On 12 December 2015, nearly 200 countries reached an agreement that many have described as a historic turning point for global cooperation in addressing climate change. This article looks at the key elements of the Paris Agreement, its legal status and potential implications for the energy sector.
Background to the Paris Agreement
The Paris Agreement arose out of the 21st annual meeting (COP21) of the United Nations Framework Convention on Climate Change (Convention or UNFCCC), an international environmental treaty that entered into force on 21 March 1994. The Convention’s objective is to "stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.” The Convention currently has 195 members and enjoys broad legitimacy, largely due to its nearly universal membership.
Work of the Intergovernmental Panel on Climate Change (IPCC) and other scientists indicates that over the last few decades, and mostly due to global industrialisation, the concentration of carbon dioxide and other greenhouse gases in the atmosphere has been increasing at an unsustainable rate. Other factors contributing to higher carbon emissions include deforestation and change in land use and increased use of road and rail vehicles. With current global emissions around 50 gigatonnes of greenhouse gases per year, scientists predict that due to ongoing activities contributing to climate change, the average global temperature could increase between 1.4 and 6 degrees Celsius in the 21st century and that the effects of global warming can have a potentially disastrous impact on our planet.
Key elements of the Paris Agreement
COP21 was held in Paris between 30 November and 12 December 2015 to take the next steps in addressing climate change and culminated in the adoption of the Paris Agreement. One of the principal developments was the move away from the binary developed-versus-developing nation structure that proved so destructive under the current Kyoto Protocol regime. Other key measures in the Paris Agreement are set out below:
Mitigation
-
To keep global temperature rise well below 2 degrees Celsius above pre-industrial levels and pursue efforts to limit temperature rise even further to 1.5 degrees Celsius above pre-industrial levels.
-
To reach global peaking of greenhouse gas emissions as soon as possible.
-
To achieve a balance between anthropogenic emissions by sources, and removals by sinks, of greenhouse gases in the second half of this century.
Transparency system and accountability
-
Each party shall contribute to the common goal by setting and communicating “nationally determined contributions” (NDCs) with respect to emissions reduction targets with a view to renew its ambitions every five years – with each further NDC expected to be more ambitious than the previous one.
-
The implementation of the Paris Agreement will be evaluated every five years whereupon each party must account for its climate action.
Adaptation
-
To strengthen the ability of countries to deal with, and recover from, climate impacts.
-
Recognition of the importance of averting, minimising and addressing loss and damage associated with the adverse effects of climate change, including extreme weather events and slow onset events.
Support
-
To provide support to developing country parties, including financial support, to assist them with respect to their mitigation and adaptation obligations.
-
Extension of the USD 100 billion a year climate finance commitment to 2025, with a commitment to further finance in future.
The obligations under the Paris Agreement are set out “in the context of sustainable development and efforts to eradicate poverty.” They also set the stage for future efforts, given that the Paris Agreement will only move the world halfway to the “well below 2 degrees” goal.
Status of the Paris Agreement
The Paris Agreement will open for signature on 22 April, 2016, and will come into force 30 days after the date on which at least 55 of the 195 parties to the Convention ratify the Agreement. In order for the Agreement to come into force, these 55 parties must also account for an estimated 55 percent of total global greenhouse gas emissions. It remains to be seen which parties will sign and ratify the Agreement, and in order that the Agreement should come into force, it will be necessary for several of the world’s main carbon-emitting countries to ratify the Agreement.
The Agreement contains ostensibly mandatory language in places with respect to the obligations of signatory states. For example, Art. 9 provides that “Developed country Parties shall provide financial resources to assist developing country Parties with respect to both mitigation and adaptation in continuation of their existing obligations under the UNFCCC.” Further, parties “shall” determine their targets for emissions reduction (Art. 4).
If and when the Agreement comes into force, however, non-compliance by the parties is unlikely to result in far-reaching legal consequences. The targets for individual states’ reductions in emissions are voluntary, and the majority of states’ other commitments are couched in precatory language (e.g., to hold the increase in the global average temperature to “well below 2 °C above pre-industrial levels” under Art. 2).
Article 8(3) provides that Parties should enhance understanding, action and support on a “cooperative and facilitative basis” with respect to loss and damage associated with the adverse effects of climate change, and Article 15(2) provides for the establishment of an expert-based committee to facilitate implementation of and promote compliance with the Agreement. However, the committee is “facilitative” in nature and function and is to carry out its role in a manner that is “transparent, non-adversarial and non-punitive”. The Agreement contains no dispute resolution provisions, and while the Agreement is a strong expression of collective political will, its provisions are not strictly legally enforceable under international law. Moreover, the Decision accompanying the agreement expressly states that Article 8 of the Agreement on loss and damage “does not involve or provide a basis for any liability or compensation.”
Potential implications for the energy sector
Notwithstanding the legally unenforceable nature of the Paris Agreement, much of the commentary since 12 December suggests that the accord is a signal to businesses and investors that the era of carbon reduction has arrived – that the Paris Agreement will prompt banks and investors to shift their loan and stock portfolios from coal and oil to the growing renewables industry. Other commentary notes, however, that without multinational carbon tax or other carbon pricing mechanism, which was not specified in the Paris Agreement, a true sea change that will curb climate change remains challenged. A range of companies, including members of the energy sector, have for some time called for governments to set a clear carbon policy framework, particularly to put a price on carbon emissions which treats all carbon equally, whether it comes out of a smokestack or a car exhaust. This will level the playing field and make efficiency more attractive and lower-carbon energy sources more competitive.
Moving down the energy spectrum toward renewables faces practical challenges. Europe has tried to lower its carbon emissions with a cap-and-trade system that gives companies incentives to cut emission. Emissions allowances, however, are worth far less than anticipated, and Europe continues to depend on coal for power. Coal also remains a dominant fuel in India and across much of Southeast Asia. Renewables, on the other hand, although fast growing, still only account for about 10 percent of total energy supply, with most of that from hydroelectric power and approximately 1.6 percent from solar and wind. Nevertheless, there are signs of changes in the energy mix. Coal investors are exiting and a number of producers have filed for bankruptcy. Meanwhile, the combined market size of low-carbon technologies exceeded USD 600 billion last year.
Initial industry reaction to the Paris Agreement has taken a positive tone. The International Association of Oil & Gas Producers (IOGP), which enjoys membership by producers of more than half of the world’s oil and more than a third of the world’s gas, welcomed the Paris Agreement and stated that the accord is in line with the association’s policy on climate change. In particular, references to “in the context of sustainable development and efforts to eradicate poverty” in the Paris Agreement set the stage for the parties to engage in a candid, realistic debate regarding the energy mix. Energy sector organisations such as the IOGP have posited that oil and gas will be a vital part of the energy mix whilst working to meet the climate change targets. Natural gas provides a pragmatic and efficient way to reduce greenhouse gas emissions and is an effective backup or bridge for renewables. When used to produce electricity, gas emits roughly half of the carbon dioxide that coal does. Meanwhile, oil will remain essential for the foreseeable future as it has no practical rivals in three crucial applications: (1) as a lubricant to enhance the operating efficiency of engines and turbines (including wind); (2) as feedstock for products such as the fertilisers needed for the rapidly growing population to feed itself; and (3) as transport fuel, in particular for aviation. Energy sector participants are also investing in mitigative technologies, such as carbon capture and storage, flaring reduction practices, methane emissions reduction and improving energy efficiency in operations.
Potential international trade implications
The Paris Agreement is unlikely to have direct implications for international trade, given that draft language expressly referring to an obligation to prevent protectionist measures was removed from the final agreement. The Agreement, however, may have a significant indirect impact on international trade in goods and services.
First, the objective of the Agreement is to encourage the development and implementation of measures to lower greenhouse gas emissions substantially over the coming decades. Such measures will necessarily impose additional compliance costs on industrial sectors across the world, often at different levels and on different timetables. The nature, scope, and timing of the reduction measures in each country will impact the relative competitive position of such country’s industries and the effectiveness of reduction measures. Countries that are first to employ these measures may face economic and emissions “leakage”, because consumers may shift from domestically-produced goods to lower cost and higher greenhouse gas intensive imports. The results of such leakage could be a transfer of manufacturing to countries with lower climate change compliance costs and a dampening of climate change benefits. How countries choose to remedy this risk of leakage will determine the scope of the Paris Agreement’s effect on international trade, new investment, and the sustainability of local industries, particularly those producing relatively fungible products in the energy, chemical, steel, and cement sectors.
Second, the Agreement is likely to require the introduction of new technical requirements to promote energy efficiency for industrial and consumer products, such as fuels, automobiles, appliances, and other goods. Such requirements have historically been an avenue for countries to introduce discriminatory measures that favour local producers. Countries can also be expected to launch or increase government subsidies for the development and production of new energy efficient products, which may cause distortions in global markets. Countries and their exporters can be expected to exercise heightened scrutiny of any new technical requirements or subsidy programs to ensure compliance with binding international trade obligations.
Third, the Paris Agreement is likely to provide a significant boost to research and development activity in relation to innovative energy efficient and low carbon technologies. In addition to the incentives provided in the Agreement itself, governments also launched initiatives in Paris, for example, to promote solar energy deployment in developing countries and to increase public investment in clean energy research and development. The results of these incentives and new investments are expected to increase the development and trade in new products and technologies.
Finally, the Paris Agreement should provide an incentive to expedite and conclude a range of additional agreements affecting trade and climate change. For example, Member countries of the World Trade Organization (WTO) are negotiating an agreement to phase out or remove tariffs on a wide range of “environmental” goods. The conclusion of this agreement should facilitate increased trade in these goods and lower costs for implementing leading technologies, including those directed at lowering greenhouse gases and mitigating impact of climate change. Both the aviation and maritime shipping sectors are also expected to intensify efforts to conclude global agreements to address emissions, which will likely have a direct impact on the costs associated with international trade.
Potential implications for environmental management
Actions to advance carbon-reduction regulation are not expected to flow directly from the Paris Agreement, but rather from efforts in individual countries to deliver on their NDCs. Companies in developed countries can expect regulation of fossil fuels to continue to ratchet up, and companies in developing countries will likely see efforts to establish baselines and emissions reporting regimes. Regulations will also create opportunities to advance investment in renewable technologies and forest conservation. Companies should also expect agencies to use their enforcement authority to leverage changes in all aspects of facility operations that can have carbon-reducing effects.
Although much has been said about the nonbinding aspects of the Paris Agreement, companies should not underestimate the behaviour-changing impetus of the required public reporting on progress. Environmental management history indicates that such “name and shame” programs work. In the U.S., the Toxics Release Inventory led to substantial reductions in chemical releases. Additionally, reporting associated with market-driven regulatory programs has harnessed economic interest to drive facilities to lower emissions.
Companies should also expect that national measures will not serve as the only driver of environmental regulation. The success in Paris arose in no small part from the “non-state actors” such as governors and mayors, and the commitments they made in Paris will likely translate into regional, state, and municipal regulatory initiatives. Private-sector initiatives seek to accelerate investment in technological development, and they may also create supply-chain pressures for energy-intensive industries.
These pressures from multiple directions provide incentive for companies to take a strategic look at the implications of the Paris Agreement. Companies should assess business risk and opportunities under the NDCs of each country in which they operate, with particular attention to specific commitments that will impact operations. Also, companies whose future strategies rely on financing may need to plan for shifts in availability and cost of such financing, depending on the nature of those future projects.
Next Steps
Perhaps the impact on industries of the Paris Agreement may be best described by a partner at a venture capital firm: “People are boarding this train, and it’s time to hop on if you want to have a thriving, 21st century economy.” The next stop for the Convention train is Bonn in May 2016, when the new Ad-Hoc Working Group on the Paris Agreement is scheduled to meet. Then, it is onward to Marrakesh in November 2016 for COP22.
