The Paris Agreement: 10 Key Takeaways for the Global Energy Landscape

Last Saturday in Paris, after two weeks of intense negotiations, delegates from nearly 200 countries approved a historic agreement to address climate change. With a small team from RMI, we were part of the so-called COP (Conference of Parties), and followed the negotiations from close up. In our mind, the Paris agreement represents a tremendous breakthrough in the fight against climate change. The deal struck in Paris represents a substantially better outcome than expected, and I—along with many others—was ecstatic with the agreement’s explicit goal to keep the global temperature rise well below 2°C by 2100, pursue efforts to limit the temperature increase to 1.5°C, and aim for net-zero carbon emissions by 2050.

Under the agreement, 195 countries attending in Paris (including all of the major greenhouse gas emitters) have set national targets for reducing greenhouse gas emissions (referred to as INDCs or “intended nationally determined contributions”). The old division, where the burden of emission reduction fell unilaterally on the developed world, has made place for a world where all countries are committed to take action. Over time, the impact on the global energy system will be enormous. Here are some of my observations of the likely impacts on the energy landscape:

1. Direction of Travel

Business leaders and boardrooms around the world will see the agreement as a clear indication of a new “direction of travel.” In particular, the overall goal (well below 2°C), the long-term decarbonization ambition (after the middle of the century), and the broad enthusiasm for the agreement around the world will accelerate the move towards a low-carbon energy system. Many countries will set stronger enabling policies, but there remains an equally critical role for markets and the private sector to seize this opportunity, develop solutions, and scale them. This is where we at Rocky Mountain Institute and Carbon War Room have focuses—and will continue to focus—our efforts.

2. Price on Carbon

The agreement does not formalize a price on carbon, and it will take a while before we make further progress on creating a carbon market on a global scale. But with China putting a cap-and-trade system in place by 2017, and the U.S. Clean Power Plan being implemented in numerous states through a cap-and-trade mechanism, I think we will see an accelerating trend towards carbon pricing around the world.

3. Other Government Policy

Government policies, commitments, and plans proposed under the plans that countries submitted (called INDCs) are clearly going to create momentum for an energy transition around the world. Impact will vary by country and sector, but it will all be pointing in the same direction—towards lower carbon. The ratchet mechanism, which asks that most governments (although not those of the least-developed countries) reassess their commitments by 2018 and adjust them upward as we increase the ambition, will help keep continued pressure on national governments to strengthen their policy instruments.

4. Long-Term Plans

The agreement specifically calls for countries to put in place and keep up to date long-term, low-carbon growth plans. Although a bit broader in scope than our Reinventing Fire work, it obviously creates a potential market for helping countries make specific detailed plans. Critical will be to make sure that these are specific plans, with detailed implementation steps, not just vague conceptual stories. Developed countries will help fund this in developing countries through the GGGI (Global Green Growth Institute).

5. Pace of Innovation

Early on in Paris, governments and a number of billionaires announced a global collaboration to drive innovation in energy. Between Mission Innovation (doubling of government clean energy research and development) and the Breakthrough Energy Coalition (with 26 billionaires committing to invest to help commercialize new ideas) we are likely to see a new dawn for cleantech start-ups and energy innovation.

6. Stranded Assets

The Paris agreement is likely to intensify the debate around stranded assets (particularly in coal and in government fossil fuel reserves). Of course, one can discount the goal of decarbonizing the economy past 2050, but it is part of a global agreement and will result in significant action in that direction. Concerns about the unburnable fossil fuel reserves will increase.

7. Cost of Capital

Immediately following the deal on Monday, stock markets pushed the prices of publicly traded coal companies down, and of renewable energy companies up. It will be interesting to see to what extent this immediate market reaction is an early indication of a longer-term shift in the cost of capital for different categories of energy technologies.

8. International Finance

Following the Paris agreement, there is a significant amount of international climate finance available for the least developed countries from developed country governments, from the Green Climate Fund, and from other multilateral lending institutions. The pressure is on to make sure that this money is appropriately invested in solid projects and sensible investment opportunities, covering both mitigation and adaptation.

9. Local Leadership

Mayors and local government leaders had a powerful presence at the COP. The Mayor of Paris, Anne Hidalgo, teamed up with former New York City Mayor Michael Bloomberg to host a big conference where local leaders were able to showcase their crucial role in leading the energy transition. Many local governments and cities have defined ambitious plans to peak their emissions early, and are practically focused on “getting things done.” One great example is the announcement of the City of San Diego, immediately following the Paris deal, to commit to 100% renewable energy by 2035.

10. Remaining Gaps

Disappointingly, strong language calling on the global shipping and aviation industries to set ambitious goals toward decarbonizing their business did not make it into the final version of the agreement. It puts additional pressure on the Carbon War Room programs to work with the shipping and aviation industries to develop credible plans towards a low-carbon future.

For the first time, humankind has come together on a global scale to address the climate change challenge. But as exciting as the accord is, it takes more than a commitment to control climate change—it takes action. We will see over the next months and years how countries step up to translate their commitment in Paris to on-the-ground progress. Meanwhile, RMI isn’t waiting to see how Paris plays out. We’re tenaciously continuing our market-based work on clean-energy solutions today, playing our own critical part of transforming global energy use.

Image courtesy of Shutterstock.