What to make of the Paris Climate Change Agreement
In December last year 195 countries came together in Paris as part of a United Nations initiative to discuss a new climate change agreement.
Under the agreement achieved at the meeting, global warming is targeted to be limited to between 2.7 to 3.5 degrees Celsius (C) from 2020. This is higher than the 2C target set at the previous agreement reached in Copenhagen in 2009.
However, countries have also agreed to regularly review their emissions reductions with the objective of limiting temperature increases to below 2C. Countries agreed that greenhouse gas emissions should peak as soon as possible, and a balance between sources and sinks of greenhouse gases should be achieved in the second half of this century.
One of the biggest surprises of the Paris talks, however, was the acceptance of a call from small nations that are most vulnerable to climate change that warming should be halted at 1.5 degrees Celsius. This acknowledgement does not, however, change the 2.7C to 3.5C agreement.
Going into the conference, those who were sceptical of international agreements might have expected a watering down of the 2C target. The fact nations agreed to try to achieve a smaller increase in rising temperatures (1.5C) puts significant moral and political pressure on countries to increase climate change initiatives.
A number of other agreements were also negotiated at the same time the main agreement was formulated. Countries attending the meeting agreed to pursue individual targets, to be reviewed every five years, and to create domestic measures to achieve them.
Nations also agreed to report regularly on their emissions and the progress made to achieve them, with the expectation of improvements. The path for achieving a low-carbon economy will depend on each country’s policy decisions.
Consequences of the agreement
The focus on achieving a temperature increase of less than 2C means countries will have to set more ambitious emission reduction goals. This applies to Australia, the European Union, Canada, Japan and South Korea but not the US.
An increase in Australia’s emission reduction target is likely to require a further increase in the amount of renewable energy and a higher renewable energy target. It’s also likely to prompt an increased focus on energy efficiency, especially in buildings.
The Paris agreement will also increase pressure to retire coal-fired generation globally, and will potentially prompt earlier retirement for some coal-fired generators than currently planned. Also expect a potential decline in electricity demand, which could impact electricity infrastructure.
With the Paris agreement achieved, the focus for investors should be on the effect on markets of domestic policies to achieve emission reduction targets.
These policies are likely to include further emission reduction targets, and steps to prepare for the expected impacts of climate change under a 2C or 1.5C scenario.
As part of the Paris agreement, a working group was established to give guidance on features of climate pledges and economy-wide greenhouse gas accounting. This is important because consistency on greenhouse gas accounting offers policymakers a comparable baseline between countries to implement climate policy such as carbon pricing in the future.
Importantly, parties engaging in international emissions trading will also need to avoid double counting of emissions or emissions reductions that occur in one country that are then “sold” to another country.
The first global stocktake of how well the agreement is being implemented will take place in 2023, with further stocktakes every five years thereafter. Countries need to submit new targets every five years, starting in 2018, with the clear expectation that the targets will represent progress beyond previous targets.
So what’s the significance of the agreement for SMSF investors? The agreement provides a clear signal the transition to a low-carbon economy is underway and the intention is to speed up the process. Expect an increasingly negative outlook for thermal coal miners and oil sands producers and associated rail, port and pipeline infrastructure.
There are a number of considerations stemming from this for SMSF investors. Questions need to be answered about who is going to pay for mitigation and adaptation strategies. Additionally, more work needs to be done to develop technology and policy capacity, elements that should also be factored in by SMSF investors when determining asset allocations to energy investments and businesses that rely on energy inputs.