The Paris Agreement: A Game Changer?

Source: AFP

Source: AFP

The answer to whether the Paris Agreement is a game changer can be nothing else but a firm and straightforward yes! The historic climate deal was reached in Paris on December 12th and 196 countries committed to limiting global warming to “well below 2℃ above pre-industrial levels and pursue to limit the temperature increase to 1.5℃.”

The Deal

The road to a final agreement was well prepared and differed from negotiations preceding the previous Conferences of the Parties (COPs). This time, all preparatory work had already been done in interim meetings while almost all the countries submitted their national action plans (Intended Nationally Determined Contributions – INDCs) in time. As a result, this time it was government leaders who opened the meeting rather than ending it. This fact boosted general optimism for a final agreement.

The Paris Agreement comes at a crucial moment since, according to an analysis performed by the Carbon Tracker Initiative, as of 2011, the world has already used up over a third of the carbon budget set for the years 2000 to 2050. The budget, and the impeding probability of surpassing it represents an important international measure to keep global warming below the 2℃ threshold. In just a decade, the world economy emitted 321GtCO2, leaving just 565GtOCO2 for the next four decades. Under the Paris Agreement, which foresees a 1.5℃ increase in temperature as the new carbon budget, the allowance has grown even smaller.

In brief the Paris Agreement foresees that:

Countries whose target contains a time frame up to 2025 or 2030 need to set a new target by 2020.

The target should be strengthened every five years.

Greenhouse gas (GHG) emissions “should peak as soon as possible”.

A financing floor contribution of USD 100 billion per year, starting in 2020, from the developed nations.

The biggest breakthrough of the Paris Agreement is that now it seems that all parties are committed to climate mitigation. So far the ‘battle’ has been between developed and developing countries regarding allocation of the shares that one should take on to reduce carbon emissions. In 1997, when the Kyoto Protocol was signed, more than half of global emissions came from developed countries such as the US and Europe while today the global emissions map has been redrawn and two third of global emissions come from developing countries with China alone accounting for 25 percent of global carbon emissions. Moreover, the Paris Agreement brought back the commitment Canada and Japan, both of whom had left the Kyoto Protocol.

A Shift in ‘Business as Usual’

As it concerns the business world, investors have been calling for years for a framework that would provide them with the long term certainty to divest from carbon intensive industries. As more subsidies for clean energy and technology are expected to be adopted by the countries, carbon markets are expected to be restructured to carry a high carbon price- driving upwards the costs of investments in carbon intensive industries. In his speech in Paris, the US Secretary of State, John Kerry, said that “In the long term, carbon-intensive energy is one of the costliest investments any government could possibly make”. This statement can be translated as stating that fossil fuels subsidies are going to decrease in the short term and vanish completely later on. Government policies towards this direction have already been introduced recently and in 2014, fossil fuels subsidies amounted to $493 billion, however the International Energy Agency (IEA) estimates that they could have been upwards of $610 billion if no policies were adopted.

However, the current global financial situation; with many countries still licking their wounds from the 2008 financial crisis and the fact that Basel III has tightened bank lending to long term finance, narrows space for governments to act. The Paris Agreement however might be opening the door for the financial markets to play a more important role in what has been decided to be the future, and at the same time unlock trillions of dollars to be poured into the low carbon economy from institutional investors. This is absolutely necessary since according to the OECD, institutional investors hold more than $71 trillion in assets while it is estimated that “economy-wide transformation will require cumulative investment in green infrastructure in the range of USD 36-42 trillion between 2012 and 2030, i.e. approximately USD 2 trillion or 2% of global GDP per year”. Given these sums it is obvious that institutional investors have an important role to play and now it’s time for them to act.

Despite the optimism that the Paris Agreement brings, action must start today as there is no time to loose. Even though all countries recognized a revision of their targets on a five-year basis, there is no commitment that the countries have to upgrade their existing pledges before 2030. Hence, there is a chance the we might see no upgrading of pledges in the next 15 years, which falls short given the targets set. An assessment by Climate Action Tracker finds that only a handful of countries have submitted INDCs adequate with the 2℃ ceiling target and none of them are a major emitters. China’s and EU’s INDC’s are rated as medium while other major emitters such as Saudi Arabia and the Russian Federation’s INDCs are rated as inadequate.

Turkey’s INDC has also been characterized as inadequate. The country aims to reduce GHG emissions in 2030 by 21 percent below a ‘business as usual’ projection. However, even this modest target might not be achieved given that Turkey’s primary energy demand increases at compound annual growth rate of 4 percent and the recent fall out with Russia might lead Turkey to rely even more on domestically abundant coal for reasons of energy security. Russia is the country’s main supplier of natural gas and the two countries had also agreed upon the construction of two nuclear power plants, the realization of which has been out under question since the diplomatic crisis proceeding Turkey shooting down a Russian military jet.

The Paris Agreement will enter into force in 2020 but changes in the international system are expected way earlier since the signal has now been given. The next big thing to anticipate is China’s 13th five-year development plan, to be published in March since it is expected to articulate the integration of the outcome of COP21 at a time when the country’s development pace is slowing down while its coal demand is reaching a plateau.

Finally, the most positive message to get out of this deal is determination from policy makers. With the EU at forefront, finally all state leaders recognized what severe impacts climate change can have on our lives and they committed to bring the necessary policies to evade a higher that 2℃ growth in the planets temperature. The target is feasible and the determination seems to be there, what is left is action.

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