For the EU, COP26 is crucial for motivating other countries to match its bold climate ambitions, as well as ensuring a level playing field. With Cicero/amo being on the ground in Glasgow for the duration of COP26, our EU team will be providing tailored updates on the progress being made, and the potential impacts for businesses in the EU, and beyond.

Make sure to also read our updates from week 1 of COP26, when our team had a look at the main outcomes of Finance Day and Energy Day.

Highlights from ‘Transport Day’

Having gotten a taste of the Scottish culture during the Climate Group’s COP26 Reception on Tuesday evening, which featured live Scottish music and a gin tasting, yesterday’s Transport Day started with the early publication of a first draft global climate deal. Speaking to NGOs, corporates and country delegates here in Glasgow, the draft deal has generally been critically received. The deal calls for strengthened climate action by the end of 2022 and is the first to propose an end to fossil fuel subsidies, yet it showcases the lack of political will to act now, with COP26 being viewed as momentum that will not reoccur anytime soon.

On a more positive note, the US and China reached an unexpected deal late on Wednesday in which the two most emitting countries recognised there is a gap between current climate policies and the 1,5 degrees global warming limit agreed in Paris six years ago. Even though both countries did not commit to concrete action, Biden and Xi Jinping could share more information during their virtual bilateral meeting that takes place next week.

However, with “cars” playing quite a central role in Boris Johnson’s “coal, cars, cash and trees” call for action, it is time to take a quick look if Transport Day led to more concrete ambition in terms of pledges to decarbonise vehicle fleets, and transport more broadly.

Internal combustion engine ban dispute

High hope for a pledge that would phase out diesel and petrol cars by 2035 and 2040 for respectively developed and developing countries turned out to be false hope. The global clean car pledge that commits countries to de facto banning the sale of internal combustion engine as of 2040 is seen as the major achievement of the day. However, the announcement that car manufacturing countries like the US, China, Germany and Japan, as well as some of the main car manufactures opted out of the deal clearly killed the good mood. Apart from cars, a small coalition of eleven countries led by the Dutch, together with cities and companies, have signed a pledge to have zero-emission trucking in place by 2040.

Decarbonising aviation and shipping

Transport Day also saw breakthrough in the aviation sector, with a signed declaration that establishes the International Aviation Climate Ambition coalition, which commits to the adoption of an ambitious long-term goal towards net zero CO2 emissions by 2050 in the framework of the International Civil Aviation Organization (ICAO). Yesterday, US Transportation Secretary Pete Buttigieg came to the COP26 blue zone plenary to speak, announcing the US commits to zero-emissions in the aviation sector by 2050.  

Shipping, responsible for roughly 3 percent of global emissions, cannot be neglected on Transport Day. 19 countries pledged to work towards the creation of at least six zero-emission maritime routes by 2025, aiming to create more by 2030. Even though this is far from a comprehensive and global effort, it is at least a start in addressing the emissions from international shipping.

Looking at these pledges, we can confidently conclude that Transport Day broadly tells the same old story of fragmented global climate ambition.

The EU’s take

Where the US has had senior representation at COP26 with appearances of amongst others Biden, Kerry, Obama, Al Gore, Buttigieg, and Pelosi, the EU has been struggling to match this in week 2 of COP26 with only Executive Vice-President Frans Timmermans being present after Commission President von der Leyen and heads of states like Merkel and Macron made an appearance in week 1 of COP26.

In terms of actions, Member States have delivered mixed results. A significant loss of credibility for the EU is of course the fact that Germany decided to opt out of the clean car pledge, while it is positive that countries like the Netherlands, Denmark, Finland and Austria are part of the progressive clean-trucking coalition.

Moreover, it is hard for the EU to make new commitments as many ambitious climate policies in the field of transport were already tabled this summer. The ban on the internal combustion engine as part of the clean car pledge is already imminent in the EU as the EU has proposed to ban it by 2035 in the revision of the CO2 performance of standards Regulation. On top of that, the charging infrastructure challenge posed by the clean and electric car and trucking pledges has already been addressed by the EU, with the proposed Alternative Fuels Infrastructure Regulation. The Regulation sets out minimum requirements for EU Member States for the roll-out of charging infrastructure. Finally, the EU is already working towards the development of clean fuels in the aviation and maritime sectors. Despite the limited impact the EU has had at COP26 so far, the EU remains a climate leader in action.

For the EU, COP26 is crucial for motivating other countries to match its bold climate ambitions, as well as ensuring a level playing field. With Cicero/amo being on the ground in Glasgow for the duration of COP26, our EU team will be providing tailored updates on the progress being made, and the potential impacts for businesses in the EU and beyond.

Highlights from ‘Energy Day’ and earlier in the week

Central to the COP26 Presidency’s objective of promoting the energy transition, the British government announced that a coalition of countries and organisations had agreed to phase out coal power. With over 190 signatories, the ‘Global Coal to Clean Power Transition Statement’ sets out a commitment to end investment in new coal plants, to phase out coal use and scale up renewable energy. This Statement holds great significance, especially for countries committing to ending the use of coal for the first time, such as Vietnam. Despite these new commitments, NGOs have been critical of the fact that some of the world’s largest coal users, notably China, have not signed up. Alongside the Statement, the ‘Powering Past Coal Alliance’, a coalition of governments and organisations working to move away from coal, announced 28 new members, including Chile and Singapore.

Thursday’s ‘Energy Day’ saw major international banks commit to effectively cease financing new unabated coal plants as of 2021, with a further group of 25 countries and public finance institutions agreeing to end international public support for unabated fossil fuel use in the energy sector by the end of 2022. Thursday also had a strong emphasis on ensuring a socially just energy transition, with an appreciation that climate change has the biggest impact on socially vulnerable groups. Several EU and non-EU countries, along with the European Commission, signed the ‘International Just Transition Declaration’, calling for the energy transition to create new jobs and opportunities for all groups of society.

Wednesday saw the US and the EU succeed in forging a coalition on cutting global methane emissions by 30% in 2030, compared to 2020. Over 100 countries have joined the pledge, which includes significant emitters Nigeria and Pakistan. Major emitters China and Russia have not signed on however, and the lack of individual signatory targets and commitments have raised concerns over implementation.

Earlier this week, the controversial subject of carbon border taxes emerged. During a speech on Tuesday, European Commission President Ursula von der Leyen stressed to the international community that the EU would move ahead with its plans for its own ‘Carbon Border Adjustment Mechanism’ (‘CBAM’). However, she underlined to world leaders that the EU would “prefer you keep the money in your economy by putting a price on carbon in your economy”.

The EU’s take

The various commitments made in relation to the phase out of coal and scale up of renewables should be seen as a positive development for the EU, with signatory countries committing themselves to a path that would put them on more equal footing on the EU. Domestically, the EU has introduced various tools to make coal a more costly energy source (e.g. EU’s Emissions Trading System), while seeking to redirect private sector investments to other sources (e.g. Sustainable Finance Taxonomy).  In relation to the social dimension of the energy transition, international commitments will also be welcomed by the EU given the emphasis on ensuring a ‘Just Transition’ under the EU’s guiding ‘European Green Deal’ agenda.

In relation to the CBAM, von der Leyen’s speech this week on the topic reaffirms the EU’s commitment to moving forward despite vocal international opposition. The topic of carbon border taxes may strain some existing trading relationships and could even jeopardise progress in some COP26 negotiations. Nevertheless, similar plans from countries like Canada highlight that the EU is not alone in its position. While there are some doubts that the CBAM proposal will survive the EU’s legislative process intact, it nevertheless represents a signal of upcoming change for the development and interaction of international carbon markets.

On methane, the formation of the coalition looking to slash global emissions by 30% is a very timely development for the EU. In December, the European Commission is due to publish a proposal for a Regulation on reducing methane emissions in the energy sector, as announced in its 2020 Methane Strategy. The COP26 commitment helps strengthen the Commission’s hand to move forward on this issue and cement its leadership position.

Photo: The Canadian Press/Sean Kilpatrick. All rights reserved

The UK Prime Minister Boris Johnson has opened the UN’s COP-26 Conference in Glasgow (1 November) arguing that it is no longer up to politicians and big businesses to direct the world’s climate fate. He believes that it is already the case that ‘punters’ (also known as citizens) are now in the driving seat. 

However, new research shows that citizen-led direct action is limited when it comes to how punters direct their household savings and investments. Cicero/amo and Architas surveyed over 11,000 people in Europe and Asia to benchmark their views on ESG investing. When choosing when to invest, the common denominators consist of investment growth potential, past performance, and investment fees. ESG is still on the fringes of people’s mindsets with only a quarter of Asian investors (25 percent) citing sustainability as an investment factor. This falls to just 16 percent among Europeans. 

This is problematic on many fronts. The world will not reach even the half-hearted efforts to transition towards net zero without fully engaging capital markets. Over $100 trillion of finance is needed to meet the UN’s Social Development Goals. Governments cannot achieve that target alone. That means retail and institutional investors directing their capital towards sustainable investments. To make green capital markets a reality, there is still much work to do. Clearly, retail investors still don’t really ‘get’ what ESG investing means. Yet several steps – involving fund managers and regulators working together – could help promote the faster take up of green retail funds.

1 – The investment industry uses too many terms to describe the same thing: sustainable, green, social, community, impact. Investors are confused and this confusion can lead people to procrastinate: As many of the commentators at Glasgow point out, Planet Earth doesn’t have time to put-off important changes in behaviour.

2 – We need better climate disclosures on investment products. Generally, around 80% of our respondents supported the need for greater information around what ESG objectives are being met, what ESG KPIs and indicators are being used, and how ESG screeners work.

3 – We need to address the fear of greenwashing and potential mis-selling of green investments, a concern among over half of women and older investors.  This fear will also put off potential investors.

4 – We also need to beef up the role of financial advisors. As many as 1-in-5 investors said that they had not discussed ESG investing with their advisor but would have valued such a conversation. What are financial advisors waiting for?

Defining what is green goes to the heart of all the points above. For example, our findings showed 38% of Asian investors would screen the oil and gas sector out of their portfolios on ESG grounds, but this fell to around 5% if the oil company used those funds to invest in renewable energy. Understanding such complex ESG investment trade-offs during the transition phase to net zero is not a simple binary choice between green on one side and brown on the other. Mobilising capital markets to go green will involve a shift over time, not a one-off event. Even more reason to pick up the pace of change now.  

Cicero/amo is pleased to share with you our analysis of the 2021 Budget Statement and Spending Review, which provided a number of ‘firsts’ for Chancellor Rishi Sunak – the first multi-year Spending Review since the COVID-19 pandemic and Brexit, and the first Budget delivered by Sunak which set out a long-term economic plan for this Government.

For business, this was a positive Statement following a tumultuous relationship with Government of late, having been positioned as one of five pillars to deliver a stronger economy. However, announcements on the green finance agenda were a glaring omission despite the UK hosting the COP26 Summit in a matter of days, and an anticipated rise in inflation threaten to kybosh the Chancellor’s extra wiggle room following the economic recovery from the pandemic.

Click here to access Cicero/amo’s overview of the Autumn Budget and Spending Review 2021

Amongst the EU27, the buildings sector is responsible for 40% of emissions. To reach the EU’s climate targets, decarbonising this sector will be crucial. In response, the European Commission published the ‘Fit for 55’ Climate Package in July, aiming to reduce emissions by 55% by 2030 and get the EU on track for climate-neutrality by 2050. It contains various proposals, notably on emissions trading, and aiming to reduce the climate impact of the transport and buildings sectors. A second part the ‘Fit for 55’ package is expected on 14 December. What will be important for the buildings sector will be the Commission’s proposal to update to the Energy Performance of Buildings Directive (EPBD). 

The buildings sector in ‘Fit for 55’ so far 

‘Fit for 55’ sets out a common emissions reduction target of 43% by 2030 for the transport and buildings sector, compared to 2005 levels. The 13 proposals presented last summer aim to reduce emissions from space heating and cooling, as well as tackle poor home insulation. Given that the broader aim of societal decarbonisation requires a comprehensive approach, ‘Fit for 55’ address the challenge from several angles:  

• Pricing the CO2 emissions of (heating) fuels through a separate  EU Emissions Trading System and via differentiated minimum excise duties in the Energy Taxation Directive based on environmental performance;
• Setting national annual emission reduction targets under a revised Effort Sharing Regulation that will trickle down into e.g. national requirements and incentives to improve isolation;
• Prescribing annual targets for the percentage of heat to come either from renewable sources or district heating and cooling in the Renewable Energy Directive II;
• Increasing national annual energy savings obligations under the Energy Efficiency Directive. 

The impact of such an approach will mean that fuels used to heat houses, such as coal, natural gas and heating oil will become significantly more expensive. According to the Commission, this should encourage a reduction in consumption and make investments in sustainable alternatives more attractive. The Commission is looking to further promote the insulation of buildings, while also promoting alternatives to natural gas through investment in (hybrid) electric heat pumps. All these changes will increase fixed costs for utilities and will require significant investment. 

A glaring concern for Member States is the impact of these price increases on vulnerable and energy poor households, the consequences of which could generate public outcry against national and EU climate objectives. To address these concerns, the Commission has proposed a Social Climate Fund, which aims to help financially support households when insulating their homes or purchasing an electric vehicle. 

The Energy Performance of Buildings Directive: Taking it one step further 

While the above proposals are now up for discussion within the European Parliament and the Council, the Commission has already set its sights on its next proposal – the revision of the Energy Performance of Buildings Directive (EPBD) – on 14 December. 

At its core, the EPBD seeks to achieve a highly energy efficient and decarbonised building stock by 2050, provide investment stability, and empower both consumers and businesses to understand how to cut energy consumption and save money. In force since 2010, the EPBD was slated for revision under the Commission’s ‘Renovation Wave’ strategy, with provisions to be strengthened to meet the higher climate ambitions under the European Green Deal, notably climate neutrality by 2050. 

An expected key change is an increase in the national annual renovation rate to 3%, requiring Member States to significantly step-up renovation efforts. Besides increasing the pace, the EPBD may also mandate a higher quality of building stock be built. Alongside this, the Commission is considering expanding Energy Performance Certificates to include stricter rules on the availability and accessibility of databases, as well as new minimum energy performance standards. These standards could go beyond the current nZEB (nearly zero-energy buildings) definition, by raising standards for 2025 and promoting a life-cycle approach by 2030. Aspects such as the production and transport of building materials would therefore be taken into account under such an approach. 

Finally, the EPBD is expected to play an important role in promoting the transition to e-mobility. Recently, the European Parliament’s Transport (TRAN) Committee pointed out in its draft opinion on the parliamentary implementation report about the existing EPBD that minimum requirements for private charging infrastructure in buildings could help promote the uptake of electric vehicles. Given that private charging infrastructure is not addressed in the Commission’s recent proposal for an Alternative Fuels Infrastructure Regulation (AFIR), the EDPD revision is expected to set out new requirements for private charging infrastructure, ranging from building and building blocks to hotels and even parking garages.

Major challenges to overcome 

Logistical challenges 

A 3% annual renovation rate under the new EPBD, in addition to the already proposed 3% annual renovation rate for the public sector under the EED, creates a significant logistical challenge both for Member States and for housing corporations. Housing corporations tend to have a natural flow in which each house in their buildings stock can be renovated as part of a 10–20-year renovation plan, allowing the necessary renovations needed to enhance the energy performance of buildings well in time before 2050. However, increasing the existing pace of renovation would require a significant rethink on their current approach.

Moving from house-by-house renovation towards comprehensive street- or neighbourhood-level renovation would still face workforce challenges, ranging from a broader shortage of workers to a shortage of workers with the specific skills needed to install sustainable solutions, such as heat pumps. The construction sector is expected to play a role in overcoming these challenges, transforming supply chains to promote results on the ground and reduce construction and renovation costs. Potential solutions include advanced insulation materials, more efficient integration of buildings within energy systems, building automation, and prefabricated systems for the retrofitting of buildings. 

Investment challenges 

From a social perspective, improving the energy performance of buildings requires significant up-front investment. Even though tenants and house owners should get a return on investment over time thanks to lower energy bills, it is critical to introduce effective financing tools to support low-income households overcome the prohibitive short-term renovation costs. This issue is only being made worse in light of skilled labour shortages and record-high material costs driving up prices. 

To tackle investment challenges, financial assistance will likely be mobilised through several instruments. At the EU level, the central avenue is the Social Climate Fund, which is expected to reinvest a portion of EU ETS revenues earmarked to support vulnerable households. The distribution of those funds would be left to Member State authorities through Social Climate Plans, which are to be submitted alongside the 2023 and 2024 updates to National Energy and Climate Plans (NECPs), both to be submitted to the Commission. Alongside this, Member States are investing money from the EU’s COVID-19 Recovery Fund into renovation, with different EU energy laws also providing for opportunities to help households, such as through exempting households from energy taxation on heating fuels. The Commission’s new Sustainable Finance Strategy, published last summer, also seeks to improve citizens’ access to green loans for relevant projects, such as improving home insultation.

What creates an additional challenge for European policy makers are the expected differences between North and South, and East and West, driven by regional historic and economic contexts. How proposed decarbonisation solutions can be tailored to different national contexts will be crucial.

Next steps and outlook 

The Commission’s proposal for the EPBD revision is scheduled for publication on the 14 December 2021, with the first reading in the European Parliament and the Council of the EU likely beginning in early 2022. As has been the case with the other ‘Fit for 55’ proposals, the European Commission may also open a public consultation on the final proposed text.

Given the EU’s growing role in guiding the decarbonisation efforts across its Member States, Brussels will be increasingly centre stage for those seeking to have their voice heard.

Cicero/amo’s EU Green Deal Team 

We hope this article gave you more insights into the challenges that the buildings sector will be facing during the energy transition. If you would like to hear about the implications of ‘Fit for 55’ for your business, or would like to strategically prepare your organisation in anticipation of the publication of the EPBD revision, please feel free to reach out.

Cicero/amo, part of the Havas Group, designs and implements national, regional and global public affairs and communications campaigns for some of the world’s largest listed businesses, new entrant challengers and technology disruptors. We provide clear and original thinking to help organisations craft their message, cut through the noise and lead by example. 

Our EU team’s energy and environmental policy expertise ranges from carbon market reforms, renewable energy, circular economy, and transport, to chemicals and sustainable corporate governance, alongside well-established expertise in the financial services and digital field. 

‘Coals, cars, cash and trees’ is the latest rhetorical flourish to come from Number 10, but with just under two months to go until the COP26 climate summit, evidence of concrete action from governments around the world appears few and far between. Coupled with the damning reception to reports that COP President-Designate Alok Sharma flew to 30 countries in just seven months, the UK Government clearly has some way to go before they are able to achieve an international consensus in November.

Environmental action is no longer the proverbial can for the Government to kick down the road. Stark images of uncontrollable wildfires in Turkey and Greece are tangible and hard to ignore, and this is filtering through to the public’s political consciousness. A shrewd populist, Boris Johnson will be keen to respond to this increased awareness and we may see political support begin to intensify domestically, bolstered by the long-awaited publication of the UK’s comprehensive Net Zero Strategy – which is expected before COP26.

However, public and political concern does not necessarily translate to concrete action and the world’s top diplomats face some major hurdles at the negotiating tables in November. The UN Intergovernmental Panel on Climate Change’s (IPCC) recent Sixth Assessment Report (AR6) on the impacts of global warming stated starkly and unequivocally that human activity is changing the climate in monumental and irreversible ways, and now global pressure is mounting to achieve an international consensus in November. Thus far it has been challenging to pinpoint the exact intention of such a consensus, but there has been a consistent recognition of the critical need to “keep 1.5°C alive” – the current target for increases in temperature as set out in the Paris Accord – particularly in light of the IPCC’s report. Sharma has emphasised that the incoming Presidency will explore options for how the ‘Glasgow outcome’ will respond to any gap in 2030 ambition, including exploring the proposal for a roadmap towards keeping 1.5°C in reach.

Climate change is the looming threat to both our economy and society. Whether or not international consensus is achieved to the necessary extent in Glasgow, there will inevitably be an influx of new regulation in the UK and in nations across the globe. Business leaders must engage with policies that help countries to deliver on their emissions targets while protecting jobs, preventing energy poverty, and further driving economic growth. COP26 allows businesses to get an early insight into the direction of such regulation allowing them to work collaboratively towards a better future.

The sheer scale of climate change presents both business risk and opportunity. Companies that follow this year’s COP – and all ensuing summits – will have a competitive advantage, staying ahead of emerging trends and keeping informed of regulation and innovation.

This article first appeared in Cicero/amo’s September 2021 newsletter. Please click here to access all articles.