Headlines from the Dubai Climate Change Conference (COP28) have been grabbed by a first declaration between countries to transition away from fossil fuels. Yet the conference was also marked by limited progress on climate finance and market initiatives that underpin decarbonization goals. In this article, S&P Global Ratings highlights its five key takeaways from COP28.

1. Fossil Fuel Transition Lacks Practical Measures

The key formal agreement--The UAE Consensus--for the first time includes language "calling" on countries to "transition away from fossil fuels in energy systems." The actions intend to accelerate the decline of coal power and the phasing out of "inefficient" fossil fuel subsidies, though the door remains open for the use of "transitional fuels" including natural gas. Other notable goals include a tripling of renewable energy capacity by 2030 and accelerated development of nuclear energy, carbon capture and storage, and hydrogen technologies.

The agreement breaks new ground, yet we consider that ambiguity over the definition and role of "transitional fuels", as well as contribution levels and timing enables countries to respond differently. With the next round of Nationally Determined Contributions due in 2025, countries will have to decide how they will contribute (or not) to the agreed actions. We believe the recent energy crisis has been a significant driver of credit quality amongst energy and carbon intensive industries. Policy diversity could have business and financial implications (including increasing capital requirements for energy infrastructure) and become more relevant to credit worthiness. At the same time, we currently do not anticipate potential policy changes will materially affect sectorial credit quality, including in oil and gas, in the coming quarters.

2. Material Climate Finance Progress Will Have To Wait for COP29

COP28's Global Stocktake highlighted the imposing size of the climate finance gap for mitigation and adaptation--notably that developing countries will need an estimated $5.8 trillion-$5.9 trillion prior to 2030, which easily outstrips current flows. The announcement, on December 1, of a new loss and damage fund managed by the World Bank set a positive tone. Yet the climate finance negotiations made slow progress. There was failure to agree if developed countries had met a $100 billion-a-year climate financing goal for developing countries, set in 2009, due to diverging views on which accounting methodology to apply. Despite that, parties began negotiating a more ambitious goal, known as the New Collective Quantified Goal (NCQG), which could include a sub-target for private sector finance. Negotiations will continue in 2024 with the aim of delivering a new agreement at COP29. There were also calls for reform of multilateral development banks and appeals for other financial institutions to increase the availability of affordable finance.

We think the NCQG will prove a core priority for all participating countries given perceptions that limited financing is hampering governments' climate actions. Sustainable finance markets have grown in developed countries, but there is widespread agreement that more must be done to ensure finance for sustainable development is available to low- and middle-income countries.

3. The Global Goal On Adaptation Gets A First Set Of Targets

COP28 introduced a first set of adaptation targets for the Global Goal on Adaptation, building on the agreement at COP27 to operationalize the collective goal to accelerate and guide adaptation efforts in developing countries. The targets, which are arguably general and hard to measure, will steer actions by 2030 (and progressively beyond), including on water security, agriculture, biodiversity, infrastructure, and health. The agreement continues to cite a target of doubling of adaptation finance and acknowledges the need for increased funding from public and, in particular, private sources. The importance of the private sector was underlined by the launch of the Dubai Adaptation Billions Challenge, which aims to raise $5 billion-$10 billion of private investment.

We believe that up to 4.4% of the world's GDP could be lost annually by 2050 if global warming doesn't stay well below 2 degrees Celsius, and absent adaptation. The financing of rising adaptation costs due to worsening climate hazards and amid higher interest rates may inhibit implementation in developing countries. Physical climate risks are likely to become more material in our sovereign rating analysis over time. National needs and the local specificities of adaptation mean the onus will be on countries to make meaningful progress toward the new targets.

4. A Declaration On Sustainable Agriculture Without Detail

COP28's "declaration on sustainable agriculture, resilient food systems, and climate action" establishes debut objectives on adaptation measures, food security, worker and local community protections, water management, and sustainable agriculture (including a shift from higher greenhouse gas (GHG) emitting practices). This is a significant development given that agriculture and land use contribute about 30% of global greenhouse gas emissions. A total of 158 countries endorsed the declaration. Financial commitments of about $20 billion were also announced to fund regenerative agriculture and other sustainable food development initiatives.

We consider meaningful implementation of the declaration to be uncertain given a lack of detail and wide-ranging objectives that won't encourage targeted and coordinated action. The absence of measurable targets (such as those concurrently released by the Food and Agriculture Organization) means GHG emissions reduction from agriculture may not materialize. The declaration also doesn't yet support adaptation plans needed to limit the impact of climate change on food security, affordability, and agricultural workers and local communities. Looking specifically at the agribusiness and food industries, climate related risks currently range from neutral to negative for credit quality. Without sufficient adaptation measures, credit quality in these sectors could weaken.

5. No Agreement On A New International Carbon Market

COP28 failed to deliver an anticipated U.N.-backed carbon credits market built on the foundations of the Paris Agreement's Article 6.4, which established a mechanism to create a global carbon market. The conference's aim was to agree the implementation rules for a new high-integrity carbon crediting mechanism. This would facilitate significant international cooperation to support countries' NDCs, and financial flows between countries and the private sector. Differing views over which project types should be eligible and how strict some rules should be prevented agreement. Countries can still agree bilateral cooperation, but, for now, further discussion is pushed to COP29.

However, standards setters, such as the Integrity Council for Voluntary Carbon Markets (VCM), SBTi and GHG Protocol, announced plans to increase cooperation to improve confidence in voluntary carbon markets. New integrity guidelines were published in 2023, but it remains to be seen if project developers and buyers will embrace VCM or wait for further progress on Article 6.4. We think regulated carbon-markets are key to removing uncertainty for companies looking to use offsetting as part of their decarbonization plans. A reliable and efficient carbon market could have positive financial impacts on certain sectors if it provides them with a cost-effective and trustworthy avenue to decarbonize.

Writer: Paul Whitfield.