Europe keeps up momentum, US moves up a notch to net zero
How credible are the political pledges on the road to a CO₂-neutral world? That depends on progress on four pillars: CO₂ pricing, policy environment, policy incentives and international cooperation.
What happened in 2022?
Assessing policy action across the four pillars - carbon pricing, political environment, policy incentives and international cooperation - over the past year, we note some encouraging progress on a country level, with Europe and the US standing out, but a disappointing lack of momentum on international cooperation. The relatively weak outcomes from COP27, and lack of specificity over the new loss and damage fund for countries most vulnerable to climate change, have shown that global agreement is difficult to reach.
Revisiting our analysis in February 2023, we make only one change by upgrading the overall US rating from ‘Low to Medium’ to ‘Medium,’ on positive developments related to increased policy incentives in the Inflation Reduction Act (IRA) and some progress on regional carbon pricing. Other changes to the Fidelity net zero tracker include adding the UK, one of the global leaders on climate policies, and dropping Russia. Table 1 summarises our latest assessment.
Our results in more detail
Whilst COP27 was by no means expected to be ground-breaking, the creation of the historic loss and damage fund was a notable breakthrough. Next to this, work to mobilise capital into cross-border climate projects continues, including via direct financing and the voluntary carbon markets. However, with no detail on actual funding and uncertain prospects from here, we do not believe the COP process has moved the needle on political international cooperation for now. The biggest surprise was to the downside through the failure to agree on the phase-down of all fossil fuels, instead only including the need for “low-emission” energy and dropping the resolution to cause emissions to peak by 2025.
On a more positive note, global momentum on corporate disclosure regulation, including the work of the International Sustainability Standards Board (ISBB) and transition plans, is gathering pace. The impact of transition plans could be positive by forcing companies to think about their climate risks, business models and products in a much more granular way than Task Force on Climate-related Financial Disclosures (TCFD).
Defining scenario thresholds for policy action
Policy action is the most challenging of the three enablers to map onto climate scenarios as it is mostly qualitative in nature and involves a high degree of subjective judgement on policy importance and scope, its implementation prospects, risks and potential unintended consequences. Our attempt to rank countries on the four key pillars of policy action illustrates this challenge. In addition to continuing this ranking assessment over time, we also propose two metrics to add a quantitative dimension to the tracker - these include carbon prices and Nationally determined contributions (NDCs).
Investigating corporate action, technology and policy action – what do the results mean for investors?
2022 was a year in which geopolitical conflicts translated into increased climate scenario uncertainty. The range of possible outcomes is now wider than before, and the influence of policymakers over the direction and speed of transition to net zero is more acute.
Carbon pricing and technological advances are among those policy factors that are most likely to move the dial towards net zero compliance in the near term. To get on track for the net zero transition by 2050, companies across most sectors would have to pick up transition momentum rapidly from here. On technology enablers, there has been notable acceleration in renewables investment and green hydrogen expansion across the world in 2022. Key policy initiatives undertaken in 2022 in the US and Europe in particular should keep this momentum going.
The developments aren’t enough to change our baseline view from a disorderly to an orderly net zero transition. But the policy shifts catalysed by the war-induced energy crisis do have the potential to dramatically speed up the progress towards net zero goals. Tracking transition enablers with the aid of analyst research should help investors navigate the tremendous uncertainty associated with climate change and its impact on economies, allowing to capture shifts in probabilities of different climate scenarios in real time.
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