A report by the Intergovernmental Panel on Climate Change (IPCC) has warned that temperatures are likely to reach or exceed 1.5° C of warming versus pre-industrial levels by 2050. But what could this mean for global trade, trade finance, and supply chains?

Aside from sending a pretty strong warning to G7 ministers as they prepare for both Glasgow’s COP26 gathering in just three months, and then the World Trade Organization’s twelfth ministerial conference (MC12), we will likely see many commitments to a policymakers’ step-change in how the world deals with climate change and cross-border trade.

All doom and gloom? Probably. The report presents the key findings of the Working Group I’s contribution to the IPCC’s Sixth Assessment Report (AR6). Since 2011, which was when the previous AR5 measurements were reported, concentrations of greenhouse gases have continued to increase, ‘unequivocally caused by human activities’, including carbon dioxide, methane, and nitrous oxide.

The landmark report showed that due to human-caused gas emissions, the earth’s average global surface temperature has warmed 1.1°C since 1850-1900, and unless all countries commit to drastically cutting emissions to ‘net zero’ by 2050, a 1.5°C–2°C warming by 2050 is likely. But why is this number so important?

The report, compiled by 200 scientists and approved by 195 governments last month, states that temperatures today have not been witnessed since our last ice age, some 125,000 years ago.

The IPCC estimates ‘equilibrium climate sensitivity’ – an important tipping point, at which the amount of warming could result in a doubling of carbon dioxide levels – and has narrowed its warming prediction since its last report: from 1.5–4.5° C to around 3°C. This is partly due to better science and methodology, but also because we are now living through the realities of climate change. The strongly-worded report was enough to put to rest any scepticism as to the correlation between climate change and human behaviour.

The impacts reported are now no longer just a possibility – they are a likelihood, and are expected to include:

• Increasingly severe and intense weather events
• Extreme heat, precipitation, and drought
• More compound events such as heatwaves and longer-term droughts
• Continuing rising of sea levels due to the melting of Greenland and Antarctic ice sheets

Video: IPCC 2021 Press Conference – The Physical Science Basis

What could it mean for trade?

Trade and climate change discussions have long been siloed by policymakers. Yet it is clear that trade impacts the climate, and vice versa, and the links between the two remain relatively unexplored. International trade did not receive much coverage in this recent IPCC assessment by Working Group I, appearing in limited ways, often in relation to keywords such as ‘infrastructure’ or ‘transport’. This is a notable absence, given that trade-induced economic growth due to trade liberalisation increases carbon dioxide emissions – the main contributor to greenhouse gas emissions driving climate change.

Here are four areas that we could see being explored more intensely over the coming months, which support initiatives to limit global warming to 1.5°C and reach net zero emissions by 2050.

1. Better leadership and better commitments from public actors

Governments, businesses and civil society will likely come together in the COP26 round of negotiations, but right now, there’s no clear dialogue between the likes of UN Environment, UNCTAD, WTO and the OECD.

Carolyn Deere Birkbeck, Senior Research Assistant at the University of Oxford, and John Denton, the ICC’s Secretary General, recently told WEF: “To date, international talks on climate and trade have been conducted in separate forums.

“At the WTO, there is a reluctance among too many governments to engage proactively – even in dialogue – on trade-related challenges and opportunities with regard to climate action.

And curiously, many of the governments pushing for climate ambition at COP are not pushing for the same climate ambition at the WTO.”

Poorer countries usually contribute the least towards greenhouse gas emissions, but they are also the most vulnerable to its impacts. It is therefore imperative to act now. The COP 26 process of the UN Framework Convention on Climate Change (UNFCC) allows for countries, which are represented equally, to highlight the necessity and urgency of preventing a global warming of 1.5°C.

2. Reducing trade barriers that support climate action

The World Trade Organization’s Doha Round of the Marrakesh Agreement encourages the liberalisation of environmental goods, and the elimination of trade barriers in goods and services that can help benefit the environment (e.g. those that reduce greenhouse emissions or improve energy efficiency).

Endorsing similar statements to reform fossil fuel subsidies, and supporting more circular, lowcarbon economies, could help green trade and mitigate climate-related disasters. This will certainly be given more attention at MC12 this November. One example of this is the Fossil Fuel Subsidy Reform, agreed by 12 member states in 2017.

Another is the newly formed ACCTS trade negotiations between Cost Rica, Fiji, Iceland, New Zealand, and Norway, which meshes together a trade policy to support climate and environmental initiatives. But a lot more will be required to achieve ambitious goals and to stick to the Paris Agreement.

3. Explicit commitments from Export Credit Agencies (ECA) to reduce support for fossil fuels

Financing the renewable energy transition has been in the spotlight in recent months, but what about energy investments in coal and other fossil fuels?

This is a sensitive topic. The role of ECAs in the context of climate change is often debated, given that they finance projects that could increase greenhouse gas emissions in emerging and developing economies (EDEs).

Such projects might have been refused financial support from other ECAs, the private sector, and multilateral development banks..

But as public finance institutions go, ECAs are mandated to align with their government’s climate change mitigation commitments and the Paris Agreement, and we will probably see pressure on ECAs to make stronger commitments to phasing out fossil fuel support, in addition to supporting low-carbon projects.

“Several ECAs are embarking on initiatives to either incentivise climate positive projects or benchmark and support low-carbon initiatives committing to net zero.”

Others such as the Export Finance for Future coalition (E3F) have clubbed together to phase out carbon-intensive projects and align with the Paris Agreement.

4. Insuring the uninsurable

Climate change costs lives and livelihoods. There’s no doubt that increased extreme weather events such as hurricanes, bushfires and biodiversity loss cost billions in damages each year. But what does that mean for the Credit and Political Risk Insurance (CPRI) market?

The systemic effects of climate change are likely to cause more market failures, affecting consumers and insurers everywhere. Both consumer behaviour and the long-term effects of climate change could make certain companies and certain business models uninsurable. Addressing risk mitigation when it comes to climate-related risk certainly poses new challenges to the insurance industry, particularly those with exposure to carbon-intensive industries. This could be an opportunity for the CPRI market to step in on both the underwriting and investment sides of their portfolios.

Coverage on renewable energy projects will likely be expected to increase as a result of Glasgow’s COP26 and today’s IPCC report, but will the CPRI market step in to plug the gap? The long-term nature of project and infrastructure finance is likely to worry insurers when exposed to the power and energy sector.

While offering an opportunity for them to finance offshore and onshore renewable energy projects, thereby diversifying their energy portfolios, there will still be a need to plug the gap for financing the extractive industries of oil, gas, and mining (which, according to BPL Global, accounted for a third of transactions submitted to the CPRI market last year) as we transition to net zero. Rethinking business models, realigning pricing, and finding innovative new solutions within the CPRI market will be critical.

“These statistics highlight the need to provide the necessary support for economies to adapt, rather than risk plunging oil-dependent nations and their populations into rapid economic decline, at a time when a fragile world is still reeling from the shockwaves of the pandemic,” said Sian Aspinall, Managing Director at BPL Global.

A catalyst for multilateral cooperation?

The fight against climate change is widely recognised as a social, economic, and environmental imperative. Sound climate policy will involve a mixture of environmental and economic cooperation, and tangible objectives between OECD and non-OECD markets. In the post-pandemic reconstruction of markets and economies, building back better is an opportunity for governments, public and private sector institutions to come together in a global effort to tackle climate change and mitigate carbon emissions, and ‘keep 1.5° C alive’.