Keeping the Lights on in the City of Light
• U.S. participation is one way the Paris climate talks differed from those of previous decades
• The drive to reach emissions targets will likely result in new regulations
• Some companies use internal carbon prices in their long-term business plans
Extreme weather cost the U.S. an estimated $100 billion in 2012. A report commissioned by G7 members noted climate change is “a global threat to security in the 21st century” and identified seven key risks. Many nations are making environmental policy changes but so far these changes are not enough to help the planet prevent a 2°C rise in temperature relative to the preindustrial period. Why 2°C? According to scientists, that increase would lock the planet into a future of extreme storms, droughts, food and water shortages, and rising sea levels. That’s why politicians met in Paris with the goal of cobbling together a climate change pact that would cut greenhouse emissions and slow the rise in global temperatures.
Committing to Change
Climate change talks have been going on for decades, so why is Paris different? First, until now the U.S. mostly sat on the sidelines (such as for the Kyoto Protocol). Second, in the months leading up to COP21 in Paris, nations developed pledges to prepare for the negotiating table and start chipping away at that 2°C rise. China unveiled a 16-page plan to reduce its fossil fuel emissions by 2030 and the U.S. and Brazil pledged to increase electricity generation from renewable sources to 20% by 2030. The Obama administration is making climate change a priority through its Climate Action Plan initiatives such as the Clean Power Plan, ambitious CO2 targets, and measures to increase access to solar energy.
There appears to be genuine commitment from heads of state such as Angela Merkel, Xi Jinping, and Narendra Modi to effect real change with binding goals and emissions targets. Leaders seem ready to acknowledge this is an issue with implications for humanity, public health, national security, and finances.
Business leaders converged in Paris to discuss how the private sector can contribute; many companies made pledges of their own. As Ceres President Mindy Lubber stated, “The issue with climate change is also one of the greatest financial risks facing us, which is why companies and investors are acting—and acting now in greater ways than they have before.”
Moving the Needle: Whose Responsibility Is It?
The agreement commits the world to hold the increase below the 2°C rise but to also limit the temperature increase to 1.5°C above pre-industrial levels and does so through four components: a legal agreement, national greenhouse gas emissions reduction contributions for 2025-2030, an economic plan, and concrete commitments by non-governmental groups to help execute the plan. Key aspects of a strong climate agreement at the end of this two-week meeting include climate finance, agreement on verification, creating a dynamic of international peer pressure, and unanimous consent:
- Climate finance is partially an equity argument put forth by developing countries. Why should they have to contribute when they aren’t responsible? Many say the money could be better spent helping the poor in their respective countries. The Paris agreement incorporated both adaptation ($100 billion minimum per year for developing countries to adapt to climate change) and the controversial loss and damage clause.
- Verification is important because the pledges cannot violate individual countries’ sovereignty. Nevertheless, everyone wants to ensure there is an apples-to-apples comparison on countries’ emissions reports as well as data credibility. This is especially important in light of a recent report showing that China burned up to 17% more coal a year than it previously disclosed.
- All the plans put forth by countries are voluntary to avoid the hurdles that come with official treaties, but must be revised every five years. Additionally, beginning in 2018, the UN will evaluate the pledges to determine the progress made in reaching peak emissions “as soon as possible.” The hope is that countries will lead by example, especially those with the largest economies, and this will create a dynamic of positive peer pressure.
- Any new measure must pass with unanimous consent; while some feared that smaller member nations could act as wild cards and derail the proceedings, in the end all 195 countries committed to curbing emissions.
Challenges and Opportunities Ahead
In the months post-COP21, the pressure will be on for companies to figure out how they can cut emissions and go carbon neutral. This could be accomplished by looking up and down supply chains or finding other internal efficiencies. Efforts could add to costs in the short term, which could prove especially difficult in struggling industries. Buying renewable remains a challenge for many companies, despite falling costs; Rocky Mountain Institute is one organization that helps guide businesses through the complicated landscape.
The drive to reach emissions targets will likely result in new regulations. Shippers, for one, anticipated a carbon levy, and while that may not materialize immediately, could still play a very real part in the future as companies and countries take measures to decrease emissions. Yet the Paris agreement and subsequent goals and regulations can provide clarity for decisions on long-term investments, risks, and growth opportunities—giving the private sector the tools to effectively create the low-carbon economy. The CEO of Shell stated that governments should set prices for carbon to shape companies’ and consumers’ behavior and motivate technological innovation; Shell and multiple other companies already use internal carbon prices in their business plans. After COP21, new scrutiny will likely cause companies and investors to examine how they calculate financial risks associated with fossil fuel assets and other impacts of climate change.
Some companies see getting involved as an important business opportunity and a way to be part of a new industrial revolution as we increase renewable energy production through capital and capex decisions. Citi established a target of $100 billion for clean energy lending over the next decade; it financed $27 billion for clean energy just last year. Similar to the dynamic of international peer pressure as a part of the COP21 agreement, companies can motivate each other to prioritize sustainability. This could entail beefing up in-house sustainability strategies and engaging in environmental advocacy, as Unilever, Nike, and Patagonia have done.
The road ahead from Paris is unclear, but for the first time, government and business leaders have come forward to effect change and hopefully keep the lights on in Paris, and everywhere else, in the years to come.
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