Coinciding with Earth Day, President Biden will convene heads of state for his virtual Leaders’ Climate Summit next Thursday, April 22nd and Friday, April 23rd. In the days leading up to the event, the Biden Administration will release its Nationally Determined Contribution (“NDC”) under the Paris Agreement, which will provide updated emissions reduction targets for the United States.
Sources close to the deliberations say this goal is expected to be a 50% reduction in greenhouse gas emissions (from 2005 levels) by 2030, reports Bloomberg. The US will also likely update its longer-term commitment to balancing human-made emissions with CO2 removals (“net zero”) by 2050, and outline specific targets for reducing methane (a potent greenhouse gas), and announce new standards for climate-related financial risk disclosures.
Bringing together 40 heads of state including Xi Jinping (not yet confirmed, but SCMP reports it is very likely) and Narendra Modi, the two-day Summit will include speeches and breakout discussions focused on how countries are working to combat climate change. All G20 countries have been invited to join the summit, which together account for 85% of global GDP, 75% of global trade, 74% of global greenhouse gas emissions and two-thirds of the world's population. The event is viewed as a platform for these leaders to announce their updated emission targets and make other climate-related commitments, which will have major policy ramifications for virtually every sector.
Why is the world watching?
- This is a redemption moment for U.S. climate leadership on the world stage. When the Trump Administration announced its intention to withdraw the U.S. from the Paris Agreement, it created a vacuum in climate leadership on the international level. While many local governments and private sector actors continued progress, the federal government has been absent for four years—until now. President Biden hopes to use this Summit to show the world that the U.S. is back at the table and leverage the U.S. NDC to pressure other nations to increase their emission reduction targets. Companies that have not been leading on climate issues will need to pay close attention as the Biden Administration seeks to implement emissions reductions.
- This is the ‘on ramp’ to a season of increasing climate ambition. The landmark Paris Agreement establishes a mechanism for increasing climate ambition through the submission of updated NDCs every five years. 2021 is a pivotal year for international climate negotiations given this is the first update of national pledges since the signing of the Paris Agreement in 2015. There will be significant scrutiny on whether NDCs align with the goals of keeping temperature increases to “well below 2°C” and to “pursue efforts to limit the temperature increase to 1.5°C” under the Paris Agreement. Expect a steady string of new commitments and calls for action through the summer as momentum increases.
- How the new U.S. NDC is translated into policy will have profound implications for companies. The U.S. NDC will need to be translated into concrete policies in order to achieve its objectives. The decision to decarbonize an economy by 50% over a twenty-five-year period has profound consequences and will require a radical shift away from fossil fuels, rapid electrification of the transportation and building sectors, and a transformation of agricultural systems. The Biden Administration has signaled an “all of government approach” to the issue, but the specific policy mechanisms to be used and their feasibility remain unclear. Internationally, commitments and policies will have implications for multinational corporations as they relate to carbon pricing and taxation, environmental regulations, and global sentiment.
Context: The rubber is hitting the road when it comes to climate commitments vs. climate action. “Whatever Joe Biden says about a ‘transition from the oil industry’ and decarbonizing the US economy, oil prices still matter to a superpower with geopolitical responsibilities,” reported the Financial Times following Energy Secretary Granholm’s recent meeting with Saudi Arabian Energy Minister Abdulaziz bin Salman al-Saud. This line of thinking—on the tension between making ambitious commitments and actually delivering on them—is going to dominate the media coverage and analysis of the Summit and following climate moments this year. It has already shaped the way the media covers corporate climate commitments and has led to many claims of “greenwashing.”
Reducing greenhouse gas emissions by 50% by 2030 will require a fundamental restructuring of the American economy. Since 2005, the United States has reduced emissions by approximately 1.1% annually (this excludes the effects of COVID whereby emissions fell by ~10% in 2020, and is reversing as economic activity resumes), such that emissions in 2021 are expected to be ~15% below 2005 levels. However, halving emissions by 2030 will require a significant acceleration in the pace of reductions, with more than a 5% annualized decline rate from today’s levels. The chart (below) highlights the trajectory required to achieve a 50% reduction by 2030 and net zero emissions by 2050.
Moreover, reductions will fall unevenly across sectors. For example, the Biden administration is targeting decarbonization of the electricity sector by 2035 given the availability of economically and technologically viable low-carbon solutions. However, harder to abate sectors such as heavy industry, which are significant employers and subject to international competition, may prove more challenging to address in the near term. While there are political barriers to decarbonizing these sectors, some of the technical challenges are being addressed by President Biden through a new ARPA-C program (backed by over $500 million in his recent budget) that will focus on climate R&D and innovative solutions.
It is noteworthy that much of the progress achieved so far has been driven by economic forces. The abundance of shale gas has allowed natural gas fired power plants to displace coal generation in many U.S. power markets.
And while ongoing declines in the cost of renewables and electric transportation will support continued emissions reductions, there will be a clear need to go beyond market forces to achieve the scale of ambition expected in the U.S. NDC. This will require a comprehensive set of policies, likely consisting of a blend of carrots (e.g. grant programs and tax incentives for clean energy, recognition of states and businesses that take aggressive action, infrastructure spending, etc.) and sticks (e.g. carbon pricing or pollution taxes, clean procurement targets, stringent environmental reviews factoring in the social cost of carbon, etc.).
The key questions will be how many of these levers President Biden and Democrats in Congress can put in place, how extensive they will be, and whether they will be durable against lawsuits or future changes in power. Green policy is already top of mind as it relates to clean jobs and green infrastructure, but the decisions coming out of the Summit and the messaging used to communicate them will provide insight into the next phase of the policy debate.
- Cooperation between the largest emitters: Given that the U.S., EU, China, and India are the four largest GHG emitters globally, their presence is key for global coordination on climate action. There is much speculation around whether Chinese President Xi Jinping will participate, with news media reporting that China is very likely going to join. Although the recent U.S.-China discussions in Alaska went publicly hostile, Chinese officials have signaled an interest in potentially working with the U.S. when it comes to climate, as evidenced by a meeting this week between U.S. Special Envoy for Climate John Kerry and his Chinese counterpart in Beijing.
- Climate-related Disclosures: The Biden Administration has signaled that it is ready to move ahead on stronger climate related financial disclosure requirements, and sources indicate that there will be further announcements on this at the Summit. Supporting existing frameworks like the Task Force on Climate-related Financial Disclosures would strengthen financial disclosures as an important tool to provide financial markets participants with high-quality and consistent information on the impacts of climate change.
- NDCs/Commitments: New commitments that exceed previous goals or accelerate timelines will be a win for the Biden administration. But if no new commitments, or commitments that are viewed as not sufficiently ambitious come out of the Summit, it may draw criticism for not accomplishing enough.
- Climate Finance: U.S. Special Envoy for Climate John Kerry and Treasury Secretary Janet Yellen are the two key players here, and they have been “making the climate finance rounds.” There will likely be a portion of the Summit focused solely on finance, building on the recent announcement of Biden’s tax plan which called to end $35 billion worth of fossil fuel subsidies.
- Coal Policies: Japan signaled that it may end its financial support of overseas coal plants and is expected to announce some new joint initiative with the U.S. at the Summit. Other countries may follow suit and discuss the transition away from supporting coal.
- Clean Jobs: The economic transition is a large part of the political climate puzzle for the Biden Administration and other countries seeking to decarbonize. Expect lots of talk about this and potentially new commitments in line with the Biden Administration’s Jobs Plan, which ties federal funding to assurances that fossil fuel communities will receive well-paying jobs in the energy transition.
- Climate Resilience and Adaptation: The effects of climate change are already being felt, from extreme weather events such as wildfires and hurricanes to sea level rise. Bolstering resilient infrastructure and investing in adaptation strategies is a crucial piece of climate action, particularly for developing nations.
- New Climate Commitments from Businesses: While they won’t officially participate in this Summit, corporations may use this as a milestone to release their own new commitment. They need to be wary of criticism if announcements aren’t backed up by a robust transition plan.