The Paris Agreement: What does it mean for business?

Eiffel tower - ©Yann Caradec

After so many years of trying, it had finally been achieved. The delegates who had actually negotiated the deal were euphoric when the COP President, France’s Foreign Minister, Laurent Fabius brought down his gavel and pronounced the Paris Agreement adopted, their cheers filling the cavernous plenary room at Le Bourget where the negotiations were held.

Now that the dust has had time to begin to settle, was that euphoria justified? What’s the actual significance of the agreement, especially for business and investors which are central to making the transition to a low carbon economy happen? Is it job done for climate change, or are the critics right – does it not come close to ensuring that dangerous climate change will be averted?

Overall significance

It’s easy to find fault with the agreement. While parts of it are legally binding, the overall agreement is not (not least so the White House does not have to ask the climate-sceptic US Congress to ratify it). It contains no binding emissions reduction targets; no penalties for inaction; no independent review of implementation; and the financial support committed to developing countries to mitigate and adapt to climate change is a drop in the ocean compared to the scale of the need.

However, the biggest achievement of the agreement is political. The long-term goals signed up to in the agreement send a clear message to business that 195 of the world’s governments are significantly and collectively increasing their level of ambition to mitigate climate change. With their goal to achieve zero net emissions by the second half of the century, they are signalling that the era of unabated fossil fuels is being brought to an end.

The Paris Agreement is also the first global agreement on climate change that involves contributions to act by all countries – resulting in a tapestry of measures that will place countries well down the path towards a low carbon economy.

So, is it enough? No, but it’s a major step forward. Five key elements of the agreement support that claim, as set out below accompanied by the relevant text from the agreement.

Key outcomes

1) Long term goals

The Paris Agreement contains two crucial long term objectives which governments have signed up to: one relates to stabilising global temperature and the other to emissions.

(a) Global temperature

"This Agreement… aims to strengthen the global response to the threat of climate change, by: Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels."      Article 2

This signals a huge step-change in ambition. It has taken at least 10 years to make headway in persuading governments to accept 2°C as a target to keep temperatures belowEndorsement of the aim of limiting temperature rise to 1.5°C came as a surprising leap in ambition.

Achieving 1.5°C will be a huge challenge – not least as warming of nearly 1°C has already happened. As the Centre for International Climate and Environmental Research (CICERO), concludes, keeping below 1.5°C with a likely (66%) chance implies a very, very small remaining carbon budget. Using the IPCC’s cumulative emission budget published in their synthesis report, we have about 400bn tonnes of CO2 to emit before 1.5°C is exceeded. At current emission rates, that budget will be spent by about 2020.

To emit for longer will require the widespread deployment of technologies that enable negative emissions. So not only will the pace of renewables deployment and demand reduction have to be stepped up dramatically, but large-scale deployment of carbon capture and storage (CCS) and burning biomass with CCS to draw CO2 out of the atmosphere will be necessary – which has widely recognised challenges. It will also require action to reduce short-lived climate pollutants, like soot and methane, which on their own could add 0.5°C of warming.

While this will be enormously challenging, it will also create huge opportunities – the International Energy Agency concludes that achieving temperature increases “well below” 2°C will require $16.5 trillion of investment by 2030, representing a major new market for green business.

(b) Global emissions

"Parties aim to reach global peaking of greenhouse gas emissions as soon as possible… and to undertake rapid reductions thereafter… so as to achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century."    Article 4

This objective would essentially take the world to zero net emissions. The timing of this goal could be debated, especially in light of the 1.5°C target. But it signals that emissions will only head downwards towards zero from now on, and so businesses and investors should invest accordingly. It is likely to prompt more and more businesses to look at how they themselves can aim for net zero emissions, further driving the pace and scale of change.

2) Intended Nationally Determined Contributions (INDCs)

"Each Party shall communicate a nationally determined contribution every five years."    Article 4

This commits governments to generating plans that should collectively put the world on track to achieving the long-term objectives governments have signed up to. This bottom-up approach to the development of climate-related commitments has already seen the submission of plans from 188 governments covering 90% of the world’s emissions.

These plans include an array of targets and measures that commit countries to developing low carbon economies – such as the EU target to achieve a 40% cut in emissions below 1990 levels by 2030; the US target to achieve a 26-28% cut below 2005 levels by 2025; and China’s target to peak emissions no later than 2030.

Businesses can use these plans to guide their investment decisions. Andas countries start to implement their plans, huge new investment opportunities in the low carbon economy will be created.

It won’t come as a surprise that the current INDCs do not go far enough. One widely cited study estimates that they will only keep global temperature rise to 2.7°C. But this is acknowledged in the agreement, which:  

"[n]otes with concern that the estimated aggregate greenhouse gas emission levels in 2025 and 2030 resulting from the intended nationally determined contributions do not fall within least-cost 2˚C scenarios … and also notes that much greater emission reduction efforts will be required."   Preamble

Which is why the next key element of the Paris Agreement is so important.

3) Five year reviews

"The Conference of the Parties… shall periodically take stock of the implementation of this Agreement to assess the collective progress towards achieving the purpose of this Agreement and its long-term goals (referred to as the “global stocktake”)… [It] shall undertake its first global stocktake in 2023 and every five years thereafter."   Article 14

This provides a critical mechanism to ratchet up the ambition to meet the long term targets every five years – a key ask of the European Union in the negotiationsUsefully, the text also bans countries from backsliding in their 5 yearly reviews. This review process is closely linked to the next key element of the Paris Agreement

4) Transparency and accountability

"Parties shall account for their nationally determined contributions…. Parties shall promote… transparency, accuracy, completeness, comparability and consistency, and ensure the avoidance of double counting, in accordance with guidance adopted by the Conference of the Parties."  Article 4

This helps ensure that governments’ reports on progress in implanting their plans, which are required every two years, use the same methodology – which is essential for reporting to be meaningful and for accountability to be possible. The United States delegation was particularly focused on ensuring this was included in the agreement in Paris.

5) Finance

"Developed countries intend to continue their existing collective mobilization goal through 2025... prior to 2025 the Conference of the Parties… shall set a new collective quantified goal from a floor of USD 100 billion per year, taking into account the needs and priorities of developing countries."  Preamble

This represents an important commitment to support action in developing countries to adapt to climate impacts and develop low carbon energy systems. The OECD estimates that $62 billion has already been pledged by developed countries so far towards the goal governments agreed in Copenhagen in 2009 to invest $100 billion per year by 2020.

The Paris Agreement confirms that there will be a new goal to provide more than $100 billion per year from 2025. Of course, the scale of overall investment needed in low carbon technology to make the sort of transition required by the long-term goals dwarfs this amount. And the text remains silent on how or through which mechanisms these funds will come. But used wisely, this level of funding could play an instrumental role in creating clean technology markets globally, leveraging far greater private sector investment, and enabling innovation to take place which reduces the cost of low carbon technology.

The agreement acknowledges the importance of supporting innovation:

"Accelerating, encouraging and enabling innovation is critical for an effective, long-term global response to climate change and promoting economic growth and sustainable development. Such effort shall be… supported … by the Financial Mechanism of the Convention, for collaborative approaches to research and development, and facilitating access to technology..."  Article 10

This provides a very welcome impetus to step up investment in innovation in low carbon technologies, helping ensure it becomes more widely affordable, a critical ambition. This is one area where progress was given a further boost by the international Mission Innovation initiative launched at the COP, in which leading governments have pledged to double public investment in clean energy innovation, as well as the Breakthrough Energy Coalition initiative to provide patient capital at unprecedented levels for early-stage technology development.

Implications for business

While far from perfect, overall the Paris Agreement will help create greater opportunities and risks for business. It will help create larger markets for low carbon technologies and services, which will be a huge source of future revenue and jobs. But it will also help create risks for organisations that don’t change – fossil fuels will no longer look like a safer, cheaper and less risky bet. No surprise then that since the agreement was reached in Paris, coal stocks have fallen.

Ultimately, Paris should provide confidence to businesses and investors that the move to a low carbon economy will happen, driving a massive realignment of investment towards low carbon technologies, potentially unlocking trillions in capital for clean energy. The size of the prize was underlined starkly in Paris by John Kerry, the US Secretary of State, who said this shift towards a low carbon economy was among the “greatest economic opportunities the world has ever seen.”

Why now?

This major step forward did not happen by accident. The French Government with the support of the UN climate secretariat managed the negotiation process with great skill. The best of French diplomacy managed to chart a path through 23 years of entrenched positions, anticipating and finding solutions to potential roadblocks in advance, conducting talks in small blocs and bringing in heads of state by phone at critical moments.

More importantly perhaps, the politics of climate change have changed. There has been unprecedented US leadership on the issue with sustained Presidential level focus, with bilateral engagements which notched up some significant wins ahead of Paris (notably with China, resulting in the latter’s pledge to launch national carbon trading system as early as 2017).

China itself has switched sides in the UN climate process, becoming a force for progress. The change in leadership in Canada and Australia has also ensured those countries have left the ranks of the laggards. Even Russia pledged not to stand in way. The EU also played a constructive role, leading the creation of a high ambition coalition in Paris – involving 100 countries (from the smallest of island states to the US and Brazil) – which helped drive the outcomes we have seen on issues like long-term goals.

Also critically important are the major buttresses supporting a strong deal that have been put in place by non-state actors: cities (through initiatives like the C40), corporates (through initiatives like the UN Caring for Climate Initiative – in which 450 CEOs from 65 countries committed to targets), investors(though initiatives like the Breakthrough Energy Coalition), Multi-lateral Development Banks (several of whom have pledged to double their spend on action on climate change), as well as social, cultural and religious leadership (though initiatives like the Pope’s Encyclical).

What next?

In April next year, governments are being invited to sign the Paris Agreement at the UN Headquarters in New York and ratification of the agreement then needs to have taken place by 55 parties or by countries representing 55% of global emissions for it to come into force by 2020.

Meanwhile, governments need to turn their focus towards implementation – to make good on the promises they have made in Paris, to enact the policies and provide the support which will drive change to take place on the ground. In that respect, organisations like the Carbon Trust remain willing and ready to continue to help turn pledges into action, not just in the UK, but around the world, so that the objectives set out in the Paris Agreement can come closer to being realised.


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