by Depending on who’s talking, the climate change agreement reached at the 2015 Paris Climate Conference in mid-December is either a watershed moment in environmental history or just another toothless framework. It’s certainly true that the political will of current and future national governments will play a large role in how much greenhouse gas emissions fall in the next two decades – and how much the global temperature rises as a result. Still, Credit Suisse says the deal’s very existence shows a growing international acceptance that the future should be a low-carbon one, and that paradigm shift will likely have a profound effect on a wide variety of industries. Getting 195 nations to approve the same text was nothing less than a historic diplomatic coup, particularly given previous failures. A climate agreement forged in Kyoto in 1997 covered countries that contributed just 55 percent of global emissions, but it failed to secure participation from the United States, the world’s second-largest polluter. Subsequent negotiations in Copenhagen in 2009 accomplished very little, in part due to China’s reluctance to commit to lower emissions. This time around, the country’s growing realization that its pollution problems could become a potent political threat paved the way for more cooperation.
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Ashley Kindergan considers the following as important: carbon emissions, Climate Change, COP21, environment, Paris, World Affairs: Features
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Depending on who’s talking, the climate change agreement reached at the 2015 Paris Climate Conference in mid-December is either a watershed moment in environmental history or just another toothless framework. It’s certainly true that the political will of current and future national governments will play a large role in how much greenhouse gas emissions fall in the next two decades – and how much the global temperature rises as a result. Still, Credit Suisse says the deal’s very existence shows a growing international acceptance that the future should be a low-carbon one, and that paradigm shift will likely have a profound effect on a wide variety of industries.
Getting 195 nations to approve the same text was nothing less than a historic diplomatic coup, particularly given previous failures. A climate agreement forged in Kyoto in 1997 covered countries that contributed just 55 percent of global emissions, but it failed to secure participation from the United States, the world’s second-largest polluter. Subsequent negotiations in Copenhagen in 2009 accomplished very little, in part due to China’s reluctance to commit to lower emissions. This time around, the country’s growing realization that its pollution problems could become a potent political threat paved the way for more cooperation. Getting the two largest polluters in the world finally on board is an unmistakable sign of progress.
The Paris agreement obliges signatories to offset all carbon emissions with an equal measure of carbon storage “sinks” sometime after 2050, and provides developing countries with $100 billion a year from developed countries starting in 2020 — all with a goal of keeping the global average temperature from rising more than 2 degrees Celsius above pre-industrial levels (and preferably well below that). But even if each country meets its self-imposed emissions goal, U.N. scientists still say the planet would still warm by 2.7 degrees – well above the target. The signatories are supposed to expand their ambitions during reviews every five years, which will also serve as an opportunity to name and shame countries that aren’t making sufficient effort. That said, there are no provisions to punish those who either fail to meet their existing goals or to set loftier targets.
Even without a legally binding agreement, Credit Suisse analysts who track environmental, sustainability, and governance issues say “the clear result [of the agreement] is that the energy balance will shift over time from fossil fuel sources to a mix of nuclear and renewables – solar and wind power.” Since it remains to be seen exactly how national governments will choose to meet their carbon emissions targets, it’s impossible to forecast with any certainty or specificity exactly what the effects will be on businesses and industries. Even at this early stage, however, it is clear that high-carbon industries such as utilities, mining, oil and gas, and car manufacturing have the most to lose from a greener future. Those that have already done some work to prepare for it, however, will be better positioned than those that have continued to plug away with fossil fuels and older, less efficient technology.
While the agreement does not bode well for utilities that rely on coal-powered electricity, those that have invested in building renewable resources or use other relatively green fuels such as nuclear power, hydropower, and natural gas are in a relatively good position. (Similarly, mining companies that are heavily exposed to coal would see the biggest strain from tighter regulations in the coming years.) Renewable energy companies stand to see the biggest boost from the deal. Credit Suisse estimates that as many as 1,600 gigawatts of additional solar power could come online over the next 10 to 20 years, which would imply additional investment of some $2.3 trillion.
Car manufacturers and airlines are in a similar position to utilities. As a group, carmakers have little pricing power to fund the research and development and capital expenditures necessary to develop cleaner vehicles, but companies with strong businesses in electric cars (Tesla) or hybrid technologies (Toyota) are better positioned. As for airlines, the U.N.’s International Civil Aviation Organization is already working on updated standards that would require new jets to emit 40 percent less carbon by 2020 than they did in 2000, and 90 percent less by 2030. If the European Commission were to introduce stricter standards on net aviation emissions in light of the Paris treaty, airlines that have invested in newer, more efficient planes (EasyJet) will be a step ahead in the game. Airlines such as Air France and Lufthansa, which have been slower to replace their aging planes, are destined to have to play a costly game of catch-up – something Air France in particular can ill-afford to do at the moment.
Oil and gas companies will obviously take a hit if governments issue tighter regulations that cause energy providers and other industries to turn away from fossil fuels – and that goes double if the nations of the world decide to implement a global carbon pricing system. The agreement in Paris acknowledged the need for such a system and even established the right for countries to meet their obligations by trading newly created assets called internationally transferred mitigation outcomes—essentially, buying the right to pollute from countries that can cut their emissions more than they promised. No system is in place to actually perform such trades, however, and the world is far from achieving a uniform global price on carbon emissions. Only a few countries and the EU have even experimented with the idea. Still, the gauntlet has been thrown, and a global pricing system would add significant implementation and ongoing compliance costs to oil and gas companies’ operations.
Even so, renewables alone can’t meet the world’s future energy demands, and oil and gas firms are likely to change rather than fade into the background. Some have already begun doing so. Most major energy firms have invested in solar, wind, and biofuels, and some even link executive pay to emissions. Even within the firms’ more traditional oil and gas businesses, natural gas is likely to take on a more important role relative to oil. In the United States, tough federal restrictions on coal, and the shale revolution, which unlocked abundant supplies of natural gas previously trapped in underground rock formations, have increased demand for natural gas. Credit Suisse believes the U.S. is likely to export a growing amount of liquefied natural gas in the future to energy-hungry countries, particularly in Asia. Credit Suisse’s analysts believe independent exploration and production companies in the U.S. and oil and gas majors with significant natural gas exposure such as Shell and Total in Europe are most likely to benefit from the ongoing shift from oil to natural gas.
Will the world change overnight after Paris? No – and in fact, it will take years to put an accurate dollar figure to the likely impact of the agreement on individual industries. Like any other secular theme, however, investors should keep emissions policies at the back of their minds, particularly when thinking about industries that are most vulnerable to tighter environmental regulations.