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After Paris: Three big questions raised by the Paris Climate Agreement

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Over the weekend in Paris, representatives of nearly 200 countries reached agreement on a treaty that for the first time commits nearly every country to curbing emissions of heat-trapping gases linked to climate change. Its goal: to limit the increase in global average temperatures to “well below” 2 degrees Celsius (3.6 Fahrenheit) above pre-industrial levels, and to “pursue efforts” to limit the temperature increase to 1.5°C.

The Paris Climate agreement is being described by world leaders and media outlets as “landmark” but it raises a host of questions for businesses.

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After Paris: Three big questions raised by the Paris Climate Agreement

  1. 1. ClientNote Date Dec. 14, 2015 Subject After Paris: Three Big Questions Raised By the Paris Climate Agreement Over the weekend in Paris, representatives of nearly 200 countries reached agreement on a Treaty that for the first time commits nearly every country to curbing emissions of heat-trapping gases linked to climate change. Its goal: to limit the increase in global average temperatures “well below” 2 degrees Celsius (3.6 Fahrenheit) above pre-industrial levels, and to “pursue efforts” to limit the temperature increase to 1.5°C. DidParissucceed? The treaty has been described by world leaders and media outlets as “landmark,” and there are indeed many reasons to view it in those terms. It is the first time in history that every country in the world has agreed on the need for a common climate goal which, as Kevin Anderson of the Tyndall Centre for Climate Change has noted, “is a really positive move forward that is testament to years of meticulous science.” Unlike previous agreements, the Paris treaty also includes emissions targets for all nations, not just the richest few. It has been a longstanding bugbear of the US that emerging polluters such as China and India could escape action while expecting developed countries to shoulder the burden. The Paris negotiators appear to have neatly addressed this standoff between the developed and developing world. Finally, Paris creates a process for increasing pressure on governments and businesses around the world to reduce their emissions. Every five years, beginning in 2020, each country will be expected to contribute a new national plan for reducing emissions. Countries will also be legally required every five years to report on how they are performing in cutting emissions, using a universal accounting system provided by the UN organization that coordinated the talks. The idea is to create a ‘“name-and-shame’ system” of global peer pressure that causes countries to reduce their emissions or risk being seen as obstacles to progress. The hoped-for effect is to send a “signal” to investors to channel more money into low-carbon alternatives to fossil fuel. However, as the celebratory mood from Paris recedes, there are also reasons to be cautious. By itself, the Paris Agreement won’t meet the ambitious goals set for it. The document “notes with concern” that the voluntary emissions cuts do not put the world on a pathway to 2°c emissions. According to the UK Energy and Climate Change Secretary, Amber Rudd, the deal will deliver something closer to 2.7°C. Another point for concern are the lack of delivery mechanisms for achieving the ambitious targets. Responsibility for implementing the treaty will remain with nation states, which will have the advantage of marking their own homework and setting their own assignments and deadlines. This voluntary approach was critical to achieving a treaty, but it may also prove its undoing when history judges its achievements. Whatdoesitmeanforbusiness?
  2. 2. © Brunswick | 2015 | Confidential | 2 For businesses, the treaty raises a host of questions: How will governments and the media talk about it? The last major climate conference in Copenhagen in 2009 also produced an outcome that was initially lauded by the heads of government who brokered it but quickly fell apart as stakeholders ripped apart the lack of detail. Therefore, an early test for this treaty will be how world leaders and major media outlets around the world talk about it. According to Michael Levi at the US Council on Foreign Relations: “What leaders say will signal how much they see the Paris deal as settled and how they interpret the language that treats developed and developing countries differently. How the media describe the Agreement will shape how the broader public views it, and hence how much of a penalty leaders might face for later backtracking or spinning what the deal says.” Two days on from the announcement, global media continue to strike a supportive tone, although with some important reservations. An early sample of headlines from around the world: Sydney Morning Herald: “Paris accord delivers hope for the future” China Daily: “Climate deal hailed as the right choice” The Times of India: “Paris accord offers hope but could have done more” The New York Times: “Leaders Approve Landmark Climate Accord in Paris” The Financial Times: “Laurent Fabius lauded for successful conclusion” Business Day (South Africa): “Euphoria as landmark Paris climate deal adopted” Frankfurter Allgemeine Zeitung: "Great Joy about Paris Climate Treaty" Le Monde: “A historic accord, but based on 'soft law'” What sorts of new policies will governments undertake? The Paris Agreement offers little new information for businesses to consider as part of their investment decisions. The carbon pledges are voluntary and were submitted to the conference months in advance. In many cases, they are the product of long-established agreements by countries and regional blocs. In effect, world leaders have played an elaborate game of ‘show and tell’ over the past fortnight, bringing a hodgepodge of targets to the negotiating table which have already been agreed and walking away with exactly the same targets, this time captured in a single document. The achievement of reaching a common agreement cannot be underplayed, but nor is it likely that business leaders will make significantly different decisions based on targets and ambitions they already knew. Three questions should matter most to the business community in interpreting the treaty: a) Will governments now put in place new policies as a result of the targets they have agreed? b) Is ‘naming and shaming’ enough to force countries to increase their targets consistently in the future? c) What does the UN do to punish a country breaking its commitments to the treaty?
  3. 3. © Brunswick | 2015 | Confidential | 3 A sobering warning comes from those countries already most advanced in the target-setting agenda, where politicians have already displayed signs of cold feet once the cost of the transition became apparent to voters. Against this backdrop, the most cost-effective measures to reduce emissions are the safest bet for investors. In some parts of the world, those actions could be tighter limits on the use of coal for electricity generation (and greater reliance on cleaner-burning natural gas). In others, the result could be more stringent automobile fuel-economy standards. In general, says Robert Stavins, a Harvard University economist who specializes in climate policy, the effect will be to raise energy costs, which “tends to be good news for producers of energy-consuming durable goods (for example, the Boeing Company) and bad news for consumers of those same energy- consuming durable goods (for example, United Airlines).” How much of an advantage will the treaty give to renewable energy? The treaty comes at an inauspicious time for spurring investment in alternatives to fossil fuel. Just last week, crude oil prices fell to their lowest levels since the 2007-08 global financial crisis. While great for consumers, low prices for fossil fuel tend to depress demand for alternatives. The Paris agreement provides no direct incentives for the development of renewable energy sources. The question of carbon pricing was not on the Paris agenda, despite the exhortations of many business stakeholders, including a coalition of the world’s major oil and gas producers. Nevertheless, the treaty could still act as an important indirect spur to investment in alternatives to fossil fuel. Listed renewable energy businesses rose on Monday morning trading across the world as the feel-good factor took hold. According to IIGCC, a network of 120 institutional investors with over 13 trillion euros in assets under management: “Investors across Europe will now have the confidence to do much more to address the risks arising from high carbon assets and to seek opportunities linked to the low carbon transition already transforming the world’s energy system and infrastructure”. Whatthecommentatorssay A selection of comment pieces from major news publications worldwide: “The historic Paris agreement on climate change provides a strong and clear signal that could unlock trillions of dollars in investments in the global low-carbon economy over the next two decades … governments must now respond to the Paris Agreement by unleashing the private sector, which will drive the acceleration now required to cut emissions.” Lord Stern, Financial Times “In the hot, sodden mess that is our planet as 2015 drags to a close, the pact reached in Paris feels, in a lot of ways, like an ambitious agreement designed for about 1995, when the first conference of parties to the United Nations Framework Convention on Climate Change took place in Berlin … Other countries, like gas station owners on opposite corners looking at each other's prices, have calibrated their targets about the same: enough to keep both environmentalists and the fossil fuel industry from complaining too much.” Bill McKibben, The New York Times “In Paris you won't hear it mentioned that this is likely to be the most expensive treaty in the history of the world. If you try to cut carbon dioxide, even with an efficient carbon tax, you end up making cheap energy more expensive and this slows economic growth.” Bjorn Lomborg, The Mail on Sunday
  4. 4. © Brunswick | 2015 | Confidential | 4 “An unequivocal signal to the business and financial communities, one that will drive real change in the real economy.” Paul Polman, chief executive of Unilever PLC, quoted in The Wall Street Journal “Climate change will continue but now at a much-reduced pace this century relative to what it would be without an international agreement and adherence to it.” Jeffrey Kargel, senior associate research scientist, University of Arizona, quoted in The Wall Street Journal “The Paris climate conference delivered more of the same – lots of promises and lots of issues still left unresolved.” Stephen Eule, vice president for climate and technology, U.S. Chamber of Commerce, quoted in The Wall Street Journal “This weekend's climate change deal in Paris gives investors the green light to invest ecologically. The agreed goals are laudably ambitious. While scepticism over the 195 countries' ability to hit them is warranted, the accord should encourage everyone from venture funds to debt and equity investors to stump up more capital” Anthony Currie, Reuters BreakingViews Lookingahead Governments now face the task of delivering on their commitments. As Richard Allan, climate scientist at the U.K.’s University of Reading told The Wall Street Journal, “Paris has delivered a plan, next begins the hard bit: action.” For businesses, this will mean new challenges in the form of regulations but also new opportunities to lead the public debate over energy policy, by explaining the actions they are taking to limit emissions while serving the needs of their investors and customers.

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