On 1 June, the new US administration unsurprisingly announced its intention to withdraw from the historic Paris Climate Agreement. Due to the legalities embedded in the accord, the withdrawal could take place on 4 November 2020. The announcement is not to be taken lightly, as it will bring significant political, economic and environmental consequences.
The withdrawal will inevitably slow the pace of energy transition in the US. It is highly probable that the country will fall short in its commitment to the Nationally Determined Contribution (NDC) target of an 26%-28% reduction in greenhouse gas (GHG) emissions compared to 2005 levels by 2025 making it more challenging to achieve the global target of well-below 2°C.
Yet the impact on the global fight against climate change will likely be less profound than initially feared because – far from being discouraging – President Trump’s decision has reinforced the determination of a significant slice of the US, and of the rest of the world, to continue the transition to a low-carbon economy.
Almost as soon as the president confirmed his decision to abandon the Paris Climate Agreement, states, cities, investors and businesses, along with leading US institutions, stepped up.
In less than 48 hours, over 1 400 of them had already publicly vowed to meet the goals of the Paris accord. This included more than 200 mayors and more than 750 companies which have already invested significant amounts of effort and money in aligning themselves with a 2°C trajectory.
California, New York and Washington states launched the United States Climate Alliance, committing themselves to at least honour the Paris Climate Agreement goal of a reduction in emissions of 26%-28% by 2025. So far, the Alliance represents 36.3% of the US economy and over USD 6.8 trillion – collectively, this is third largest economic grouping, behind only China and the US itself.
The biggest fear over the US withdrawal though was that other countries might follow suit and abandon their pledges in reaction to the action by the second largest polluter (and the largest on a per-capita basis) and biggest financial contributor to the Green Climate Fund*.
However, the response has been unanimous. China, India, Canada, Australia, Mexico, Indonesia, Japan, the European Union and many others have all reinforced their commitment to “make the Planet great again”. Even more encouraging has been China’s and Europe’s expressed willingness to step up their efforts on emissions abatement (the US accounts for 15% of current emissions) and on climate finance.
Beyond climate change, the underlying economic rationale
Economics and long-term factors such as demand for clean air are also driving forces for turning to renewable energy technologies. Investing in clean energy and energy efficiency offers significant advantages related to diversification from fossil fuels and energy independence, including economic growth and job creation, technological progress and clean air.
The rise of renewables and clean technologies has exceeded even the most optimistic expectations. Renewables provide almost a quarter of the world’s power, second only to coal. In 2015 alone, renewable generation capacity rose to the equivalent of about one-third of average US electricity demand, with wind and solar accounting for 75% of the additions.
Prices have dropped sharply – the cost of producing solar electricity by two-thirds and onshore wind by 30% - while investment has been sustained. In 2015, USD 349 billion was invested globally in renewables, excluding large hydropower, in comparison with USD 130 billion in coal and gas.
Such investment levels are inevitably creating jobs. Almost 800 000 people work in the US renewable power market, compared with fewer than 55 000 in the coal mining industry. More importantly, green technologies’ capacity to create jobs has far exceeded (12 times faster) that of the rest of the US economy.
Paris Climate Agreement exit creates two-speed America
By exiting the Paris Climate Agreement and dismantling environmental regulation, the US government is de facto creating a two-speed America. One part is fully on board and ready to build on the opportunities that the clean energy transition offers, whereas the other will in all likelihood fail to keep pace with the technological progress that is set to define the markets of the not-so-distant future.
For us, as long-term investors, it means we ought to be able to differentiate between the leaders and the laggards, and engage in dialogue with the latter. We also need to respond to the rapid tightening of emissions-related regulation that will doubtless be imposed in support of the restated commitments by large parts of the US and other major economies such as China, India and the EU to the transition to clean energy.
Written on 11 June 2017
*By exiting, the US also jeopardises financing for mitigation, adaptation and control efforts by poorer nations - the US being the major contributor to the climate aid finance package to help the poorest countries adapt and fight climate change. It had pledged USD 3 billon of which USD 2 billion has been cancelled." Washington Post, ‘Trump will stop paying into the Green Climate Fund’, 2 June 2017.