It will be interesting to see what the US does to reach emission reduction targets: Sergey Paltsev

Yahoo Finance's Brian Cheung spoke with Sergey Paltsev from MIT's Joint Program on Science and Policy of Global Change about Glasgow's climate conference, climate change, the shift to net-zero emissions, and how businesses can create action plans to address climate change.

Video transcript

BRIAN CHEUNG: Sergey Paltsev is the deputy director of MIT'S joint program on the Science and Policy of Global Change. He's the author of more than 100 peer reviewed publications in scientific journals and books on climate. Paltsev was also a lead author of the Fifth Assessment Report Intergovernmental Panel on Climate Change, or the IPCC.

I'm Brian Cheung with Yahoo Finance, thrilled to be joined here by Sergey. Sergey, happy Monday.

SERGEY PALTSEV: Yeah, happy Monday to you. Yeah.

BRIAN CHEUNG: I want to start up this conversation with the big UN Climate Change Conference in Glasgow, kicking off this weekend. You know, it feels like this is a big one, this being the Biden administration's really first chance to show the United States' position on climate, with the administration's changing. And Sergey, you'll be there at the event. So I'm wondering what you're expecting out of that meeting that starts this weekend.

SERGEY PALTSEV: Indeed, that's an extremely important conference. And indeed, the expectations are high. And my hope that the United States is going to be back at the table and is going to show its leadership, that they are back in Paris, and they are committed to these targets.

And hopefully, they will have the solid plans to show how they are going to achieve those announced targets of reduction 50% to 52% in 2030. And as you might be aware, while currently, the specificity is lacking. But it will be interesting to see what the current administration is going to come up with in order to justify what they are going to do to reach this target of emission reductions.

It's not only about the US leadership. Europe already is showing leadership with their 55% reduction and through the climate neutrality goals by mid-century. But also China, India, other places are extremely important for the success of this conference. So I'm really looking forward to that.

BRIAN CHEUNG: Now Sergey, as you mentioned, it's not just the United States that's the focus here. But what is interesting is that the heads of states of Russia and China, Vladimir Putin and Xi Jinping, won't be there at the conference this weekend. How significant are Russia and China to these discussions, especially as that transition appears to be the majority of the case for the 197 or so countries that will be attending, not having those two nations there is kind of a big statement, is it not?

SERGEY PALTSEV: Yes, it is, indeed, especially China, because China is the largest emitter. And so the whole world is looking at how serious is China and especially, looking at the current energy crisis in China-- well, I wouldn't call it a crisis. I shouldn't call it crisis, but a lot of challenges with energy access in China.

It will be very important to see how they are going to go forward, how they are going to stay committed to their declared target. As you may be aware, they have declared that by 2060, it's going to be carbon neutral China. So in other words, all greenhouse gases are going to be eliminated or compensated-- So net zero target. And extremely important for the rest of the world to make sure that China is in, because, well, that's such a big player. Russia is extremely important as well. And the current situation with energy in Europe also suggests that it's extremely important to have Russia on board in these negotiations and making sure that they are part of the solution.

BRIAN CHEUNG: So let's zoom out from China and Russia, but drill into the actual topic of net zero emissions, which we know is part of that Paris Agreement. And what makes COP26 so significant is that this is really the first time, since the Paris Agreement was signed, that they will have more substantial discussions about exactly how to do that. Now, the shift to net zero is going to be a pretty dramatic shift, is it not? Is there a risk of disruption at a macro scale, not just to financial markets, but to the global economy, with a big turn like that?

SERGEY PALTSEV: Exactly. And that's why I'm really happy that you are bringing this point. So we at MIT, at the joint program are currently exploring these financial risks. And so, well, there are two sides of these risks. There are physical risks-- so what is going to happen when we see more and more extreme events, when we will see extreme temperature-- fires, droughts, flooding. So these needs to be taken into consideration and how they might affect the financial stability.

But on the other side, as you have correctly mentioned, there are transition risks. And so those are even more important. Because we currently don't have a clear understanding what exactly the pathway which the world is going to choose to get to those targets. So just to give you one example, the International Energy Agency has done an assessment where we are currently with all pledges and where we need to be in 2030 in order to reach 1.5 degree.

And there is the gap. There is so-called ambition gap of about 12 gigatons. So we are short of 12 gigatons of needed reduction currently. And that's comparing with the pledges. And if you're going to take a look at the pledges and the actual policies which are on the books in countries, well, that's another gap of about 2.6 gigatons. So we are nowhere near where we need to be on the trajectory for 1.5.

And that is going to bring a lot of attention from the financial community to try to understand, well, what is for real where we are going to get? If we are not going to reach 1.5, what is the probability? What are the actions from that? Or if we are going to reach that, at what date?

And so the way how we see that, there is another danger that, if we are going to overshoot that 1.5 target, we need to make sure that we can [INAUDIBLE] that this is not-- that we are going to lose all the battles. Every emission counts. Every emission reduction counts. And, so we need to make sure that whatever companies are doing are still trying to push as aggressively as possible, even though currently, we are far from reaching those targets.

BRIAN CHEUNG: Now, can we zone in a little bit more on the financial side of things? We know that banks and other types of financial services companies are really kind of the heartbeat of where the financing goes. And we know that with the shift to net zero, that ESG has really emphasized the need to make this type of shift. But in the interim, as you mentioned, that transition risk has been flagged by financial regulators, at least here in the United States. There was a pretty meaty report from the Financial Stability Oversight Council. It's kind of the Justice League, if you will, of financial regulators that are trying to figure out what the best way to assess these climate related risks are.

The report details things like having increased data collection and more regulatory disclosures from the private sector with regards to these things. Is that going far enough? Because there are some progressive groups that are saying, honestly, maybe regulators should be doing more to ensure that transition happens.

SERGEY PALTSEV: Indeed. As you have correctly mentioned, it's not just the financial departments and financial regulators, financial institutions. Similarly, probably you are familiar with the reports from the defense and reports from intelligence, which also state the same urgency, that we need to make sure that we are taking those risks into account. And indeed, that report on Climate Related Financial risks, which is led by the Treasury, but also, has many other agencies on board-- so Fed Securities and Exchange Commission and many other agencies is paving the very important path where we need to go.

It's important to note that that report is not exhaustive. And that's not the final word. But that brings a lot of very concrete recommendations. So that report has, if I'm not mistaken, about 40 different recommendations, which broadly, are helping the institutions how to find the path, in order to make sure that those financial risks are taken into their account.

And we at MIT are working with several financial institutions. So for example, we have a project with Bank of Canada, where we are doing exactly that, where we are trying to use scenario analysis to quantify the risks. And I can tell you and of my own view when we are going to be serious. Well, when these companies would be willing to make sure that they have enough resources to the standard risk, to assess that risk, and when they are going to put in a lot of resources to evaluate that, I would see that, yes, indeed, we are serious. It's not just the cheap talk, but there is action as well. And that's what is needed, not just the pledges, but the action plan.

BRIAN CHEUNG: How would you grade the overall global approach to these types of things? Because just to use the example of the [INAUDIBLE] report, this is the first step, if you will, for United States financial regulators to figure out a framework for the best way to assess these types of risks. But it's 2021, and we know that some of these other greenhouse gas targets that are being set at an international level are really not that far away from that.

So do you feel like they're behind the ball here? And I'm not just talking about the United States regulators, but regulators around the world, fiscal agencies as well. How fast are they getting to this, or how slow are they getting to this?

SERGEY PALTSEV: Well, look, many regulators, the financial regulators are on board. So there is the network for greening financial system. So again, many banks, which are leading that-- and so Bank of France, Bank of England, Bank of Canada, which I have mentioned, South African Reserve Bank-- so they are watching that closely, and they are really trying to understand how to do a stress test. Because we don't want the repeat of the crisis of 2008.

And that's why we see that as an emerging threat. So I think that's the right way to put that. It's an emerging threat. So it's not something which is going to be resolved overnight or even in five years or even in a decade, but that's an emerging threat which needs to be taken into any decision-making. And so that risk, both on the physical side and transition side, needs to be taken into any company's policy, any company's annual report. And so I think that's exactly what they do.

On the other side, you don't want to run faster than you need. And so I think you have to be really, really careful in this approach, making sure that you are not prescribing too much. And because that potentially can lead to some dead ends in terms of the technologies, in terms of the policies, and other approaches. So I think this latest report is, I think, extremely important. And that shows clear signal, not only in the US, but for many other financial institutions around the world.

BRIAN CHEUNG: And Sergey, lastly here, we've been asking this about other climate-related guests today as well. But you're headed to that COP26 meeting. It feels different than it has in previous meetings. What would you need to see out of that meeting to declare it a success on a global scale, in terms of trying to address a lot of the challenges that we just discussed in the last few minutes?

SERGEY PALTSEV: What is extremely important is to send the clear signal that this policy is going to stay. Because what the investors need, what the companies need, they need to see that these targets are solid, that we are not going to give away and give up, even though we are not there in terms of the emission reduction; so my hope that it will be a confirmation that we will try to eliminate as much as greenhouse gases as possible by 2050.

At the same time, I'm hoping that it will be involvement of the businesses and involvement of the market options-- so like emission trading, carbon pricing. Because that's extremely important, to make sure that those instruments which brings the goal in the most economically efficient manner are staying on the table. And so that's I see as the very good outcome out of this call. But in general, again, if we confirm from the top leadership that the US is back, and Europe is there, and China and India are there, that's the most important signal for the rest of the markets, especially in the current turbulent times in the energy markets.

BRIAN CHEUNG: A lot of work to do, but as you mentioned earlier in the interview, important to pace yourself and not move too fast on those transitions as they happen. But again, Sergey Paltsev, deputy director at the MIT Joint Program on the Science and Policy of Global Change, thanks so much. And safe travels to Glasgow.

SERGEY PALTSEV: Thank you, Brian.