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COP26: The last chance saloon

The COP 26 meetings due to be held in Glasgow in November are set to be the most important in a generation. Few countries have made good on the promises they made in Paris in 2015. Without more ambitious targets and credible actions to back them up, the world will fail to hold the increase in the global average temperatures to well below 2 °C above pre-industrial levels, let alone 1.5 °C. In this note, we identify why progress towards the Paris goals has been insufficient and what needs to change in Glasgow to put things right.

Our key recommendations for restoring the credibility of the Paris Agreement are detailed below.

  1. Countries upgrade their emissions reduction targets so that the total envelope of global emissions is compatible with keeping temperatures at least 2 °C below pre-industrial levels.
  2. As many advanced economies as possible commit to Net Zero 2040 targets. This will ease the burden on emerging economies and increase the likelihood that the Paris objectives can be met.
  3. Governments back up their targets through binding legislation, including more onerous carbon pricing, joined up policy across all levels of government and greater zero carbon R&D spending.
  4. The regressive effects of higher carbon prices are offset by funnelling revenue into progressive policy initiatives, including reform of tax-transfer systems.
  5. Signatories treble the size of the Green Climate Fund (GCF) and accelerate the Sustainable Development Mechanism (SDM) to aid the just transition.
  6. Signatories implement clear climate disclosure frameworks and standards in line with the Task-force on Climate related Financial Disclosures.

The G7 and G20 members should signal their willingness to take steps in this direction at their forthcoming meetings. This will send a powerful message to the rest of the world that the largest economies and emitters are ready to do what it takes to limit future damaging climate change.

The Paris Agreement has mostly been observed in the breach

Looking back on the five years since the Paris Agreement was ratified, it is hard to see them as anything but a missed opportunity. Between 2016 and 2019, global greenhouse gas emissions continued to rise, albeit much more gradually than during the previous decade. And though emissions plunged in 2020 thanks to the Covid-19 restrictions on economic activity, they have bounced back strongly during the recovery, with coal burning, and the use of both natural gas and oil all on the rise. The upshot is that there is now a good chance that global emissions will not peak until at least 2022, requiring even more drastic emissions cuts through the rest of the decade if there is to be any chance of still meeting the Paris objectives.

In many ways, these failures became likely as soon as the Paris Agreement was signed. Despite the lofty ambitions of the agreement, the nationally determined contributions (NDCs) that were meant to support the temperature objectives fell at least 80% short of what was necessary to achieve them. And even after accounting for the widespread ramping up of national targets over the past year, current pledges have still left the world on track for 2.4 degrees of warming (see Figure 1), and all the physical damages that will flow from such an outcome.

Figure 1: current pledges leave the world on track for 2.4 degrees of warming

Watch what countries do, not what they say

More fundamentally, lasting, sufficient emissions reductions require much more than high level target setting. They require wholesale, widespread political buy-in backed by clear legislation. That is why we developed the ASI Climate Policy Index for the major advanced economies. This builds on our Going Green research and is closely aligned with our ASI Climate Scenario framework which is central to how we capture the risks and opportunities in our investment processes and the climate solutions we are building for our clients.

Fundamental to the construction of our index is an assessment of the political and policy environment supporting climate change action. We identify eight factors that we regard as critical for driving and supporting sustained, credible action. We then assign each a score depending on the extent to which a driver is compatible with reaching net-zero emissions by 2050.

Our work highlights that while most developed countries have made progress towards the decarbonisation of their economies, progress has been varied and there are still no countries that in our view have fully credible Net Zero 2050 strategies (see Figure 2). The gap between what is being planned and what is needed is even larger once we recognise that the advanced economies ought to reach net-zero emissions well before 2050 to ensure a more just transition that accounts for their greater historic responsibility for the climate crisis.

Looking more closely at the variation in credible action across countries, Sweden and Denmark currently lead the pack thanks to the way both build climate initiatives into all facets of policymaking. Sweden’s Climate Policy Action Plan contains over 130 measures covering all of its economic sectors. And in Denmark, its climate law requires that sustainability is incorporated into all legislation, overseen by a standing committee on ‘green transformation’. This kind of accountability and legally binding commitment to act stands apart from the majority of countries where ambitious high-level political commitments have little legal weight.

The ASI Climate Policy Index June 2021

Figure 2: No countries fully net-zero aligned in spite of commitments

Carbon pricing: beloved of economists but still politically unpopular

Climate change is a classic example of market failure caused by negative externalities. Greenhouse gas pollution has highly adverse environmental and social consequences but individual polluters are not incentivised to account for those effects in their own actions. Pricing these externalities, either through carbon taxes or permits within emissions trading schemes (ETS), is the ideal way to force polluters to internalise the costs of the harm they do, and accelerate the transition to a zero-carbon economy.

Unfortunately, existing carbon pricing schemes are inadequate. Although most countries in our index have some form of carbon pricing in place, prices are generally too low to match existing climate goals. Even Sweden, which has the highest carbon price in the world at around 126 USD (SEK 1,190) per metric ton of CO2, is not yet on a pathway that is high enough to be consistent with net-zero emissions by 2050. Permit prices in the EU ETS have increased significantly through this year, but at just 50 euro per ton, are still far too low to drive sufficient changes in behaviour. Meanwhile, the laggards on our climate policy scoring system, such as the US, Australia and Japan, do not even have nationwide carbon pricing in place – and there is little chance of that changing.

Political incentives are a key reason for inadequate carbon pricing and policy gaps more generally. In the US (the world’s second-largest emitter of carbon dioxide), deep partisan divisions have stymied much-needed progress on the climate front. The Biden administration has put climate front and centre of the political and policy agenda following four years of reversals from the previous administration. But even this administration is loath to implement federal carbon pricing. And as long as Republicans and Democrats remain deeply divided on the need for climate action, sustainable climate action in the US is at risk with every midterm and presidential election.

In Europe, on the other hand, although we see varying degrees of political commitment to climate across member states, the collective EU-level legal mandate to decarbonise the region provides a circuit breaker to ensure progress is likely to continue. In essence, this puts a floor under minimum climate action but is far from enough to guarantee unified action towards net zero, especially when around half of the EU’s emissions sit outside the scope of its ETS.

Of course, while carbon pricing has a vital role to play in driving the zero-carbon energy transition, it also needs to be complemented by other targeted actions. The IEA’s roadmap to net zero by 2050 highlights that almost 50% of the emissions reductions required depend on technologies not yet available. Governments have a critical role in ensuring that the time to bring products to market is foreshortened, necessary infrastructure is enabled, and appropriate regulatory frameworks are in place.

International cooperation will also be critical to ensure transfer of knowledge, alignment of strategies within regions, and to enable economies of scale to be realised. The necessary R&D will need to be supported by a large increase in both public and private investment – with significant public funding required to manage the risk and leverage the level of private financing that will be needed. However, government spending globally on R&D has fallen by approximately two-thirds as share of GDP over the last three decades, highlighting another gap between their rhetoric and action.

Emerging markets must be the next frontier of decarbonisation efforts

Our Climate Policy Index covers 14 major developed countries that together have accounted for a large proportion of historical greenhouse gas emissions. But over the past two decades, rapid growth in emerging economy emissions has seen them overtake the advanced economies, with China now by far the world’s largest emitter (see Figure 3). Going forward, given existing population and economic growth trends, as well as their greater emissions intensity, the proportion of emissions accounted for by emerging economies will only grow further. This will leave the fate of the Paris goals increasingly in their hands.

The outlook for emissions and policy in China is worth looking at especially closely. Late last year, China significantly upgraded its climate commitments, pledging to become a net zero economy by 2060. This was a welcome shift in emphasis, as was the decision to implement carbon pricing through an emissions trading scheme, demonstrating once again China’s ability to lead its emerging economy peers, as well as many advanced economies.

Nevertheless, China needs to do much more to make these commitments fully credible. It is not yet promising to start reducing its emissions by 2030, which will put a lot of strain on other countries to do the heavy lifting this decade. And when one looks at China’s targets in more detail, negative emissions technologies, like carbon capture and storage, do a lot of the work. However, China (nor the rest of the world for that matter) has yet to demonstrate these operate at the scale necessary.

In the short-term, Chinese emissions have rebounded more quickly than any other economy, with emissions already above their 2019 levels. This is partly because the fiscal stimulus China put in place to support its recovery was much ‘browner’ than ‘green’, and more industrial than services led. China has also continued to invest in new coal-fired power capacity and its new ETS arguably over-allocates permits to some of the least efficient plants.

Meanwhile, most other emerging countries outside the orbit of the EU face even larger challenges of moving climate further up their policy agendas, given the natural greater emphasis on economic development and their reliance on renewable technology, know-how and financial transfers from the rest of the world.

Insufficient policy action presents a critical dilemma for investors

This policy backdrop, in which aggregate global emissions reduction targets are both insufficient and lacking credibility, matters enormously to the investment community. One of the key objectives of the Paris Agreement was to ensure that financial flows were compatible with the agreement’s temperature objectives. Subsequently, there has been a rush of action to encourage the major players in the financial industry, as well as the companies in which they invest or lend to, to align their capital allocation decisions to the Paris goals.

But in a world where global policy is not credibly aligned with those objectives, and not expected to in the future, capital flows directed by the financial sector will not either. Indeed, that reality is a feature of our climate scenario framework. In our mean scenario, the world fails to hold temperature increases below 2 °C, which in turn generates very different investment risks and opportunities than a Paris-aligned world would. This is a key reason why most investor and corporate net-zero commitments carry the caveat somewhere in the small print that they are conditional on government policies becoming aligned with the Paris Agreement’s goals.

Glasgow represents perhaps governments’ last opportunity to set the world on a Paris-aligned pathway.

A course correction in Glasgow?

Glasgow represents perhaps governments’ last opportunity to set the world on a Paris-aligned pathway. So what needs to be done? Below are six, core, and we believe practical, recommendations for making the Paris objectives more credible.

  1. Our first recommendation is that emissions reduction targets be upgraded such that the total envelope of emissions when added across all signatories is compatible with keeping temperatures at least 2 °C below pre-industrial levels. Reinforcing commitments to the most ambitious temperature objectives, without NDCs that are consistent with them, will not help anyone.
  2. Although there are many more advanced economies with Net Zero 2050 commitments than emerging economies, the onus on wealthy countries to upgrade targets is at least as high as it is for developing countries. As such, our second recommendation is that as many advanced economies as possible commit to Net Zero 2040 targets. This will increase the likelihood that the Paris Agreement’s objectives can be met.
  3. In light of our emphasis on credibility, our third recommendation is that upgraded NDCs are backed up by concrete, binding national legislative action, and preferably more onerous carbon pricing. The Swedish and Danish approaches to climate policy, which ensure that all policy actions are consistent with their aggregate emissions targets, should become the model for the majority of countries.
  4. Without that approach, it will remain common for infrastructure and other projects to gain approval that undermines rather than supports climate objectives. The potential political fallout from higher, regressive, carbon prices can best be managed through a commitment to funnel revenue into progressive policy initiatives, including reform of tax-transfer systems, which becomes our fourth recommendation.
  5. Next, given the dependence of the Paris Agreement on decoupling carbon usage from energy demand and economic activity in the emerging economies, signatories need to significantly upgrade both the Green Climate Fund (GCF) and the Sustainable Development Mechanism (SDM). The $100bn pledged through the GCF for supporting mitigation and adaptation in developing countries was woefully inadequate, while the SDM has yet to get off the ground. A trebling in the size of the GCF – which would still represent less than 0.5% of a single year’s global GDP – would represent an appropriately ambitious commitment to a just transition.
  6. Lastly, we recommend signatories implement clear climate disclosure frameworks and standards in line with the Task-force on Climate related Financial Disclosures. This will give investors the necessary information to incorporate climate change risks and opportunities into investment decision-making. Further, this must be focused on achieving real-world impact towards net zero.

Keeping an eye on the prize

Our set of recommendations is undoubtedly ambitious. Yet is also achievable, if each country plays its part, and shares the burden of action. Importantly, the benefits are almost incalculable. The IEA recently demonstrated that if implemented in the right way, a net-zero transition by 2050 can lift rather than lower economic activity relative to the baseline.

Moreover, once one accounts for the economic costs of inaction that will accrue to future generations, not to mention the social, health and environmental impacts that also carry a heavy cost, the calculus tips even more towards stronger action today.

The question is whether the world’s leaders have it within them to look beyond the short term, and whether, we, as citizens, will reward them for it.


The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

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About the authors

Jeremy Lawson, Chief Economist, Aberdeen Standard

Jeremy Lawson joined the company in March 2013 as a Senior International Economist, becoming Chief Economist in October 2013. He is now responsible for overseeing the firm's economic research and economic forecasts as Head of the ASI Research Institute. Jeremy is also a member of the Strategic Investment Group and Global Investment Group.

Prior to joining Standard Life Investments, Jeremy was a Senior US Economist at BNP Paribas, responsible for US inflation and fiscal policy forecasts and contributing to macroeconomic forecasts. He also spent time at the Institute of International Finance, OECD, Reserve Bank of Australia and the Office of the Leader of the Australian Federal Opposition. He has also tutored economics at both the University of Adelaide and the London School of Economics.

Jeremy graduated with a Bachelor of Economics (1st Hons) from the University of Adelaide and an MSc in Economics, London School of Economics.

Qualifications: MSc,BSc
Jeremy graduated with a Bachelor of Economics (1st Hons) from the University of Adelaide and an MSc in Economics, London School of Economics.

Stephanie Kelly, Head of Asiri, Aberdeen Standard

Stephanie Kelly is the Senior Political Economist at Aberdeen Standard Investments Research Institute. She leads the politics, policy and ESG research stream for the Institute, specialising in US, European and UK political and policy analysis. She is also a regular commentator in print media and Bloomberg TV. Stephanie sits on the CFA UK Scotland Committee and the CFA Gender Diversity Network Scotland. Stephanie holds a BA(Hons) in Economics and Politics and an MSc in International Politics from Trinity College Dublin, with research experience from Sciences Po, Paris and the University of British Columbia. Stephanie joined Standard Life Investments in 2014.


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