US withdrawal from Paris Agreement

Event

President Donald Trump announced yesterday his intention to withdraw the US from the Paris Agreement on climate change, which aims to limit global temperature change to 2°C above pre-industrial levels.

The announcement has drawn strong rebuke from other international leaders, US state and municipal leaders and the global business community, including US oil and gas companies, which have previously advocated remaining in the accord.

Implications

The June 1st announcement has no immediate effect on the US' legal status under the Paris Agreement, which requires any ratifying party to remain part of the accord for at least three years.

The earliest the US could officially indicate its intention to withdraw is November 2019, three years after the agreement came into effect. Another year would then pass before the withdrawal would become final.

Though the US will legally remain party to the Paris Agreement until 2020, the announcement signals a significant shift in commitment to the targets and measures pledged under its Nationally Determined Contribution (NDC). Though the NDCs are meant to become legally binding once a country ratifies the accord, the enforcement mechanism has yet to be agreed.

Moreover, the Paris Agreement will only come into force in 2020, when the Kyoto Protocol expires. As such, the US can quite easily abandon its NDC commitments even while remaining party to the Paris Agreement in the near term.

Some of the executive orders Trump has already issued, including rolling back the Clean Power Plan and reviewing fuel efficiency standards, aim to undo many of those commitments, though they are likely to remain embroiled in legislative and legal limbo for some time.

Moreover, US national policies and commitments may not ultimately be as important to achieving decarbonisation as more organic shifts in economic and social behaviour, combined with state, local and corporate policies and goals.

The transition from coal to natural gas-fired power was driven as much by lower natural gas prices as government policies. The economics of renewables, especially solar, are increasingly competitive with hydrocarbons, and a California bill committing to 100% renewable generation by 2045 cleared the state Senate this week ahead of President Trump's announcement.

Meanwhile, the Internet of Things is making it easier for consumers to monitor and manage their own electricity consumption. In the transport sector, growing urbanisation and ride sharing services, combined with the prospect of self-driving and connected cars, have potential to reduce transport demand. Those same forces are shaping growth in developing economies as much if not more so than in the US and other developed economies.

Energy companies should therefore expect continued movement toward a low-carbon economy, regardless of US participation in the Paris Agreement, and take appropriate steps to prepare.