December 2015 marked the first time in history where virtually every country in the world committed to curbing greenhouse gas emissions in order to stave off the effects of climate change. The conditions that allowed for this many members of the global community to arrive at an agreement were unprecedented.
Until the Paris Agreement that was reached on December 11, 2015, nations had been firmly divided between developed and developing nations. This distinction was enshrined in the 1992 Framework Convention in Rio de Janeiro, Brazil, and dominated modern global environmental agreements for the majority of the 1990s and 2000s. This approach was rigid: Developed countries were responsible for cutting emissions through assigned targets, which were to be enforced through international law.
The Paris Agreement took a fundamentally different approach. All countries, not just developed ones, are now expected to curb emissions to reach a goal of limiting global temperature increases to 1.5 degrees Celsius (2.4 degrees Fahrenheit) above pre-industrial levels. There was also a pledge to grow financial support for poorer countries beyond $100 billion a year after 2020.
However, instead of delegating that responsibility from a top-down perspective, each country was asked to develop its own plans based on its own circumstances. Now, going forward, it will be political pressure, not international law, that acts as the enforcement mechanism for these agreements. In other words, it’s nonbinding. This is a new, flexible style of international cooperation that got everyone to the table and creates a foundation that the countries can build on over time.
Each country’s progress will be reviewed regularly in a public setting (though much of the detail on each remains to be developed) through a set of mandated transparency measures. As a result, each country will need to maintain more comprehensive records about what it purchases, consumes and disposes of. Also, every five years (starting in 2020) each country is supposed to put forward stronger national emissions reduction plans. What is so novel about this approach is that nothing in the agreement actually compels countries to get involved from a legal perspective.
Why Was This Flexible Process Helpful?
Barriers to curbing emissions occur at the domestic level, not the global level, so allowing goal-setting to occur within each country is more conducive to the underlying political and economic reality of dealing with climate change.
Also, for countries that do not follow through on their goals, there has been no established mechanism for punishment; therefore, bolstering political will and technical capacity is more likely to result in emissions reductions than threatening to take countries to the courts.
Lastly, while some fundamental debates are not yet resolved (e.g., how the definition of a developed versus a developing nation impacts who helps whom in transitioning to a low-carbon economy), the Paris Agreement has increased the legitimacy of the international agreement process in the eyes of the public.
Now What?
The short-term and long-term implications of the Paris Agreement have yet to be determined. The first major test will be to watch how leaders and major media channels discuss the deal in the coming days and weeks. These discussions will frame the legitimacy of how leaders may be scrutinized if they do not meet their targets.
The second major test will come in November 2016, when the U.N. Climate Summit will be held in Morocco, and countries will work through the provisions for transparency and review and will update the targets set in the Paris Agreement. The third major test will be whether countries will actually commit to revising their emissions-cutting plans every five years.
Ultimately, the true test will not come for decades, and that is whether this agreement will facilitate a substantial reduction in the risk of climate change. Right now, at best, the pledges put the world on a path to 2.7 degrees Celsius of warming.
A much more integrated global treaty will likely be needed to actually make the major cuts in greenhouse gas emissions needed to meet global goals, but this flexibility offers a way for countries to get started, which will hopefully build a willingness to do more over time. Perhaps if easier problems are tackled first, this will make it possible to tackle more difficult diplomatic challenges later.
Why Should Investors Care?
With greater global political certainty around commitments to reducing emissions, the forces of capitalism can now be more securely unleashed to move toward a low-carbon economy. Paris catalyzed a pledge for financial support for poorer countries beyond $100 billion a year after 2020.
But, in reality, trillions of dollars are needed for this transition. The International Energy Agency says meeting the COP21 pledges will require $13.5 trillion of energy-saving and low-carbon investments over the next 15 years. While this is a daunting amount of capital, the Paris Agreement sent a powerful signal to the world’s markets that it is now safer to channel capital into investments that bolster a low-carbon economy.
Already, the money has begun to flow. New York State’s $183.5 billion Common Retirement Fund just pledged to double its $1.5 billion sustainable investment program and commit $2 billion to a new index “that will exclude or reduce investments in companies that are large contributors to carbon emissions like the coal mining industry, and increase the Fund’s investments in companies that are lower emitters.” This means the pension fund’s total commitment to sustainable investments is now more than $5 billion.
The University of California’s endowment office this week also pledged $1.25 billion over five years to the Breakthrough Energy Coalition, the collection of billionaires who are pledging to back up any agreement at the COP21 climate talks in Paris with investment dollars to go toward clean energy research and development.
These are just a few of the actions from investors already thinking through their responses to climate change under the umbrella of new policy regimes after Paris.
Other significant changes are inspiring investors to channel more capital into climate change mitigation and adaptation work. Arguably, shifts in the technological landscape have made it easier to come to consensus on climate change and create the conditions for an international deal. As the prices for renewable energy continue to fall, cutting emissions has become much easier.
How exactly do we build a low-carbon economy? How can capital be channeled most fairly, justly and effectively to help the poorest and most vulnerable nations prepare themselves for massive changes in climate? Whether considering African nations’ worsening drought conditions, or small atoll states facing sea-level rise, there is tremendous need for investment in new energy, food and water systems to transition to a low-carbon economy.
There are already some answers to these questions, but new investment strategies and vehicles are needed, and more opportunities are arising across asset classes for doing so.
Sources:
- Michael Levi, “Two Cheers for the Paris Agreement on Climate Change,” Council on Foreign Relations, December 12, 2015, cfr.org/levi/2015/12/12/two-cheers-for-the-paris-agreement-on-climate-change/.
- David Victor, “Why Paris Worked: A Different Approach to Climate Diplomacy,” Yale e360, December 15, 2015, yale.edu/feature/why_paris_worked_a_different_approach_to_climate_diplomacy/2940/.
- Fred Pearce, “Landmark Agreement on Climate Is Reached in Paris to Cap Warming,” Yale e360, December 12, 2015, yale.edu/digest/landmark_agreement_on_climate_is_reached_in_paris_to_cap_warming/4609/.
- David Bank, “New York Pension Fund Tips $3.5 Billion Toward ‘Low Carbon Future,’” ImpactAlpha, December 5, 2015, com/new-york-pension-fund-tips-3-5-billion-toward-low-carbon-future/.
- Ewa Krukowska and Alex Morales, “The Five Key Decisions Made in the UN Climate Deal,” Bloomberg News, December 14, 2015, briefs.blpprofessional.com/document/GYuF50uZMMtRfLzPtSgXrg–_2dz1hcgkonuz12puvv4/front.
