The Paris Climate Agreement Is Already Reshaping the World’s Economy. Ditching It Could Leave the US Behind
After months of delays, many expect President Donald Trump to follow through with his campaign promise to pull the US out of the 2015 Paris climate agreement (the imminent announcement is practically a done deal, according to reported leaks). While many establishment Republicans have pushed for the … let’s say, Parexit, a surprising number of US businesses opposed the decision, on grounds that it will weaken the US’s global competitiveness.
Among the most surprising combatants are oil giants like Exxon and Shell. Exxon’s new CEO, Darren Woods, even wrote Trump a personal letter urging him to stay in the agreement. It’s not that Woods and the other big oil magnates suddenly saw some polar bears and had their hearts grow three sizes; they are worried about a change in the global economic climate. See, most of the world has promised to transition to low carbon, and eventually carbon-free, energy sources. Many economists and industry insiders say the US will get left behind as the rest of the world transitions to a clean energy economy.
Since last April, almost every country on the planet has signed the Paris climate agreement, a collective effort to limit global warming to 2˚C and try to keep it as close to 1.5˚C as possible. Exceptions include Syria (mired in a civil war) and Nicaragua (didn’t think the Paris agreement was strong enough!). Each country submitted a commitment to reduce its overall greenhouse gas emissions, forging a sort of collective promise to share the economic burden of transitioning away from fossil fuels. The agreement is globally appealing because no single country wants to sacrifice prosperity or see its rivals gain an unfair advantage. “In order to reduce greenhouse gas emissions, you have to restrict certain types of economic activities,” says Rod Godby, the director of the University of Wyoming’s Center for Energy Economics & Public Policy.
Take the US. America promised a 26 to 28 percent reduction of 2005 levels by 2025. Part of getting to those numbers was enacting the Clean Power Plan. It puts heavy restrictions on emissions from coal power plants in an attempt to make coal-generated electricity more expensive, and therefore incentivize power companies to invest in cleaner energy sources. Obama’s Climate Action Plan detailed numerous other efforts—better fuel standards, home insulation requirements, forest protections—to tip the scales in green energy’s favor.
Trump has promised to kill the Clean Power Plan, and he signed an executive order that rolls back much of the Climate Action Plan. He seems to want to get rid of all the regulations, regardless of how he swings on the Paris agreement.
But all this regulatory reversalism might be for naught. Photovoltaic and wind energy are now both cheaper than coal, so long as the sun is up and the wind is blowing (and new large-scale battery technology could make erase these intermittency issues). Given enough time, renewables could outscale fossil fuels.
And the real change agent has been natural gas. Fracking has made gas so cheap that both coal and oil have lost market share to it. “Wholesale changes in economy happen over time naturally; look at historic evolution of different fuel sources,” says Godby. “But in the past, these changes have been market driven, and this agreement seeks to drive and accelerate them by social choice.”
Natural gas is a fossil fuel, yes, but it emits way less carbon dioxide than coal or oil—though it emits a lot of methane, another potent greenhouse gas. Still, natural gas is an important bridge for countries transitioning fully to renewables. Obama’s regulations—and the Paris agreement—were all about giving these maybe-already-happening market changes a little extra oomph.
Trump is not about all that. His “America First Energy Plan” has few details but a very clear message: Save coal, save oil, fossil fuels rule! But there is a paradox at play here. Trump’s fossil fueled deregulatory agenda will actually crimp oil and coal domestically, and ditching the Paris agreement could damage US natural gas producers’ ability to sell their volatiles abroad.
Oil has been on the mend lately—back to nearly $50 a barrel—but is still recovering from a massive slump. Again, blame natural gas, not regulations. “The collapse of the oil price which occurred early last year was really a function of market forces and technological innovation in the fracking sector,” says Tom Sanzillo, the director of finance for the Institute for Energy Economics and Financial Analysis. “The problem isn’t regulations; it’s that the market is oversupplied,” says Sanzillo.
Not to say that the Paris agreement isn’t putting a hurt on oil. “If you are a Texas oil company with lots of energy exports, you have to consider what will happen in the rest of the world,” says Godby. Two weeks ago, shareholders for Occidental Petroleum made history by voting that the company research and report how global climate regulations would hurt its business. Today, while everyone was waiting to see if Trump would pull the trigger on Paris, shareholders at Exxon did the same thing. Exxon!
Natural gas and fracking—not regulations—also usurped King Coal. Coal was never a really big mover on the international stage (except during China’s boom years), and US production peaked back in 2007. In February, this trend—along with both China and India’s major commitments to renewables—prompted Goldman Sachs to publish a report on coal’s irreversible decline.
As for renewables, pulling out of Paris could cut the US out of an explosively growing market. China, India, and other growing economies have pledged billions towards renewables. The competition may have already begun. In April, Atlanta-based solar panel company Suniva filed for bankruptcy, citing an unfair advantage by Asian competitors. Adding to the drama, a Chinese wind company recently offered to teach US coal workers how to be turbine technicians. That’s the kind of thing that’ll make you want to yell out Covfefe!