Tag: net zero


The Climate Change Pact agreed by leaders at the end of COP26 in Glasgow went further than many pessimists had forecast, but not far enough to meet the goal of keeping global warming to 1.5°C above pre-industrial levels. The Pact states that:

limiting global warming to 1.5°C requires rapid, deep and sustained reductions in global greenhouse gas emissions, including reducing global carbon dioxide emissions by 45 per cent by 2030 relative to the 2010 level and to net zero around mid-century, as well as deep reductions in other greenhouse gases.

So how far would the commitments made in Glasgow restrict global warming and what actions need to be put in place to meet these commitments?

Short-term commitments and long-term goals

According to Climate Action Tracker, the short-term commitments to action that countries set out would cause global warming of 2.4°C by the end of the century, the effects of which would be calamitous in terms of rising sea levels and extreme weather.

However, long-term commitments to goals, as opposed to specific actions, if turned into specific actions to meet the goals would restrict warming to around 1.8°C by the end of the century. These long-term goals include reaching net zero emissions by certain dates. For the majority of the 136 countries agreeing to reach net zero, the date they set was 2050, but for some developing countries, it was later. China, Brazil, Indonesia, Russia, Nigeria, Sri Lanka and Saudi Arabia, for example, set a date of 2060 and India of 2070. Some countries set an earlier target and others, such as Benin, Bhutan, Cambodia, Guyana, Liberia and Madagascar, claimed they had already reached zero net emissions.

Despite these target dates, Climate Action Tracker argues that only 6 per cent of countries pledging net zero have robust policies in place to meet the targets. The problem is that actions are required by firms and individuals. They must cut their direct emissions and reduce the consumption of products whose production involved emissions.

Governments can incentivise individuals and firms through emissions and product taxes, through carbon pricing, through cap-and-trade schemes, through subsidies on green investment, production and consumption, through legal limits on emissions, through trying to change behaviour by education campaigns, and so on. In each case, the extent to which individuals and firms will respond is hard to predict. People may want to reduce global warming and yet be reluctant to change their own behaviour, seeing themselves as too insignificant to make any difference and blaming big business, governments or rich individuals. It is important, therefore, for governments to get incentive mechanisms right to achieve the stated targets.

Let us turn to some specific targets specified in the Climate Change Pact.

Phasing out fossil fuel subsidies

Paragraph 20 of the Climate Change Pact

Calls upon Parties to accelerate … efforts towards the … phase-out of inefficient fossil fuel subsidies, while providing targeted support to the poorest and most vulnerable in line with national circumstances and recognizing the need for support towards a just transition.

Production subsidies include tax breaks or direct payments that reduce the cost of producing coal, oil or gas. Consumption subsidies cut fuel prices for the end user, such as by fixing the price at the petrol pump below the market rate. They are often justified as a way of making energy cheaper for poorer people. In fact, they provide a bigger benefit to wealthier people, who are larger users of energy. A more efficient way of helping the poor would be through benefits or general tax relief. Removing consumption subsidies in 32 countries alone would, according to International Institute for Sustainable Development, cut greenhouse gas emission by an average of 6 per cent by 2025.

The chart shows the 15 countries providing the largest amount of support to fossil fuel industries in 2020 (in 2021 prices). The bars are in billions of dollars and the percentage of GDP is also given for each country. Subsidies include both production and consumption subsidies. (Click here for a PowerPoint of the chart.) In addition to the direct subsidies shown in the chart, there are the indirect costs of subsidies, including pollution, environmental destruction and the impact on the climate. According to the IMF, these amounted to $5.4 trillion in 2020.

But getting countries to agree on a path to cutting subsidies, when conditions vary enormously from one country to another, proved very difficult.

The first draft of the conference agreement called for countries to ‘to accelerate the phasing-out of coal and subsidies for fossil fuels’. But, after objections from major coal producing countries, such as China, India and Australia, this was weakened to calling on countries to accelerate the shift to clean energy systems ‘by scaling up the deployment of clean power generation and energy efficiency measures, including accelerating efforts towards the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies’. (‘Unabated’ coal power refers to power generation with no carbon capture.) Changing ‘phasing-out’ to ‘the phasedown’ caused consternation among many delegates who saw this as a substantial weakening of the drive to end the use of coal.

Another problem is in defining ‘inefficient’ subsidies. Countries are likely to define them in a way that suits them.

The key question was the extent to which countries would actually adopt such measures and what the details would be. Would they be strong enough? This remained to be seen.

As an article in the journal, Nature, points out:

There are three main barriers to removing production subsidies … First, fossil-fuel companies are powerful political groups. Second, there are legitimate concerns about job losses in communities that have few alternative employment options. And third, people often worry that rising energy prices might depress economic growth or trigger inflation.

The other question with the phasing out of subsidies is how and how much would there be ‘targeted support to the poorest and most vulnerable in line with national circumstances’.

Financial support for developing countries

Transitioning to a low-carbon economy and investing in measures to protect people from rising sea levels, floods, droughts, fires, etc. costs money. With many developing countries facing serious financial problems, especially in the light of measures to support their economies and healthcare systems to mitigate the effects of COVID-19, support is needed from the developed world.

In the COP21 Paris Agreement in 2015, developed countries pledged $100 billion by 2020 to support mitigation of and adaptation to the effects of climate change by developing countries. But the target was not reached. The COP26 Pact urged ‘developed country Parties to fully deliver on the $100 billion goal urgently and through to 2025’. It also emphasised the importance of transparency in the implementation of their pledges. The proposal was also discussed to set up a trillion dollar per year fund from 2025, but no agreement was reached.

It remains to be seen just how much support will be given.

Then there was the question of compensating developing countries for the loss and damage which has already resulted from climate change. Large historical polluters, such as the USA, the UK and various EU countries, were unwilling to agree to a compensation mechanism, fearing that any recognition of culpability could make them open to lawsuits and demands for financial compensation.

Other decisions

  • More than 100 countries at the meeting agreed to cut global methane emissions by at least 30 per cent from 2020 levels by 2030. Methane is a more powerful but shorter-living greenhouse gas than carbon. It is responsible for about a third of all human-generated global warming. China, India and Russia, however, did not sign up.
  • Again, more than 100 countries agreed to stop deforestation by 2030. These countries include Indonesia and Brazil, which has been heavily criticised for allowing large parts of the Amazon rainforest to be cleared for farming, such that the Amazon region in recent years has been a net emitter of carbon from the felling and burning of trees. The pledge has been met with considerable cynicism, however, as it unclear how it will be policed. Much of the deforestation around the world is already illegal but goes ahead anyway.
  • A mechanism for trading carbon credits was agreed. This allows countries which plant forests or build wind farms to earn credits. However, it may simply provide a mechanism for rich countries and businesses to keep emitting as usual by buying credits.
  • Forty-five countries pledged to invest in green agricultural practices to make farming more sustainable.
  • Twenty-two countries signed a declaration to create zero-emission maritime shipping routes.
  • The USA and China signed a joint declaration promising to boost co-operation over the next decade on various climate actions, including reducing methane emissions, tackling deforestation and regulating decarbonisation.

Blah, blah, blah or real action?

Many of the decisions merely represent targets. What is essential is for countries clearly to spell out the mechanisms they will use for achieving them. So far there is too little detail. It was agreed, therefore, to reconvene in a year’s time at COP27 in Egypt. Countries will be expected to spell out in detail what actions they are taking to meet their emissions targets and other targets such as ending deforestation and reducing coal-fired generation.

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Questions

  1. What were the main achievements of COP26?
  2. What were the main failings of COP26?
  3. How can people be incentivised to reduce their direct and indirect greenhouse gas emissions?
  4. How is game theory relevant to understanding the difficulties in achieving global net zero emissions?
  5. Should developing countries be required to give up coal power?
  6. If the world is to achieve net zero greenhouse gas emissions, should all countries achieve net zero or should some countries achieve net negative emissions to allow others to continue with net positive emissions (albeit at a lower level)?


The transition towards clean energy in combination with a shortfall in supply has seen the price of raw uranium, also known as ‘yellowcake’, rise almost 60 per cent in recent weeks. It is now trading at over $50 a pound – a nine-year high. The market has been described as being at a ‘tipping point’. Given the recent boom in the market, the current conditions could tip the balance towards an era of rising uranium prices.

What is uranium?

Uranium is a heavy metal which has been used as a source of concentrated energy for over 60 years. Uranium ore can be mined from underground, milled, and then sold. It is then used in a nuclear reactor for electricity generation. About 10% of the world’s electricity is generated from uranium in nuclear reactors. There are some 445 nuclear reactors operating in 32 countries. It is the most energy-dense and efficient fuel source we have, with just ten uranium pellets able to power the average household for an entire year.

In March 2011, Japan’s most powerful earthquake on record triggered a tsunami, which then caused a meltdown at a nuclear power plant in Fukushima. It forced residents from their homes as radiation leaked from the plant. Since the Fukushima accident, uranium prices had been on a downtrend trend – enough to force several miners to suspend or scale back operations.

However, there has been a 42 per cent increase in the price of the metal in the first nine months of 2021 alone.

Demand for uranium

Since launching in July, a new investment trust, run by Canadian asset manager Sprott, has snapped up about 6m pounds of physical uranium, worth about $240m. This aggressive buying has helped push prices of uranium to more than $40 per pound, up from $30 at the start of the year. In the first part of September alone, prices surged by around 40%, outperforming all other major commodities. In just a few weeks, millions of pounds of supply were scooped up by the Sprott Physical Uranium Trust. This puts pressure on utilities that need to secure supplies of the commodity for electricity generation.

This increased demand is occurring at precisely the same time as countries and companies around the world are committing to net-zero carbon targets. As a result, nuclear power companies are now facing competition for supplies of uranium from financial investors, who are betting on sharply higher prices and demand for the radioactive material used to fuel reactors. This boost in demand is said to be due to uranium being used as a low-carbon energy source, despite the radioactive waste problem that comes with it. Investors are betting that nuclear power will be a key part of the move away from fossil fuels.

Production from world uranium mines has in recent years supplied 90% of the requirements of power utilities for uranium, with the current global mine supply expected to be about 125m pounds for 2021. In addition, there are secondary sources such as commercial and military stockpiles. However, according to the World Nuclear Association, demand for uranium is expected to climb from about 162m pounds this year to 206m pounds in 2030, and to 292m pounds by 2040. This is largely driven by increased power generation in China. China is planning a big increase in its nuclear power capacity over the next decade as the country seeks to cut its emissions.

Supply of uranium

Although uranium is relatively abundant in the Earth’s crust, not all uranium deposits are economically recoverable. While some countries have uranium resources that can be mined profitably when prices are low, others do not. Kazakhstan is the largest producer of uranium and in 2019 produced more uranium than the second, third, and fourth-largest producers combined.

The big issue is that supply to the market is falling significantly. For deliveries that would start in 2022, Kazakh producer, Kazatomprom, is now discussing the possibility of supplying the metal directly to Sprott. However, it also warned of the risk that its mines would not reach their output target for 2021, and it said earlier this year that it would keep its production at reduced levels through 2023. In addition to this, the recent surge in buying is also reducing the inventories that accumulated after the Fukushima accident.

The supply of uranium is set to fall 15 per cent by 2025 and by 50 per cent by 2030. This is mainly due to a lack of investment in new mines. The lack of new uranium mines will mean the price has to move higher. Namibian mines, accounting for 8 per cent of world supply, are approaching the end of their lives. Cameco of Canada, another important source, has shut one large pit because of uneconomic prices. According to BMO Capital, a mine supply deficit since 2019 will continue.

Supply has also been affected by the pandemic. The boom in demand has coincided with historically low prices and pandemic-driven mine disruptions, prompting uranium producers to buy from the spot market to fulfil long-term contracts with consumers. Some of the largest mining operations in Canada and Kazakhstan had to suspend production temporarily due to a shortage of workers.

Adding to the security of supply concerns is the role of commercial and state-owned entities in the uranium market. Uranium is a highly trade-dependent commodity with international trade policies highlighting the disconnect between where uranium is produced and where it is consumed. About 80% of primary production comes from countries that consume little-to-no uranium, and nearly 90% of uranium consumption occurs in countries that have little-to-no primary production. As a result, government-driven trade policies can be particularly disruptive for the uranium market. It is argued that the risk to uranium supply may create a renewed focus on ensuring availability of long-term supply to fuel nuclear reactors.

The role of financial players

Financial players have been accelerating the recent recovery in the price of uranium, with large-scale speculative buying and withholding of supply. But it can be argued that this would not have occurred if there were not a fundamental and substantial shortage.

If investors keep buying uranium, analysts expect utility companies will come under pressure to replace long-term supply agreements before they expire. At the moment, long-term contracts cover 98 per cent of the uranium needed by US utility companies. But that figure drops to 84 per cent next year, and 55 per cent by 2025, according to uranium investment company, Yellow Cake.

As annual supply declines, demand for uranium from producers and financial players increases, and with trade policy potentially restricting access to some markets, it is believed the pounds available in the spot market will not be adequate to satisfy the growing backlog of long-term demand. As a result, companies expect there will be increased competition to secure uranium under long-term contracts on terms that will ensure the availability of reliable primary supply to meet growing demand.

What will the future look like?

Many countries are turning their attention to nuclear power in order to become net-zero economies. Even in Japan, nuclear generation has slowly been returning. It is argued that nuclear power is needed to some degree for the country to achieve its pollution-curbing goals. However, not all nations are re-embracing nuclear. Germany, for example, is set to shut its last reactor next year.

The concern is whether the recent gains in investor demand is enough to underpin the market. It can be argued that even before the recent price rally started, demand for uranium from the investment sector was already growing. However, observers of the market have suggested that just as quickly as uranium skyrocketed, prices may now be hitting the brakes. Producer stocks that got swept up in the frenzy seem to have peaked. In addition, the world’s top uranium miner Kazatomprom has warned that the recent price action was being fuelled by financial investors rather than the utilities that use the radioactive metal as fuel in their reactors. On the other hand, it is argued that this pickup in the spot market will be the catalyst to push more utilities to get involved in term contracting.

Despite the impact of the pandemic on global energy demand, it is now growing again. Gas and other energy shortages are being seen and the price of gas has been rising rapidly. This rise in energy prices plus a focus on carbon-free generation is likely to continue driving demand for nuclear power and hence for uranium. In addition, producers have warned of supply shortages in the long term as investors scoop up physical inventory and new mines are not starting quickly enough. Thus nuclear’s growing role in the clean energy transition, in addition to a supply shortfall, could turn the tide for the uranium industry.

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  1. Using the uranium market as an example, describe the relationship between an increase in demand and the market price.
  2. Explain whether the supply of uranium would be price elastic or inelastic in (a) the short run; (b) the long run.
  3. What is the role of speculation in determining the recent movements in the price of uranium and likely future price movements?
  4. Given your answers to the above questions, draw supply and demand diagrams to illustrate (a) the recent increase in the market price of uranium; (b) the likely price of uranium in five years from now.