TODAY’S STUDY: ADDING UP THE CLIMATE CHANGE NUMBERS

Two degrees of separation: ambition and reality; Low Carbon Economy Index 2014

September (PricewaterhouseCoopers)

Heading for four degrees?

The PwC Low Carbon Economy Index (LCEI) calculates the rate of decarbonisation of the global economy that is needed to limit warming to 2°C. We base our analysis on the carbon budget estimated by the Intergovernmental Panel on Climate Change (IPCC) for 2°C.

Emissions per unit of GDP fell in 2013 by 1.2%, marginally better than the average decrease of 0.9% since 2000. But with such limited progress in decoupling emissions growth from GDP growth, the gap between what we are doing and what we need to do has again grown, for the sixth year running. The average annual rate of decarbonisation required for the rest of this century for us to stay within the two degree budget now stands at 6.2%. This is double the decarbonisation rate achieved in the UK during the rapid shift to gas-fired electricity generation in the nineties.

While negotiations focus on policies to limit warming to 2°C, based on the decarbonisation rates of the last six years, we are headed for 4°C of warming in global average temperature by the end of the century, with severe consequences identified by the IPCC for ecosystems, livelihoods and economies.

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The mounting challenge of decarbonisation

PwC’s Low Carbon Economy Index (LCEI) has looked at the progress of the G20 economies against a 2°C global carbon budget since 2009. Currently, economic growth is closely coupled with carbon emissions and increased greenhouse gas (GHG) concentrations. The IPCC’s latest assessment report (AR5) has reinforced the message that, without the rapid decoupling of GDP and emissions, climate change will present widespread threats to business and society.

AR5 sets out four carbon budgets that correspond to different degrees of warming by the end of the 21st century. The current consensus target by governments, convened under the UN Framework Convention on Climate Change (UNFCCC), is to limit global average temperature increase to 2°C. To meet this warming scenario (known as RCP2.6 in AR5), cumulative fossil fuel CO2 emissions between 2010 and 2100 need to be no more than 270GtC (or around 990GtCO2).

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But while all governments at the UNFCCC reiterate the goal of limiting warming to 2°C, implementation has fallen short of this goal. Current total annual energy-related emissions are just over 30 GtCO2 and still rising, a carbon ‘burn rate’ that would deplete the carbon budget for the entire century within the next 20 years. The IPCC has warned that our current trajectory will lead to warming estimated to range from 3.7 -- 4.8°C over the 21st century. It anticipates severe adverse impacts on people and ecosystems through water stress, food security threats, coastal inundation, extreme weather events, ecosystem shifts and species extinction on land and sea. At the higher levels of warming, the IPCC states that these impacts are likely to be pervasive, systemic, and irreversible.

Against this backdrop of gloom, the decarbonisation results reported in this years’s LCEI bring a glimmer of hope, with growth in absolute emissions of only 1.8%, the slowest rate of emissions growth since 2008-2009, when carbon emissions fell as a result of the global recession. The reduction in carbon intensity is also the highest since 2008, standing at 1.2%, compared to 0.8% in 2012. Nevertheless it is still only one fifth of the decarbonisation rate required. Currently, the LCEI shows the global economy would need to cut its carbon intensity by 6.2% a year, every year from now to 2100, more than five times its current rate.

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The stakes are high

The physical impacts of climate change will vary from country to country, and some countries may find that the impacts within its own borders are relatively limited or in some cases benign. But in a highly globalised economy, no country is likely to be spared as the impacts of climate change ripple around the world, affecting interdependent supply chains and flows of people and investment.

Indirect impacts of climate change

The UK, for example, will face adverse domestic impacts in the form of extreme weather events such as flooding, storms and heat waves, as well as some negative impacts on agricultural production. It is also projected to see some benefits, through increased agricultural yields for some produce, and lower winter mortality. But the international impacts of climate change to the UK could be an order of magnitude larger than domestic threats and opportunities. The UK for example, holds around £10 trillion of assets abroad, with the flow of investment by the UK into other countries exceeding £1 trillion in 2011 alone. Physical or economic damages in the countries that the UK has invested in will therefore flow back to the UK – and some of the sectors that the UK has invested in have already identified vulnerability to climate impacts, for example food and beverages, mining and power generation. Many of the UK’s largest retailers are now conducting risk assessments of long-term climate trends and the implications for their supply chains and business operations. Other sectors, such as manufacturing and financial services, could be affected by both the physical impacts of climate change and regulatory pressures on carbon-intensive assets. Extreme weather-related events beyond UK borders in the past year alone have shown that these losses can be significant.

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Progress in 2013

In last year’s LCEI we calculated that the global economy needed to reduce carbon intensity (the amount of carbon emissions per unit of GDP) by 6.0% a year to limit warming to 2°C. Overall, we have fallen far short of the global target for the sixth successive year, achieving only a 1.2% reduction in 2013. Having failed to achieve the global decarbonisation rate of 6.0%, the global challenge we face going forward is now tougher still. The path to 2100 requires an annual global decarbonisation rate averaging 6.2%. But the global result masks striking variations in performance at the national level.

An unexpected champion surpassed the decarbonisation target – Australia recorded a decarbonisation rate of 7.2% over 2013, putting it top of the table for the second year in a row. Three other countries – the UK, Italy and China – achieved a decarbonisation rate of between 4% and 5%. Five countries, however, increased their carbon intensity over 2013: France, the US, India, Germany and Brazil.

One glimmer of hope lies in the performance of emerging markets, with this year seeing the reversal of an emissions trend between the G7 and E7 economies. Since LCEI analysis started, the G7 has consistently outpaced the E7 in reducing carbon intensity, but in 2013, for the first time, the E7 averaged a 1.7% reduction in carbon intensity, while the G7 managed only 0.2%. This indicates the possibility of the E7 maintaining economic growth while slowing the rate of growth in their emissions. As the main manufacturing hubs of the world, the E7 economies currently have total carbon emissions 1.5 times larger than that of the G7, a figure expected to grow. This possibility of the E7 decoupling of growth from carbon is vital for global progress towards carbon targets.

Ups and downs: Analysing the results…Can renewables compete with coal by the 2020s?..

Promising three degrees…How the pledges currently stack up…Commitments vs. progress by the largest emitters…Weak G7 progress towards 2020 targets…Continued rising carbon emissions from E7…Politically not scientifically driven…

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Delivering two degrees

So what is needed?

The international negotiations leading up to Paris 2015 are a critical chance to ensure collective agreement on targets to keep temperature increases within 2°C. The foundation of a successful deal will be a set of emissions pledges that are adequate to maintain global temperature increases below 2°C.

The IPCC, and others such as UNEP, have estimated the required carbon emissions levels under the different concentration pathways. The IPCC’s latest report on mitigation has also put forward, based on a range of models, a possible breakdown of the carbon budget by regions14. The UN initiative referred to as the Deep Decarbonisation Pathways Project also considered plausible decarbonisation pathways for 15 countries15.

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What does this look like in more detail?

The LCEI takes these breakdowns as a basis to outline the potential reductions required by these countries, and their ongoing decarbonisation rates. The challenge is considerable.

Overall, to stay within the global carbon budget, annual energy-related emissions by the G20 bloc need to fall by one-third by 2030 and just over half by 2050. Much of the debate in climate negotiations has centred on responsibility and how to share the burden between developed and developing countries, as defined in 1992 in the UNFCCC. Regardless of how the carbon budget is split, it is clear that both developed and emerging economies face the challenge of growing their economies whilst radically curbing emissions.

The timeline is also unforgiving. The IPCC and others have estimated that global emissions will need to peak around 2020 to meet a 2°C budget. This means that emissions from the developed economies need to be consistently falling, and emissions from major developing countries will also have to start declining from 2020 onwards.

Specifically, to stay within a 2°C budget, the G7 needs to further reduce its absolute carbon emissions by 44% by 2030 and 75% by 2050 compared to 2010 levels. Even if the 2020 pledges are met, this means its carbon intensity needs to fall by 5.9% from 2020 to 2030, and by 6.0% from 2030 to 2050.

For the E7 economies, meeting the 2020 pledges is just the first step. The required carbon emissions reduction from 2020 to 2030 will have to be sharp and immediate, equivalent to a carbon intensity reduction of 8.5% per annum. If this is achieved, then further carbon intensity reductions of about 5.3% a year to 2050 could take the E7 to emission levels compatible with limiting climate change to a 2°C warming. In this case, carbon intensity levels will be comparable to those of the G7 by 2050…

G7 (incl EU) historical energy-related emissions and targets…G7 carbon intensity reality and ambition…E7 historical energy-related emissions and targets…

Betting on Paris 2015…Expectations and necessity…The critical role of national targets…

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Smoke signals to look for before Paris

With timing of the essence, there are a number of developments to watch out for ahead of the climate talks in Paris 2015 that look to be preconditions of success:

• Big footprint leadership: The outcome of the New York UN Climate Leaders’ Summit, hosted by Ban Ki-moon on September 23 2014, will be highly influential. Strong attendance by heads of state, and strong calls for increased ambition and action – whether jointly or individually – will provide legitimacy to the efforts of their negotiating teams in Lima and beyond, while encouraging governments to put forward more ambitious targets.

• INDC pledges: The emissions reduction pledges submitted by countries by March 2015 are the building blocks of a deal. How the renewed pledges add up will shape the likely carbon emissions trajectory for the world for the next decades. These pledges can be increased after Paris, and a new UN process would likely be introduced to enable this, but the INDCs will demonstrate the short-to-medium term willingness of governments to decarbonise.

• ‘Draft decisions’ papers: laying down the policy foundations: Specific policies, what’s in and what’s out, will be the battleground for negotiators in the next months. The more that is locked down before Paris, for example in the 2014 summit in Lima, Peru, the more likely it is that there could be an international deal. Draft decision papers that secure at least a high level policy consensus will therefore be critical. Working groups of the UNFCCC process are gearing up activities by making public some possible options for the Paris 2015 deal.

• A change in the carbon rhetoric? Above all, as some renewables appear to approach cost parity, and as the costs of climate inaction – from flooding to food insecurity - appear to grow, the strongest determinant of success will be the broadening of the emerging recognition by both business and political leaders that taking decisive action to mitigate climate change is not a cost, it is a pre-condition for sustained economic growth.

The next two annual UN climate summits in Lima and Paris will indicate the direction in which the world is headed on climate change. Where we are now is clear: inadequate pledges, inadequately implemented. If these four indicators above of success are met, though, the picture could start to look different. The stage is then set for one meeting to take us off the path to 4°C, beyond the present promises of 3°C, towards a policy framework for a future where warming is limited to 2°C.

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