Navigating COP28
In the imminent days, Sultan al-Jaber faces a formidable task. The United Arab Emirates is gearing up to host the 28th Conference of the Parties, a paramount global climate assembly. As the CEO of the Abu Dhabi National Oil Company (ADNOC), al-Jaber shoulders the responsibility of ensuring its success. His primary focus lies in rectifying a pronounced global disparity in green finance.
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Described by the United Nations as a "stocktake," the gathering is anticipated to involve 70,000 participants, including ministers, executives, investors, academics, and various other attendees. Intended as a formal assessment of progress in global decarbonization since the pivotal Paris climate conference in 2015, it appears to have failed in injecting the anticipated dynamism into the proceedings. The Nationally Determined Contributions, outlining each country's plan to reduce greenhouse gases, suggest a mere 2% reduction in global emissions by 2030 compared to 2019, falling significantly short of the requisite 43% decrease to maintain temperature increases at a tolerable 1.5 degrees Celsius.
Rather than drawing attention to this lack of ambition, al-Jaber advocates for states to commit to tripling the global capacity of renewable energy by 2030. Despite rapid growth in China's solar panel capacity, outpacing the requirements to restrict warming to 1.5 degrees, as noted by the International Energy Agency, progress in the U.S. and other developed countries relies heavily on financial incentives. These regions contributed to 84% of the $1.3 trillion allocated to global climate finance in 2022. However, these accomplishments bear little significance without parallel advancements in developing countries, responsible for one-third of the world's energy-related carbon emissions and hosting two-thirds of the global population.
According to the IEA, clean energy investment in China and the West must double by 2030 to limit global warming to 1.5 degrees. In contrast, developing markets necessitate a fivefold increase. Economists, including Professor Nicholas Stern, known for his influential 2006 study on climate change economics, estimate that developing countries must invest around $2.4 trillion annually by 2030 to decarbonize their economies. Approximately $1.5 trillion will be allocated to wind turbines and solar panels, facilitating the energy transition, while an additional $600 billion will aid these economies in adapting to the impacts of a warmer planet. The remaining $300 billion is earmarked for sustaining agriculture and preserving natural environments in the face of climate change.
Stern contends that about $1.4 trillion of this funding can be sourced from emerging economies themselves. However, the remaining $1 trillion necessitates external financing. While private investors may contribute approximately half of that amount, their commitment is contingent on multilateral lenders like the World Bank providing around $300 billion. Developed governments must contribute the remaining $200 billion through avenues such as bilateral "concessional" finance, mitigating investment risks by offering cash at below-market interest rates. Currently, public and private investors in the affluent world are facilitating only $200 billion annually, according to Stern's data. To unlock the required $1 trillion, the private sector must contribute five times more than its current commitment, and financing from multilateral lenders must triple. Ajay Banga, the new World Bank chief, is attempting to mobilize private capital with the assistance of his advisory body, which includes luminaries such as former Bank of England Governor Mark Carney, Prudential Chair Shriti Vadera, and BlackRock CEO Larry Fink.
A significant hurdle is that the developed world consistently falls short of targets to channel climate funding to less developed counterparts. The most recent example, a fund agreed upon at last year's COP27 summit in Egypt to cover current climate change damage, relies on rich-world countries to contribute on a voluntary basis.
Real-life projects currently underway do little to inspire confidence. The Just Energy Transition Partnership (JETP) signed by Indonesia with the U.S., Japan, and other affluent states last year, initially a $20 billion initiative to retire coal plants prematurely, has faced delays. These setbacks led Indonesian President Joko Widodo to question the commitment of his rich-world backers.
One contributing factor is that affluent countries face fiscal constraints, with many grappling with significant budget deficits and increased public debt burdens due to higher interest rates. However, the latest update on the JETP project suggests it may close less coal-fired generating capacity than initially anticipated, casting doubts on Indonesia's commitment. Similar partnerships in South Africa and Vietnam are also progressing at a sluggish pace.
Furthermore, nearly a quarter of emerging markets contend with annual borrowing costs 10 percentage points higher than those of the U.S., posing a threat to their ability to generate the $1.4 trillion annual green investment Stern envisions they can handle independently by 2030. Even a $1 trillion annual transfer to poorer states would be of limited use if priced at market interest rates, as was the case with over half of all climate finance in 2022.
Al-Jaber possesses a noteworthy asset: the UAE's standing as a leading oil producer. Elevated crude prices have resulted in the Gulf country earning over $200 billion in net oil export revenues in the last two years. In September, al-Jaber unveiled a $4.5 billion scheme to employ UAE state funds and private sector resources to support Africa's decarbonization. A source familiar with the situation suggests that UAE President Mohammed bin Zayed al-Nahyan may reveal a more extensive plan at COP28.
Even a financial pool ten times the size of the UAE's African scheme would not resolve the inherent practical and political challenges of deploying substantial resources overseas. Nor would it simplify the reform of multilateral lenders. Nevertheless, it would open an alternative avenue to decarbonizing the developing world and enhance the prospects of COP28 leaving a lasting impact.
