Sovereign decarbonization: will 2030 targets be achieved?

The pathway to a lower global carbon economy is defined in many aspects by the pace of country-level (sovereign) decarbonization. In this regard, it is encouraging that 107 countries representing 82% of global greenhouse gas (GHG) emissions have adopted a net zero target, while 194 countries (and the European Union) have signed up to the Paris Agreement.1

But are these countries on track to achieve their targets? This will become an increasingly important question, not just for policymakers but also for financial market participants, including asset managers and owners with sovereign bond exposure in their portfolios. Hence, tracking sovereign-level climate progress toward individual country targets and their alignment to the Paris Agreement is becoming integral to sovereign risk analysis.

G10 countries making progress

The G10 countries, which comprise the world’s most developed economies, have in addition to signing the Paris Agreement all adopted an interim 2030 decarbonization target, making analysis of their climate progress even more pressing.

An assessment of progress so far, using ICE sovereign emissions data (production-based tCO2e), shows the G10 have established a steady decarbonization trend over the past 20 years, with both the mean and the median trend of emissions on a clear downward trajectory (see Figure 1). Even the worst performing of the G10 countries has kept a relatively flat trend, preventing an increase in emissions.

Figure 1. G10 emissions trajectory, 2005-2022

Source: ICE

It is also interesting to note that the G10’s emissions reduction path has been steady in both the 10 years prior to and in the years following the 2015 Paris Agreement. The average emissions reduction for the G10 countries was 12.6% from 2005 to 2015 and 12.3% from 2015 to 2022 (the latest available data). The lack of acceleration in the decarbonization trend post-2015 could be viewed as surprising given the climate target setting and net zero commitments generated by the Paris Agreement.

For the G10, our analysis finds there is some progress toward the 2030 interim climate targets. The average percentage emissions decline from target base dates (which vary from country to country) to the latest reported data (2022) is around 27% for the G10 countries. While this may seem like significant progress toward the average emission reduction target of 55%, when viewed against the target time horizon there is a lot of work still to be done by the G10 in the short space of time remaining for interim targets to be achieved. The 2030 target date is now coming within investors' decision-making timeframes.

Increase in momentum needed

Given the majority of G10 countries set 1990 as the base year for their interim target and have counted previous emissions reductions going back to that year, an average of 82% of the available time to achieve their targets has already elapsed, with only 48% of the required emissions reduction achieved. Only half of the G10 have achieved at least 50% of their required emissions reduction. This implies that on average the G10 countries need to significantly increase their pace of decarbonization in the next few years if targets are to be met.

Indeed, while there is significant variation between countries, at the current annual pace of emissions reduction none of the G10 are likely to achieve their 2030 targets, although a couple of countries are not too far off the pace. The average annual decarbonization rate for the G10 over their interim target-setting period has been 1.2%, implying an increase in the average annual decarbonization rate to 7.4% for the remaining years is required to bring the 2030 interim targets within reach. Interestingly, years with the highest rates of decarbonization are associated with periods of recession or slower growth in the developed economies, which are then reversed to some extent in the following year (see Figure 2).

Figure 2. G10 countries’ annual average (mean) decarbonization rate (% y/y)

Source: ICE

However, the pace of emissions reduction will have to be even greater if the net zero and Paris alignment ambitions of the G10 countries are to be met. Research published by the United Nations, finds that a 43% decarbonization from 2019 levels would be needed by 2030 for Paris alignment to be achieved. As things currently stands, the average decarbonization of the G10 countries from 2019 is just 8%.

G20: a mixed picture

While the G10 are heading in the right direction and making progress toward their interim targets, our analysis of the G20 countries’ (representing around 77% of global GHG emissions ) progress toward their interim climate targets suggests far more mixed results.

The divergence in performance of the G20 compared to the G10 countries can be seen in Figure 3. Here, our analysis finds a much broader distribution of results, with the median trend of emissions for the G20 remaining relatively flat, suggesting little in the way of decarbonization progress compared to the downward trend witnessed for the G10. While the upper boundary of the distribution is significantly higher for the G20, it must be noted this is defined by a small group of the faster-growing developing economies where increases in carbon emissions is still taking place, according to the latest available data (2022).

In fact, for some of the faster-growing developing economies, their interim climate targets equate to a limitation in the pace of emissions increases rather than an outright reduction of emissions at this stage.

Figure 3. G10 and G20 emissions trajectory 2005-2022

Source: ICE