Decarbonization Beyond Paris and Marrakech

By Joe Madden

The surprise of Donald Trump was felt across the world — perhaps in Marrakech, Morocco, at COP22 most of all. President-elect Trump has said he will “cancel” the Paris Agreement that was hailed as a breakthrough for humanity less than a year ago.

I happened to be in Marrakech during the U.S. presidential election, and there was a tangible pall in the air the morning that the results came in. Since that time, there has been a tremendous amount of valuable analysis of the potential paths a Trump administration might take on climate, and even the best-case scenarios appear a setback from the alternative outcome.

Beyond analysis of scenarios going forward, it is worth looking at some of the core drivers behind decarbonization beyond high-level policy or regulation.  Signs pre-dating the U.S. election signaled that momentum and resolve may be such that U.S. actions — even in a worst-case scenario -- may not be as devastating to global climate action as immediately perceived. Sound data suggests that elemental market forces, not political or regulatory action, are driving the trend toward decarbonization. The market key forces driving de-carbonization are twofold and consist of (a) unit economics and (b) risk.

Regarding unit economics, coal’s biggest challenge is economics, not climate-related policy or regulatory actions. Its demise is due to the abundance of natural gas which is a lower-priced alternative (that happens to be less carbon-intensive as long as methane leakage associated with its use remains less than 3.2 percent). Second, the cost of renewable energy, particularly solar, is decreasing rapidly. While solar has benefitted from subsidies to date, the percentage of solar power generation in the U.S. now exceeds that of coal. Coal is simply becoming less and less competitive on a cost basis when compared with its alternatives.

Risk is more nuanced, but it increasingly factors into the large-scale move toward decarbonization through the allocation of capital. Investors, particularly institutional ones, hold large asset allocations across all sectors of the economy and geopolitical regions within their portfolios. As evidence of resource constraints -- beginning with carbon — become increasingly apparent and quantifiable, the risk associated with action in the form of political, regulatory, or stakeholder (shareholders, customers, etc.) action to address those resource constraints is increasing. This creates a direct correlation between carbon intensity and financial risk.

This link is acknowledged by the world’s largest asset holder BlackRock. Groups like CarbonTracker, CDP, Ceres, and many others are developing increasingly sophisticated ways to analyze, report and communicate this risk in a format that investors and global markets can digest.

I do not mean to downplay the importance of the Paris Agreement (or the value of sound climate policy and regulatory approaches broadly). It is an incredibly important global agreement and worth embracing for many, many reasons. In the case of risk, the Paris Agreement provides a “North Star” citing a scientific 1.5- to 2-degrees Celsius target.

This target, in turn, allows for the development of science-based GHG targets within each sector. Then, institutional investors can begin to compare the performance of companies within a given sector based on their exposure to carbon risk (i.e., their respective carbon intensity per unit of revenue or profit). This creates competition among companies to demonstrate reduced exposure to carbon risk by demonstrating decarbonization.

Disruption of the Paris Agreement does not change scientific reality. From an investor perspective, a void at the al level could lead to a myriad of less uniform efforts at the subnational level, actually creating more uncertainty (read: even more “risk”) for investors. This means that pressure for multinationals to decarbonize all aspects of their operations and products is likely to continue.

Time will tell, but the reality of scientific constraints means that global markets will find a way to incorporate the cost of GHG emissions.

Image credit: Flickr/wbr_deluz

Joe Madden is the CEO @ EOS Climate