An uneasy climate alliance

The 28th edition of the Conference of Parties to the United Nations Framework Convention on Climate Change — COP28 — ended in Dubai last week. For many climate activists, it was a failure, with the action promised in the final communique far less than what is the minimum necessary to bend the curve of carbon emissions down towards the zone that would keep the world below 1.5 or even two degrees of global warming. This failure, many believe, was pre-ordained — giving COP28 to a major fossil fuel exporter like the United Arab Emirates, which then chose a president for the conference who was also the head of a national oil company, was hardly likely to lead to more urgent action on greening the world economy.

It is certainly true that this COP saw more than its share of deal-making, and fossil fuel representatives were very visible indeed — as they were, incidentally, in last year’s COP at Sharm-el-Sheikh in Egypt. That said, the broader criticism is largely unfair and may also miss the bigger picture.

Click here to follow our WhatsApp channel

In fact, some insight into the future path of climate action can come from a closer look at the biography of the COP28 president, Sultan al-Jaber. Yes, he now runs the Abu Dhabi National Oil Company and has since 2016 — in spite of himself being from one of the smaller emirates in the UAE and not Abu Dhabi. But he began his career by founding and running Masdar, the UAE’s renewable energy company. Masdar essentially ploughs back some of the earnings from the Emirates’ fossil fuel sales into renewable energy investments.

The fact is that, absent large transfers from rich-country exchequers that were always unlikely and now look politically impossible, investment into newer, greener technologies is likely to be financed by the earnings of legacy industries. The energy transition will require, for one, the redirection of the profits earned by current energy companies (as well as their managerial and entrepreneurial energy, if any). Consider, for example, how the Union government is going about the energy transition in India. It has promised Rs 30,000 crore budgetary support to the state-controlled oil companies for their decarbonisation programme; but this is more likely compensation for their politically-mandated under-recoveries on the sale of petrol and diesel. The point of the budgetary support is to ensure, however, that the legacy oil companies continue to devote internal resources to the energy transition within the country. A related approach is visible in the implementation of India’s green hydrogen mission: officials have set a capacity target for the state-controlled oil and gas companies, of 230 kilotonnes of green hydrogen by 2024-25.

This logic extends beyond the energy sector to various carbon-intensive sectors from steel to cement. Reducing emissions in these sectors will require the cooperation of the companies that currently dominate those sectors — mainly because decarbonisation will have to be paid for from their own earnings. Naturally, tightened regulation will be the spark for these efforts. But profit has its own motive, and unless a compelling financial argument is visible to the managements and owners of companies in these sectors, they will not just resist, evade, or ignore decarbonisation efforts but also refuse to offer up their profits in the service of innovating and implementing low-carbon alternatives.

The simplest and most theoretically elegant answer to this problem might be to impose stringent regulation and let the market create newer, greener alternatives to legacy companies. Creative destruction would almost certainly give us the best possible outcome if our object is the building of an efficient low-carbon economy. It would also save us the trouble of dealing with companies and investors that have a clear stake in preserving the status quo if at all possible.

Unfortunately, however, we may be out of time to implement this first-best option. Most climate scientists agree that major investments and capacity additions will be needed in the next few years to make a credible difference before 2030 — without which averting catastrophic warming above the two-degree benchmark would become impossible. It is deeply unlikely that regulations could be devised, passed, and implemented, which in turn causes an entire new set of corporate entities to arise in time to meet this deadline.
 

So there is no alternative to co-operating with legacy players in legacy industries. This can still work as long as we have a very clear view of their own incentives and how they can be shaped by policy shifts.

At COP28, at least, the presence of the fossil-fuel industry did not prevent the final communique from advocating, for the first time, a transition away from fossil fuels. Building a global consensus on this statement seemed impossible a few years ago; it is worth noting that, prior to the Glasgow COP two years ago, fossil fuels were not even mentioned in the final drafts. The final hours of COP28 saw considerable drama about this promised transition: the Saudis and Iraqis in particular refused to play ball until right at the end. Reuters even reported that the Secretary General of the Organisation of Petroleum Exporting Countries, or OPEC, Haitham al-Ghais from Kuwait, had sent a letter urging its members and those of OPEC-plus (which includes the Russian Federation) to oppose any deal at COP28 that singled out fossil fuels rather than emissions in general before their hands were forced by Western delegates and those from small island states. It is easy to imagine, however, that if this COP had been held elsewhere, in a country that the Saudis saw as less sympathetic to their concerns than the UAE, they would have refused to budge at all. At a COP in which the United States refused to budge on finance — and other countries refused to budge on their various vital concerns from biofuels to coal — it is noteworthy that it is the oil exporters that eventually gave in.

For developing nations, the targeting of specific sectors for action, such as coal or oil in energy, has historically been a red line. This is partly because they feel it takes some of the attention off overall emissions — which are higher in the developed world — and partly because they also prioritise a stable transition and energy security. This red line has now been breached. Is this because the participation of legacy companies and sectors provides comfort in the stability of the energy transition?
 

Next year’s COP, to be held in the city of Baku in Azerbaijan — which is highly dependent upon oil and gas exports — is going to test this thesis even more stringently. The Emiratis at least seemed committed to playing a balancing role between various factions at COP. Will the Azeris — who are closer to Russia than many other oil and gas exporters — be equally careful?
Whether or not compromise can be extended and deepened next year, and turned into actual action in terms of private investment, will depend on whether participants left over from the fossil fuel era are let into the room, and on whether then they are willing to take a constructive stance.

The writer is director, Centre for the Economy and Growth, Observer Research Foundation, New Delhi