U.S. Exit from Paris Agreement Changes Very Little

Economy

U.S. Exit from Paris Agreement Changes Very Little

Pavel Molchanov, Senior Vice President and Energy Analyst, comments on the United States' announced withdrawal from the climate change agreement.

June 2, 2017

President Trump yesterday announced – confirming press leaks from earlier in the week – that the U.S. will withdraw from the Paris Agreement on climate change, which was signed in December 2015 and took effect in November 2016. What does the decision to exit mean in economic practice, separate from the PR and diplomatic consequences? Here is the short answer: It means virtually nothing. Press coverage of this issue has (incorrectly) portrayed the president’s decision as an impactful and even pivotal policy step. But it is purely a matter of political symbolism, with no substantive read-through in terms of how energy is produced or consumed in the U.S. market. In particular, we would underscore that the trend visible across the U.S. power sector (coal losing share, natural gas and wind/solar gaining) will not be affected in any sense by the Paris withdrawal.

In and of itself, the Paris Agreement does not impose binding carbon emissions limits on any country. Part of the reason for the media’s excessive focus on this issue is an inaccurate understanding about what the Paris Agreement actually does. While Paris provides an overarching framework, each country’s pledge – the Nationally Determined Contribution – is not legally binding under international law. In some jurisdictions (notably the EU), the pledge is binding under domestic law, but in the U.S. that was never the case, because opposition in the Senate meant that Paris was ratified as an executive agreement by the Obama administration rather than a full-fledged treaty. The Obama administration’s pledge – reducing U.S. carbon emissions by 26-28% from 2005 to 2025 – was a political commitment, nothing more, nothing less. The EPA’s Clean Power Plan would have imposed a first-of-its-kind decarbonization mandate for the U.S. power sector (had the presidential election gone the other way), but the 26-28% pledge for the U.S. economy as a whole was never legally binding in U.S. law.

In theory, a major country’s withdrawal could have created a domino effect. But in practice, China and the EU have already reaffirmed their commitments. Because of the non-binding nature of Paris, even an outright “collapse” of the agreement – all or most countries withdrawing – would have had limited consequences in a practical sense. But in any case, the Trump administration’s decision was met with near-universal commitments by other countries to stay in. Just two weeks ago, Canada became the sixth G7 country to unveil a nationwide carbon pricing policy. This week, China and the EU – the world’s #1 and #3 carbon emitters – jointly declared that they will sideline the U.S. by partnering in various ways on decarbonization and clean energy investments. Collectively, China and the EU emit almost three times as much as the U.S. To be clear, the EU’s emissions trends – the peak was more than two decades ago – have no linkage to Paris whatsoever. China is the more important actor here, because its emissions have grown steadily until the past couple years, so it has a tougher task at hand. It is worth noting that China and India have not pledged a specific cut in nominal emissions, though they have promised to reduce their carbon intensity (emissions per unit of GDP). In both countries, the political push for decarbonization is amplified by the urgency of tackling the air pollution crisis that’s been largely caused by coal-fired power generation.

U.S. power sector “greets” this week’s decision by shutting down another three coal-fired power plants. We are quite sure that the timing is purely a coincidence, but it just so happens that 24 hours before the Trump administration’s decision on Paris, the two largest coal-fired power plants in New Jersey, as well as the largest one in Connecticut, were permanently shut down. In aggregate, the capacity of these three plants easily surpasses what’s currently in construction or development nationwide. This is a small but concrete illustration of the fact that the U.S. power sector’s shift away from coal is not due to the Paris Agreement, or even EPA policy, but rather a combination of underlying economics along with regulatory requirements in some states. This does not mean, by the way, that coal will lose share at a linear pace. For example, the past winter’s increase in U.S. natural gas prices has resulted in some fuel switching away from gas and towards coal, and so coal may well gain back a bit of share for 2017 as a whole (as had been the case in 2010 and 2013, also due to short-term commodity price dynamics).

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. Past performance may not be indicative of future results.



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