COP28 – the impact on Commodities

At the close of COP28, we ask what the latest UN climate conference means for the commodities industry.

This iteration of the leading annual gathering of climate conferences was held in Dubai from 30 November – 12 December, bringing together a wide range of government and industry representatives. This year the conference’s remit was broader than ever, with focus days dedicated to the climate’s impact on health, gender, youth, urbanisation and more. The conference also covered the first Global Stocktake – the process by which countries and stakeholders measure their progress towards meeting the goals of the Paris Climate Change Agreement, and operationalising the loss and damage fund which supports vulnerable countries.

As well as this, the conference covered several global challenges likely to have a direct impact on commodity producers and merchants, including the first COP trade day, the energy transition, food systems transformation, and climate finance.

The energy transition

As is to be expected from a climate conference, the use of fossil fuels and the energy transition played a key role in many discussions, with multiple points of view and agendas on display. The energy industry was well-represented at COP28, with over 2,450 people designated as representatives from the fossil fuel sector, more than the delegations of most countries.

The Oil and Gas Decarbonization Charter was released by industry signatories during the conference. This voluntary charter calls on the oil and gas sector to reach net zero emissions for their own operations by 2050. It has, however, been criticised for its lack of ambition, including the fact that it only covers companies’ own operations, not the emissions from the fuel itself.

The potential phase-out of fossil fuels would obviously have a huge impact on all commodity organisations shipping materials around the globe. This was the subject of particularly polarised debate, with 80 countries pushing for a broader pact to phase out fossil fuels. Meanwhile, there is strong opposition, led by but not limited to, Russia, Saudi Arabia, and China.

In the end, the summit agreed to “transition away” from fossil fuels by the 2050 target, but this remained a voluntary commitment. Most items in the discussion had no time limit either, except the trebling of global renewable capacity by 2030, and doubling the annual average rate of energy efficiency improvements. The final COP28 text also calls for accelerated action in the next decade on carbon and other emissions including methane, meaning more challenges in the energy sector.

Metals in the energy transition

Trebling global renewables capacity over just 6 years is going to require significant infrastructure investment and could trigger even larger shifts in the metals industry than we have already seen. UN Secretary-General António Guterres highlighted how the challenge will be in extracting and sourcing the metals and minerals needed for the transition in a “sustainable, fair and just way”, as a lack of global governance could exacerbate geopolitical risk and environmental and social challenges. However, the green energy boom also provides an opportunity for commodity-rich developing countries to expand their economies.

Agricultural and soft commodities

134 countries, covering 70% of the world’s land, have signed the Emirates Declaration on Sustainable Agriculture, Resilient Food Systems, and Climate Action at the conference. This declaration is a commitment to integrating food into climate plans by 2025, meaning we could be seeing substantial policy reforms over the next year.

This Declaration could mean several different things for ags and softs traders, and will likely have different outcomes in different geographies. Examples that we might see include stricter ESG requirements to support the most vulnerable farmers and environments, and more creative financing partnerships to transform food systems. At this stage, the watchword is “uncertainty” and commodity traders should keep an eye on the situation.

Carbon crediting and trading

Voluntary carbon markets are back on the agenda with the launch of a framework for the Energy Transition Accelerator, a programme designed to generate funding through the voluntary carbon market to help developing countries transition to cleaner sources of energy. The programme could have a significant impact on the reputation of voluntary carbon credits, whose credibility has suffered this year. But the new ETA commitment to create the highest-quality carbon credits “have the potential to re-energize carbon markets”, providing new opportunities for commodity traders looking to engage in these markets.

However, hopes for a UN-sanctioned global market were dashed on the final day of COP when negotiators could not agree on key rules to trade offsets. The US pushed for light-touch regulations which would mean a prominent role for private sector players from the voluntary carbon market, but means the mechanism risks becoming a dumping ground for junk credits. The EU and many African and Latin American states favoured stronger checks and balances. As the text could not be agreed, the discussions, already kicked down the road at COP27, have been put on hold again until COP29.

Global trade

COP28 was the first in the series to dedicate an entire day to trade, highlighting the central role of trade in climate action. Traders of all varieties have a key role to play in tackling climate change, not least because of the carbon emissions from the production and distribution of products, but also because as an industry we have the power to increase the flow of lower-carbon goods and provide wider access to the technologies driving the energy transition.

As should be expected, the relationship between trade and decarbonisation is not a straightforward one. One particular challenge highlighted by Dr Akinwumi Adesina, African Development Bank Group President, is that the EU’s new Carbon Border Adjustment Mechanism could constrain Africa’s trade flows and industrialisation progress by penalising value-added exports including steel, aluminium and fertilisers. The continent’s reliance on fossil fuels could therefore force it to revert to exporting raw over processed commodities, setting development back and disrupting supply chains, if the energy transition is not managed fairly on a global scale.

Conclusion

COP28 may not have spearheaded the decisive change that climate activists were hoping for this time around, and there are still many challenges ahead in terms of reaching a global consensus in areas such as carbon markets. But the conference does represent another step on the journey towards the energy transition, one that incorporates more areas of public life, and commodity trading, than ever before. The full effects of the conference will be felt over the coming years, and will keep the climate agenda on the radar of almost all in the commodities industry in 2024.