Editorial

Facing up to carbon and changing energy markets

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China and the US — the world's biggest greenhouse gas emitters — have performed a spectacular U-turn on climate change policy.

The principal opponents of the 1997 Kyoto Protocol agreement had resisted all policy efforts since to curb emissions growth. Yet the ratification in early September 2016 by the two countries triggered a domino effect with other signatories falling over themselves to join. The December 2015 Paris Agreement comes into force on November 4th 2016.

Why did China and the US change direction? There is certainly political motivation. President Obama left the G20 stage after Hangzhou, and signing up the US to the Paris Agreement cements his global legacy. China seizes the initiative as responsible global citizen, leading the effort to curb emissions growth.

Though China may fall just short of achieving peak CO2 emissions by ‘around 2030’, most other targets look broadly achievable.

It's also much easier to commit now than before. China has promised to cut carbon intensity by a heroic-sounding 65% (relative to 2005 levels). But the target should be achievable without de-railing growth, as consumption usurps investment as the dominant economic engine. The growing importance of renewables is another factor, and our own Base Case assumes a 72% cut in intensity by 2030. Though China may fall just short of achieving peak CO2 emissions by 'around 2030', most other targets look broadly achievable.

There are parallels here with changes in US energy demand patterns over the last two decades. Washington's objection to Kyoto was the constraint it would impose on US economic growth. In the event, improved efficiency and the black swan event in the shape of cheap unconventional gas have cut US carbon emissions both per US$ of GDP and in absolute terms since 1997. An explicit carbon policy driver was never needed.

The new US target requires deeper emissions cuts, beyond what we forecast in our Base Case. Paris invites similar criticism as a threat to economic growth; but energy supply dynamics continue to work in the right direction. Renewables is the new, irresistible force, with solar already cost-competitive in parts of the US, even without subsidies. Assuming the trajectory of falling renewable costs persists, Paris could be achieved with little impact on US economic growth. Promises to revitalise high cost US coal look no more than electioneering.

Even so, the signal from China and the US portends big changes ahead for the energy industry. A formalised global policy framework favouring low-carbon energy not only challenges the coal industry but in the longer run the traditional business model in oil and gas production.

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