Inside Paris COP-21


A final bang of the gavel on Saturday, December 12th marked a pivotal point for humanity: for the first time in history, the entire world - including nations of the likes of Saudi Arabia and Venezuela that have everything to gain from oil consumption - agreed that this century will be the one in which the fossil fuel era ceases to exist.

The end of the carbon era in human economics may or may not come in time to avoid the worst climate chaos, but come it will, and the pace of market adjustment to this shocking new reality will now accelerate.

- Carl Pope, Former Chairman, Sierra Club.

climate agreement

The world acted.

Not perfectly, not timely, but with seriousness and gravity. The metaphor of the day was some variant on turning point/pivot/fork in the road/hinge of history. Now we are free - if we choose - to race towards climate stability and then, once we reach that plateau and stand poised to actually lower concentrations of greenhouse gases, climate recovery. - C. Pope.

INSIDE PARIS COP-21: THE FINE PRINTBeyond sanctioning the prevailing significant, but voluntary, country-level commitments to reduce carbon emissions, the two week negotiations resulted in three notable outcomes.[Read the Paris COP-21 Climate Agreement in its entirety.]1. 195 nations committed to concrete actions in order to maintain global warming below 2 degrees Celsius, with an aspiration goal of curtailing emissions to stay under 1.5 degrees Celsius, achieving net zero emissions in the latter half of the century.2. The establishment of five year reviews to keep governments in check. Countries agreed to strengthen their actionable plans to increasingly lower emissions over time.3. The establishment of a system for the developed world to assist the developing world in mitigating and adapting to the plights of climate change. Moreover, developed countries agreed to take the lead in mobilizing climate finance from a wide variety of sources, notably, public funds.In other words, an abundance of aspirational goals for the future.However, with negotiators from 195 different countries holding starkly different agendas and interests, a perfect agreement was never on the table. As Coral Davenport articulated in The New York Times, the Key to Success of Climate Pact Will Be Its Signals to Global Markets.INSIDE PARIS COP-21: THE IMPLICATIONS

"Experts said the ultimate measure of success of the agreement will be whether it sends a clear signal to global financial investors that they should move money away from fossil fuels and towards clean-energy sources such as wind and solar power. Without that signal, there is little chance that emissions will be reduced enough to stave off the most catastrophic impacts of global warming." - Coral Davenport, The New York Times.

The financial appeal remained ambiguous after a near-final draft was released on December 4th. Said draft defined many of the goals that climate policy advocates had been hoping to occur, but the fine print failed to address a significant issue: transparency.How did all these countries intend to monitor, validate, and disclose levels of pollution? What did this lack of transparency mean for the broader markets?"It's a question of what kind of signal you give to investors and people who decide where the dollars go. They decide whether to invest in one kind of electric power plant or another." - Nathaniel Keohane, Economist, Environmental Defense Fund.cropped-sri.jpg

The combined stock value of the world's coal, oil, and gas companies is approximately $5 trillion. This $5 trillion of assets exists in contrast to the $300 billion allocated towards renewable energy companies (Bloomberg New Energy Finance).A successful climate accord has the potential to transform the energy economy that has prevailed since the Industrial Revolution."There will be a sea change. You will see more money begin following those outcomes, flowing to wind and solar, because there's trillions of dollars in profit to be made." - John Kerry, U.S. Secretary of State.Kerry has long been vying for aggressive transparency measures, asserting all governments should be mandated to publicly quantify emissions, and that all disclosures should be subject to third-party verification, empowering quasi-auditors for greenhouse gas emissions.However, while Kerry has been leading the United States' push for transparency, China and India, the world's largest and third largest polluters, still oppose the notion. China and India are instead demanding the Paris negotiations echo the lighter monitoring and verification requirements for emissions that was prescribed for developing countries in the 1997 Kyoto Protocol.We already have a thorough system of accounting. We don't understand the need for a super-inspector going around and seeing what we're doing. - Ashok Lavasa, Secretary of India's Ministry of Environment, Forest, and Climate Change.Yet, the transparency of emissions is vital for the rerouting of investments towards positive change.
THE MARKETS WAKE UP:While the ink on the Paris Agreement is still drying and financial analysts are still processing the effects, for the last decade, energy companies have been betting on natural gas.In November of 2010, Exxon was a first-mover, purchasing natural gas producer, XTO Energy, for $31 billion. Five years later, Shell, producing about 1/2 energy as natural gas, is currently in the process of acquiring BG group, primarily for the company's large Australian natural gas holdings. Although its huge Gorgon project is delayed, Chevron is investing $54 billion in an LNG (liquified natural gas) plant in Australia - the largest single energy investment, ever.The energy companies are putting their money where their mouth is, contending coal must be replaced with natural gas.  In fact, the United States is producing so much natural gas that the price of natural gas hit a 14-year low last week.The climate deniers, long attempting to prohibit collective action, are shrinking in size. The question that remains has become a quasi-battle between climate advocates and energy producers: renewables versus natural gas.In the United States, the Obama administration has been vying for renewables. Friday, December 18th marked a huge win for planet Earth: Congress passed legislation extending the solar investment tax credit, due to expire in 2016, to exist until 2024, with a gradual phase-out beginning in 2020.The solar ITC, with a $1.15 trillion spending bill, is designed to advance commercial and utility solar projects by providing a 30% tax credit to solar initiatives.Meanwhile, China, the world's largest polluter and second largest energy consumer, is making a big bet on natural gas, proposing the Altai NG pipeline to flow from Russia's Western Siberia to North-Western China. The Chinese government has slashed natural gas prices by 28% to encourage use. "The cuts are important not least because they signal Beijing is serious about weaning its reliance on coal as part of cleaning up China's economy" - Brian Spegele, Wall Street Journal, 2015.While the climate change solution remains blurry, one thing is crystal clear: coal has got to go.coal plummetingAs portrayed above, coal prices have plummeted in a region (China) that utilizes 74% of electricity from coal, dominating worldwide coal consumption with a whopping 49% share. For context, the second largest consumer of coal is the United States, at 11%. In fact, China has increased coal consumption over the last decade by 2.3 billion tons, which is equivalent to 83% of the global increase in coal consumption (Energy Information Administration).Bloomberg Business recently wrote about the purchase of a coal mine - valued just three years ago at over $600 million - for just one dollar.
Monday, December 14th, the first day of trading after the close of the Paris negotiations, was positive for climate change advocates, who have been contending that investing in environmentally unsound companies is economically unwise.Suffering the most heat were shares of coal-producing companies, such as Peabody Energy Corp, plunging 12.6%, and Consol Energy, which declined 3.3%. The U.S. Oil & Gas Index experienced its lowest level in about seven years, dipping a full 1% before reversing losses. In contrast, the MAC Global Solar Energy Index rose 4.5%, while the iShares Global Clean Energy ETF was up 1.4%. Solar companies welcomed the Paris Accord with open arms, as SunPower's stock price climbed 8.7%, with shares of First Solar close behind at a 5% increase.This (Paris Accord) deal will help boost the mid-to-long term fundamentals in renewable energy generation, especially solar, while making any further investments in fossil fuels increasingly vulnerable. - Theimo Lang, Portfolio Manager, RobecoSAM.Although difficult to ascertain whether investor dollars are chasing the Paris Agreement or the fact that Congress renewed the solar ITC (my money's on the latter), it still bodes well for the future of energy economics.THE PATH FORWARD:It is too early to assess the "success" of the Paris Accord, as concrete, global action might not occur until 2020 - 2030. While world leaders pledged their nation's support, the unfortunate truth is that these advocates will likely not be leading when difficult decisions need to be made in five, ten, and twenty years.


It seems near impossible to imagine society with the absence of economic growth. Yet, for thousands of years, a stagnant economy was status quo. India witnessed shrinking real incomes through the 19th century, Egypt experienced consistently low income per capita, and most of Europe had no growth at all for 5 entire centuries before the Industrial Revolution.Economic growth was fostered through innovation and, you guessed it, an immense amount of carbon-based energy.Some have boldly suggested the only means to contain carbon emissions is to curb growth.This is narrow-sighted.A no-growth world is a zero-sum game: a man and his neighbor seeking similar outcomes cannot both emerge winners. Market based economics simply cannot exist in such a world.There must be another solution.The question that climate progress seeks to answer is not how to halt growth, rather how to distribute natural and financial resources and use technology to afford civilization perpetual growth.