Row over fossil fuel language – COP28 ‘on the verge of failure’

With hours to go until the 28^th Conference of Parties (COP) draws to a close, all eyes are on nitty gritty of the final policy documents: Should fossil fuels be phased out or phased down? While the difference might seem marginal, these words send important signals to global capital markets. We take a closer look at the language limbo.

As COP28 wraps up, countries are now expected to commit to phase down, rather than phase out fossil fuels. The focus is also on reducing “unabated” fossil fuel emissions rather than simply emissions as a whole, a draft policy document revealed on Monday.

This has sparked a row between nations, with Australia, the US, UK, Canada and Japan refusing to co-sign the statement, describing it as “a death certificate for small island states.”

The leaked document marks a significant U-turn and was strongly condemned by climate activists and diplomats across the globe. Former US presidential candidate and climate campaigner Al Gore warned that the summit was now “on the verge of complete failure” accusing the policy document to be "by the Petrostates and for the Petrostates". 

But he also emphasised that there was still an opportunity to turn this around: “In order to prevent COP28 from being the most embarrassing and dismal failure in 28 years of international climate negotiations, the final text must include clear language on phasing out fossil fuels. Anything else is a massive step backwards from where the world needs to be to truly address the climate crisis and make sure the 1.5°C goal doesn’t die in Dubai,” he warned.

To the unsuspecting observer, these may seem like marginal differences but they could matter a great deal to investors across the globe. So, why does terminology matter so much here?

The f word

Despite being hosted by an oil producing nation, hopes were high that this year’s COP28 Summit in Dubai could finally mention the f word: fossil fuels. Despite having gathered 28 times, policy makers have so far successfully avoided mentioning fossil fuels as the root cause of climate change.

Last week, the expression fossil fuel phaseout was included in a draft version of the policy document, to the dismay of OPEC secretary general Haitham Al Gais, who urged OPEC members not to back a phaseout of fossil fuels. 

Moreover, a coalition of more than 2000 investors, politicians, executives, scientists, activists, and global faith leaders, including representatives from the Net Zero Asset Owner Alliance (NZAOA) had called for a clear commitment to phase out fossil fuels.

But the broader context behind the row over phasing out fossil fuels is that many of the world’s largest economies, including some who are now urging for a clearer commitment to a phaseout, are still expanding their fossil fuel production.

India, Russia and Australia are planning to increase their coal production within this decade while Saudi Arabia, the US, the UK, Brazil, Canada and Kuwait have confirmed oil expansion plans. Also, the UAE, the host of this year’s climate summit, plans to drill 40% more oil by the end of the decade than it does now, according to forecasts by Rystad Energy. 

This is despite the International Energy Agency (IEA) explicitly stating that in order to meet the 1.5 degree target, no new oil or coal production is required. The IEA instead warns that there is already an oversupply of fossil fuels.

In this context, the terminology “reducing both consumption and production of fossil fuels, in a just, orderly and equitable manner so as to achieve net zero by, before, or around 2050” appears to suggest that politicians have no intention to put their words into action.

“Unabated”

Another term that has caused dismay in the leaked policy statement is the use of the phrase "unabated" in reference to fossil fuel pollution efforts towards substitution of unabated fossil fuels in energy systems. This implies that countries will continue to produce fossil fuels, but will attempt to offset their detrimental impact through new climate technologies such as carbon capture or carbon credits.

The draft policy statement pledges to: “Accelerate zero and low emissions technologies, including, inter alia, renewables, nuclear, abatement and removal technologies, including such as carbon capture and utilization and storage, and low carbon hydrogen production, so as to enhance efforts towards substitution of unabated fossil fuels in energy systems.”

Indeed, the UAE appears to have its cake and eat it. It has pledged to become net zero by 2050, a plan that seems out of synch with its drastic expansion of fossil fuel production. But simultaneously, the country also hosts some of the world’s biggest investments in carbon capture and carbon credits.

ADNOC, the UAE’s national oil company led by COP28 host Sultan Al Jaber is piloting a project, which relies on sucking carbon out of the air and converting it into rock that will be blasted into the Hajar Mountains in Oman. The initiative, which is backed by Exxon Mobil among others, plans to capture 10m tonnes of CO2 per annum by the end of the decade.

But the technology is controversial. Hoesung Lee, chair of the Intergovernmental Panel on Climate Change warned that banking on carbon capture was no free lunch and would lead to an overshoot in oil production, which would trigger more global warming.

Researchers also say that if carbon capture and storage underperforms by only capturing part of the carbon released into the atmosphere, it could amount to a “billion tonne carbon bomb” being released into the atmosphere.

“If carbon capture rates only reach 50% rather than 95% and upstream methane emissions are not reduced to low levels, this would pump 86bn tonnes of GHG into the atmosphere, equivalent to more than double the global CO2 emissions in 2023,” researchers for the think tank Climate Analytics warned.

“The term abated is used as a trojan horse to allow fossil fuels with dismal capture rates to count as climate action,” they warned. 

“Abated may sound like harmless jargon but is actually language deliberately engineered and promoted by the oil and gas industry to create the illusion that we can keep expanding fossil fuels,” Claire Fyson, co-head of the Climate Policy Team at Climate Analytics said. 

The policy – investment nexus

This apparent disconnect between words and action at COP28 leaves investors in limbo, a challenge that was evident at Net Zero Investor’s Annual Conference in London yesterday.

Speaking on a panel about the geopolitics of the energy transition, Edward Baker, net zero manager at LGPS Central, said that policy support was crucial in order to make long-term investment decisions on capital allocations to renewables.

"We have seen more opportunities coming through on the back of policy developments in the US and EU, the opportunities are there and are growing, it is just that if you benchmark it against the net zero pathway, it is currently not sufficient,” he warned. "We need to move faster and that needs to be supported by the right policy environment," he added.

Policy investment nexus was also at the forefront of the NZAOA's agenda at this year’s COP. “Policy can play a crucial role in the energy transition, that be in the form of carbon pricing or a carbon tax or in the form of subsidies like the Inflation Reduction Act,” said Olga Hancock, head responsible Investment at the Church Commissioners for England and one of the policy leads at the NZAOA, during Net Zero Investor's Annual Conference. 

But Kingsmill Bond, energy strategist at RMI warned that investors who failed to align with the climate transition risked exposure to stranded assets: “We stand of the cusp of the greatest energy transition since the industrial revolution yet large parts of the financial sector are still behind the curve,” he stressed.

Comparing the energy transition to the industrial revolution, he argued that countries who failed to adapt risked losing their status in the global economy. "Cardiff once was the centre of the world's coal trade. I would argue that what Cardiff was in 1913 is Dubai in 2023."