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The push begins for a fossil fuel crackdown at COP28

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Hello from London. After weeks of rumbling and speculation, the European Commission has finally laid out its proposed response to the US Inflation Reduction Act.

There is much to like here for companies who have been threatening to shift investment across the Atlantic to benefit from Joe Biden’s raft of subsidies. A bonfire of bureaucracy looks on the cards, with a promise to streamline burdensome permitting processes for green projects. There’s a welcome focus on equipping Europeans with the skills needed to drive the energy transition, including the proposed creation of “net zero industry academies” across the EU.

What businesses really wanted to see, however, was money — specifically, what financial incentives the EU can muster in response to the US’s monster $369bn package. The commission said it would suspend its tight rules around state support for industry (albeit only until 2025), allowing member states to “grant necessary aid” to green development. To allay fears that France and Germany will use the opportunity to charge ahead of the rest of Europe, existing EU funds will be made available for all members.

Promising signs, then — but for now it remains a proposal, subject to approval by EU members. And with some — notably the Netherlands — seeming wary of an exuberant green spending spree, it remains unclear just how big the European bazooka will prove.

While the EU is racing to catch up in the green spending race, some of its members have been ahead of the pack in ruling out fossil fuel expansion — and are trying to bring the rest of the world with them, as our first item explains. Also today, Kenza highlights a new development that will shed new light on lending to heavily emitting nations. Have a great weekend. (Simon Mundy)

The long slog to pull governments away from oil

Dan Jørgensen was taken aback when, soon after he took charge as Denmark’s energy and climate minister in 2019, his staff presented him with a proposed new licence for an oilfield in the North Sea. Previously, he says, such awards had been treated as “routine”. But if the government pushed ahead with this licence, Jørgensen realised, it would have opened the door for fossil fuel extraction on Danish territory well into the second half of this century.

The ensuing discussion in the government led, the following year, to a landmark decision. Denmark — one of the EU’s biggest oil and gas producers — pledged to stop issuing new fossil fuel licences, and to halt all fossil fuel extraction on its territory by 2050.

Then, at Glasgow’s COP26 in 2021, Denmark launched an initiative to persuade other countries to do the same. The Beyond Oil and Gas Alliance, created in partnership with Costa Rica, attracted an initial eight nations and jurisdictions, including France, Ireland and Sweden. All have pledged an immediate end to new oil and gas exploration, and set a firm date for the end of extraction from existing fields. “We’re not saying turn off the taps from one day to the other,” Jørgensen told me during a visit to London. “We’re saying, let’s have a managed transition.”

Since the alliance’s launch, its growth has been modest — perhaps not helped by a year of energy market turmoil that has driven fears about fuel supplies. Only two new members — Portugal and the US state of Washington — have joined, though several others including Italy and Chile have become “friends” of the initiative on a non-binding basis.

But Jørgensen insists that BOGA is poised to have an impact at the COP28 summit in Dubai later this year. Negotiations are continuing with several potential new members; Kenya recently announced its intention to sign up, and a fund has been set up (with a modest initial endowment of $10mn) to help developing countries research the feasibility of joining.

BOGA members plan to push hard for tougher language around a phase down of all fossil fuels in the COP28 closing text, Jørgensen said. More than 80 countries supported that idea at last November’s COP27 — including, he noted, major oil and gas producers such as the US and Norway.

There seems slim chance of any of the world’s biggest producers committing to end fossil fuel licensing in the near future. But while BOGA’s currently small membership highlights the world’s continued addiction to fossil fuels, Jørgensen hopes the grouping can nonetheless raise the bar for national-level action on climate change, and add to the pressure on the biggest producers to do better.

These mega-producers, of course, include COP28 hosts the United Arab Emirates, who have drawn fire for appointing the head of their national oil company as the conference president. But Jørgensen reckons it’s time to bring the big oil producers into the heart of the COP process — and that co-ordinated pressure from groups like BOGA could yield a more constructive approach from the UAE and other oil exporters.

“Now is the time to take the next step, where even countries that were probably seen a decade ago, as being totally opposed to the process, need to be an integrated part of the solution,” he told me. (Simon Mundy)

Sovereign bond holdings come in for scrutiny

An $11trn investor group will start disclosing carbon emissions linked to its private and sovereign debt investments for the first time, opening up new avenues for scrutiny of lending decisions to oil and gas-rich nations.

The UN-convened Net Zero Asset Owner Alliance’s 84 members includes some of the world’s largest pension funds, like California’s Calpers and Canada’s CDPQ, as well as insurers Axa and Swiss Re.

Udo Riese, head of sustainable investing at the German insurer Allianz’s investment management branch, told Moral Money the grouping’s “spin to private assets” would help bring “transparency to what sovereigns are doing on climate change”. “Disclosure is the first step,” he said.

Until now, net zero targets by financial institutions have mostly focused on lending and underwriting services for listed companies.

But roughly a fifth to a third of assets under management by the NZAOA members are held in sovereign bonds, and up to a tenth in private equity — creating a potentially vast swath of new data. Government debt made up about 30 per cent of Allianz’s investment portfolio at the end of 2021, and private equity about 2 per cent.

Under guidelines issued on Tuesday, asset owners who have pledged to reach net zero by 2050 will have to start disclosing their share of emissions from a country’s domestic production and electricity use — worked out based on their exposure to sovereign bonds.

They must also work out the emissions linked to their private equity and debt funds, and loans to private companies.

In the wake of investigations by multiple news organisations of alleged integrity problems in the voluntary carbon markets, the new guidelines also ban the use of carbon removals to reach decarbonisation targets until at least 2030.

Environmental groups say the NZAOA should do more to ensure that members follow through on their existing commitments. Nearly three-quarters of members do not disclose their financed emissions, according to a report last week by the University of Edinburgh and SDG Labs.

Allianz’s Riese said the data on this type of emissions is still not of high enough quality to make disclosing it or including it in targets mandatory. “Target setting means taking investment decisions which impact profit and loss outcomes . . . We cannot put something in targets where the data are unreliable.” (Kenza Bryan)

Smart read

A new independent sovereign debt authority is needed to address the worsening debt crisis in developing nations, writes Rebeca Grynspan, secretary-general of the United Nations Conference on Trade and Development. To call their debt pile sustainable, she warns, “is like saying a poor family will stay afloat because they always repay their loan sharks”.

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