Why COP26 Matters For Markets

WHAT IS COP26 AND WHY DOES IT MATTER FOR MARKETS?

Against the backdrop of rising energy prices leading to economic fallout for economies in Asia, Europe, and North America, COP26, a two-week event, is set to begin on October 31 in Glasgow, Scotland. The United Nations’ Conference of Parties (COP) was first held in 1995, and COP26 gets its name for this year’s meeting being the 26th iteration of such an event.

History of global temperature change and causes of recent warming (Chart 1)

Why COP26 Matters for Markets

Source: Climate Change 2021: The Physical Science Basis - Summary for Policymakers (IPCC)

COP26, later this month and in early-November, will be an attempt to get countries on the path to fulfilling the goals laid out in the 2015 Paris Climate Agreement. The Paris accord outlined the goal of keeping the planet from warming by 2 degrees Celsius by the year 2100, and if possible, to stop warming at 1.5 degrees Celsius (relative to pre-industrial era readings).

Per a report released this summer from the UN’s Intergovernmental Panel on Climate Change (IPCC), the planet has roughly ten years left to make significant cuts to emissions before the 1.5-degree Celsius threshold is reached, with the planet already having warmed by 1-1.2 degrees Celsius relative to the end of the 19th century.

Assessed contributions to observed warming in 2010–2019 relative to 1850–1900 (Chart 2)

Why COP26 Matters for Markets

Source: Climate Change 2021: The Physical Science Basis - Summary for Policymakers (IPCC)

A sense of urgency underscores COP26, but the October/November summit – whose aim is effectively to curb use of fossil fuels like coal and oil – is arriving at the worst possible time thanks to a budding energy supply crisis gripping most of the globe’s major economies.

WHY ARE ENERGY SUPPLY CONCERNS PROLIFERATING?

To meet their obligations laid out in the Paris Climate Agreement, many of the world’s major economies – China, the UK, the US, among others – have attempted to scale back their use of coal and oil as primary energy sources. But with the coronavirus pandemic’s impact still being felt, supply chains have been in disarray. Just days ahead of COP26, China announced that they would begin to restart coal production in order to meet the country’s energy needs.

Companies unable to secure raw materials in a timely manner as well as labor markets not recovering as quickly as anticipated have created job shortages in key areas like truck drivers, leaving energy supplies unable to be transported (Europe, the UK). Closures at ports have compounded the problem (the US). Trade tensions remain tense in some areas (Australia, China). Seasonally, with winter coming in the Northern Hemisphere, fears are that demand will continue to outstrip available energy supplies (fossil fuels or renewables) that could create a more significant economic issue over the coming months.

HOW COULD COP26 EXACERBATE ENERGY SUPPLY ISSUES?

It is no secret that the world’s major economies are doing a poor job at achieving the goals laid out in the 2015 Paris Climate Agreement. Recent attempts to do so – by cutting coal consumption, for example – have created a scarcity of available electricity, which has disrupted global manufacturing chains based out of Asia (China), contributing to the rise in inflation felt in North America and Europe.

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