Catch 22: The UN climate conference and the Republican elephant in the room

On November 7th, COP22, the follow-up session to last year's Paris UN Climate Change Conference, kicked off in Marrakech.  The mood was upbeat, riding on a wave of momentum from the signing of the Paris Agreement by over 190 countries and recent announcements by the United States and China to formally ratify the agreement.

Then, on November 8th, Donald Trump became the president-elect of the United States of America.

One of Mr. Trump's first moves as president-elect was to appoint a leading climate-change denier to head the U.S. Environmental Protection Agency (EPA) transition team, sparking waves of trepidation amongst the group assembled in Marrakech.  Insider reports suggest that talk about the effect of a Trump presidency on climate policy "completely consumed the place" as many have wondered whether this election signals the end of an era of U.S. leadership in the global fight against climate change.

Morocc-ing the boat
The diplomats in Marrakech could be forgiven for taking such a bleak view on the results of the U.S election.  In addition to appointing Myron Ebell as head of the EPA transition team, Donald Trump has given them plenty to worry about.  The Trump campaign made several statements concerning America’s climate commitments, including exploring an exit of the Paris Agreement and, on the domestic front, striking down the proposed Clean Power Plan (CPP) introduced by the Obama administration.  Others fear he may abolish or redirect funding away from the EPA entirely. Additionally, Mr. Trump has already indicated he would axe methane emissions standards in the country and promised a renaissance for the U.S. fossil fuel industry. In Marrakech, much of the concern was centred around the chain reactions of other major polluters such as China and India should the United States fail to fulfill its commitments.

Clearing the air
From the perspective of climate change and clean energy advocates, these are certainly concerning promises to hear from a new American administration. In reality, the situation may be much rosier than it originally appeared.

The new administration will find it difficult to deliver on much of what it has promised.  The Paris deal struck last year binds the United States to the accord until 2020, providing limited options in the near-term.  Given that waiting may be a politically unappealing choice, the alternative would be a more drastic move: completely exiting the underlying diplomatic structure for the Paris Agreement, the UN Framework Convention on Climate Change.  Some speculate, however, that exiting the UNFCC, which dates back to 1992 and was ratified by George H.W. Bush, would require a fight in the Senate and would lose the United States much credibility in any global deals it hopes to strike in the future. 

It is unclear if the new administration will have the will to push through such difficult changes, or whether they will prefer the less combustive route of ignoring the accord completely.  It is also worth mentioning that it seems Mr. Trump has altered his opinion on climate change several times in the past. In 2009, he was a signatory on an open letter asking for ‘meaningful’ climate change policy.  In 2012, he tweeted that “the concept of climate change was created by and for the Chinese in order to make U.S. manufacturing non-competitive”.  Just days ago, in an interview with The New York Times Mr. Trump said he now has an “open mind” about the Paris Agreement and that there is “some connectivity” between human activity and climate change. Perhaps he will be open to compromise.

A climate of uncertainty
Whether the United States stays or goes will probably not make a major difference. A departure would be mainly symbolic.  The reality is, in or out, the new administration is not likely to be a leader in tackling climate change through policy. This will mean more pressure on rest of the world, especially poorer countries, to go it alone.

The good news is that it appears the rest of the world will keep on with or without America.  Despite initial fears, it has become clear these are no longer the days of the Kyoto Accord.  China and India have repeatedly affirmed their dedication to combatting climate change even in the face of a U.S. exit. It is not hard to see why.  Both countries have significant vested interest in tackling air pollution and mitigating the risks posed to their populations by the inclement weather that would come with a temperature change above the 2-degree threshold.

While a global climate change agreement would be made stronger by American leadership, it appears the rest of the world will be willing to take up the reins and trudge onward.

What does this mean for Energy?

1.      This is not the death knell of wind and solar in the United States
Regardless of the direction taken by the new administration, it is unlikely that this will signal an end to the movement that saw renewable energy investment surpass that of all other fuels for the first time in 2015.  The Clean Power Plan may be sunk, but that may not matter.  Much of the regulation relating to solar and wind energy sits at the state-level, not the federal. Many environmental regulations that could be the target of roll-backs have previously been challenged and upheld in the courts, giving them a legal standing of their own which could take years to reverse. 

Additionally, it is hard to argue with the economics of renewables.  Growth in these technologies has been based primarily on the attractiveness of their business case and heavily funded by the private sector, not through subsidy and policy.  Solar and wind are increasingly competitive against traditional fuels and costs continue to fall.  What tax breaks these technologies have received enjoyed support on both sides of the aisle in Congress when they were last renewed in 2015.  Kansas, Texas, and Oklahoma – home to 6.3M (10%) of the president-elect’s supporters - are the main beneficiaries of these subsidies.  The renewables industry now employs 2.5M people in the United States, a figure that would be hard to ignore by the candidate who ran on a platform of job creation.

You can expect renewables to grab an increasing share of the energy mix over the next 4-year term, and beyond.

2.      Conversely, this may also not be the boon for U.S. fossil fuels that was promised
The focus of the Trump campaign’s plan to revitalize the American fossil fuel industry centred around coal and fracking.  Unfortunately, there are some harsh market realities standing in the way of realizing this growth, regardless of who sits in the White House.

Mr. Trump has pledged to open more public lands for mining and make coal more competitive.  Sadly, it is not the lack of resources that American coal miners suffer from, but cost competitiveness against lower cost and cleaner fuel alternatives, which ironically includes natural gas from shale.

On the topic of shale, it is important to remember that the deregulation of the fracking industry and fuel exporting will only provide benefits if global prices are high enough to support production in the first place.  As it stands now, capacity growth in America might only further contribute to the global oversupply that is depressing prices.

Dec 1, 2016 by: Andrew Dean, MBA2018