350 billion euros on such measures in 2022 — a record high.

To give businesses and investors the certainty that the EU won’t be going backwards, we need to set clear, consistent targets and stick to them. It is essential to anchor players’ expectations on a fixed and certain horizon so that markets can be challenged, competition can be triggered and private investment can flow.

Any form of renunciation by the EU will discourage players from speeding up the transition and will cause those who were ahead of schedule in reaching the 2035 horizon to backpedal.

Avoiding “the tragedy of the horizon”

To remain competitive, French carmaker Renault has focused its clean-car strategy on its electricity division and split its activities into five divisions — Ampere (clean vehiciles), Power (thermal and hybrid motors), Alpine (sport), Mobilize (new forms of mobility) and The Future Is Neutral (circular economy). Power is intended to be supported in part by the profits from the project “Horse”, which involves a joint venture with the Chinese carmaker Geely.

Stellantis — the parent company of Chrysler as well as European brands such as Peugeot, Citroën, Fiat and and Alfa Romeo — has also positioned itself in the premium segment of the clean-car market, alongside other players such as Tesla of the US and French energy giant TotalEnergies, which is equipping its service station network with recharging stations.

These moves demonstrate the decisive role of competition in developing a range of products and services in line with the imperatives of the energy transition.

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Open markets allow new players to join or withdraw on terms that suit them, thus fostering competition and innovation. This virtuous circle is essential to overcoming the technological frontier of transition — the most advanced level of research at a given time — and get a jump on tomorrow’s solutions.

In theory, an economy that’s open to competition leads to sophistication in the value proposition of offerings and to shared value for all: quality of service and lower prices to the benefit of demand greater returns on innovation and scale and attraction of scarce resources to the benefit of supply.

The longer the European Union postpones its objectives and gives in to protectionist pressures, the longer it will be locked into what former Canadian central banker Marc Carney has called the tragedy of the horizon and so the more it will fall behind its rivals.

The EU would benefit from remaining consistent with its founding principle of competition and its four fundamental freedoms (movement of goods, capital, services and people) to attract the capital needed for the transition and the infrastructure essential for its spread (such as electric charging stations) and acceptability.

At a time when the United States has strayed into protectionism, the EU must stand firm on its commitments and remain faithful to competition, the virtues of which will accelerate the transition and its spread with accessible solutions.

It’s time to move on from “greenwishing”, as the American economist Nouriel Roubini called it ironically, to green-enacting thanks to a winning combination of competitiveness and attractiveness.

Anna Souakri, Affiliate Professor in Strategy/Innovation & Researcher at Square Management, ESCP Business School and Jean-Marc Daniel, Emeritus associate Professor, Law Economics & Humanities, ESCP Business School

This article is republished from The Conversation under a Creative Commons license. Read the original article.