2 Significant Outcomes From COP26

If you follow the energy markets, as I assume most readers here do, you may be aware that COP26, the U.N. climate summit held in Glasgow, Scotland is drawing to a close today after eleven days. If you live in the U.S., however, there is also a chance that you haven't heard much about it. Coverage of the summit is extensive in Europe and my U.K. friends and relatives have been abuzz with stories emanating from Glasgow over the last couple of weeks, whereas it is an afterthought for most news outlets here and very few people have mentioned it in conversation.

So far, the history of these kinds of things suggests that, from an investor's perspective at least, the U.S. media treatment of COP26 is far more realistic than, say, the BBC World Service's somewhat breathless blanket coverage of the event. Yes, I get that the science indicates that climate change is a real problem that threatens the very planet we live on, but summits such as this have never been agents for real change. They have been about making concerned sounding speeches and posturing, while setting lofty goals far enough in the future to enable current politicians to essentially ignore them. If anything, the amount of hot air and CO2 they produce probably makes the problem worse.

There has been plenty of that this week, but there were also two developments that could force real change within a timeframe that affects us all.

The first came quite early, when several key countries agreed to stop using government money to fund fossil fuel projects overseas. When The Netherlands became a signatory to that accord this week, it brought the total number of participating governments to 21. Notable absentees from the list of participants include China and Japan, but even so, this marks a significant shift in tone. In the past, countries like the U.S. and the U.K. have funneled money into coal, oil, and gas exploration and production in developing nations. That has been presented as "aid" but has also been of enormous benefit to oil companies from the funding countries.

Now, however, the countries that have received that "aid" no longer want it, nor will it be forced upon them. They want the money to be spent on cleaning up the mess it has often created in the past, and to be invested in green energy projects instead of more wells and mines. The donors, however, will still want to derive some economic benefit from giving money away. The logical conclusion here is that the agreement will accelerate the growing advantage of large companies in the solar and wind energy industries in the donating countries over conventional big oil firms in the short-term, and the switch to sustainable energy by those legacy firms in the longer-term.

The second potentially significant development coming from the summit is the unexpected agreement between the U.S. and China to cooperate on limiting emissions and combatting climate change. One could argue that this is, like so may pronouncements in the past, just talk, but it does remove one obstacle that has hindered real progress…the weaponization of the subject in geopolitical terms.

In the past, the world's two biggest polluters have pointed fingers at each other as culprits and avoided doing anything much themselves for fear that acting unilaterally would hand an advantage to the other country. Of course, signing an agreement doesn't mean anything unless you stick to it, but it does suggest at least a recognition that taking shots against each other about climate change is not in anyone's interests. It doesn't guarantee any real cooperation, but it does make freeing up domestic production to gain a competitive advantage less likely over the next few months.

That means that as long as the current regimes remain in place in each country, easing regulations on fossil fuel companies to address rising energy costs is off the table. They can release reserves, as China has already done and the U.S. is rumored to be considering, but those are short-term answers that won't increase fundamental supply. Put that with rising energy demand, and commodity prices look like they will remain elevated for some time.

As I said, history suggests that we shouldn't read too much into anything that comes out of a climate summit, which is why I am not going to let the final draft of the statement of intent or any of the fancy speeches influence my decisions. However, stopping government funding of overseas fossil fuel projects and an agreement between the U.S. and China to stop hitting each other over the head will have real and rapid consequences, so COP26 cannot be completely ignored by investors.