The Five Key Takeaways From the Paris Climate Change Agreement

16/12/2015 09:56 GMT | Updated 15/12/2016 10:12 GMT

The Paris Climate Change Conference (also known as COP21) is a political milestone in the global fight against climate change. All 195 participating countries agreed to the resulting Paris Agreement. I will examine the key lessons from the negotiations in five categories that matter the most: diplomacy, politics, law, business and economics.

1) Diplomacy matters: host nation France shines

For centuries French has been an important language of diplomacy and international relations. France and diplomacy--a winning combination at COP21 too. The host nation's diplomatic skills made a huge difference. France's foreign minister and the president of the COP21 summit, Laurent Fabius, has been praised for his management style, patience and ability to listen to and respect the views of all participants. Similarly, the French ambassador for the climate negotiations, Laurence Tubiana, was an important direct point of contact for delegates at the conference. She is credited with the idea of inviting the heads of state to the opening of the conference rather than at the end (as was the case in the ill-fated Copenhagen Climate Change Conference in 2009). This diplomatic stroke ensured that the countries' leaders called for an ambitious agreement early on, and negotiators then had a stronger mandate and incentive to find consensus. The actual negotiations during the conference were also facilitated by the strong preparatory work done by Mr Fabius, Ms Tubiana and their teams of diplomats, who had already started to build international commitment and consensus long before COP21.

2) Politics matters: stronger commitment and greater certainty

The Paris Agreement aims to hold the increase in the global average temperature to well below 1.5°C above preindustrial levels. This is even more ambitious than the previous target of 2°C agreed at Copenhagen in 2009--and also highlights the scale of the ambition given that global temperatures have already risen by 1°C above preindustrial levels. This difference could turn out to be critical for small, low-lying coastal states such as the Marshall Islands, the Seychelles and Tuvalu that are particularly at risk from rising sea levels.

Potentially even more important than the 1.5°C target is the goal of "net zero emissions" between 2050 and 2100. This means that countries have committed themselves to creating, by the second half of the century, a balance between new emissions and emission removal via carbon sinks (such as forests or carbon-capture-and-storage technology).

The new 1.5°C target and the commitment to net zero emissions signal a strong political commitment and consensus that creates more predictability for businesses and investors. However, not all parts of the Paris Agreement are actually legally binding.

3) Law matters: not everything in the agreement will be legally binding

The Paris Agreement will become legally binding only if 55 countries, together representing at least 55% of total global greenhouse gas emissions, ratify the deal. This is likely to be achieved given that the deal enjoys the support of the biggest polluting economies--the US, China, Europe, Russia and India (which together account for around two thirds of global emissions).

However, there are no legally binding emission-reduction targets. Instead, countries have submitted their climate-action pledges via so-called Intended Nationally Determined Contributions (INDCs). This system has been instrumental in convincing big emerging economies such as China and India to sign up to the deal given the concern that binding emission targets could undermine economic growth. Moreover, the agreement includes a review mechanism that commits countries to revisit their INDCs every five years--this could be a powerful instrument in ensuring continued momentum towards achieving the ambitious new targets.

The agreement also contains the goal for developed countries to provide US$100bn per year by 2020 for climate-change mitigation and adaptation efforts in developing countries, plus more finance beyond 2020. But this part of the agreement is not legally binding--which will have played an important role in ensuring support from the US and other major developed economies.

Nonetheless, overall, the strong likelihood that the overall agreement is set to become legally binding is a major achievement--not least because of the stronger legal and regulatory framework that this is likely to create for the private sector. More than half (60%) of those who took The EIU Perspectives' opinion poll on the desired outcome of COP21 called for "a formal international treaty with tough legally-binding targets" rather than just "a robust political agreement with voluntary targets" (17%), a soft and broad political agreement (13%) or no agreement at all (10%).

4) Business matters: stronger clarity and predictability creates business opportunities

The strong political commitment and the improved legal and regulatory framework that will emerge from it are good news for many in the private sector who needed stronger clarity and predictability on the future policy direction. Renewable-energy companies and their investors will be particularly thrilled. But companies from various sectors have long called for tough climate action, e.g. the American Business Act on Climate includes big companies from the technology, retail, clean energy, food and agriculture sectors. At COP21 some of the world's biggest companies joined an initiative of 114 companies that have adopted science-based carbon-reduction targets. These initiatives from the private sector are set to spur investment, creativity and innovation that are crucial for the transition to a low-carbon economy. A notable example is a new global clean energy research project launched at COP21.

Investors will continue to matter in the years ahead--both through investments in low-carbon assets and through their support for tough climate action. Asset managers are increasingly concerned about the costs of inaction on climate change. A recent report by The Economist Intelligence Unit, The cost of inaction: Recognising the value at risk from climate change, states that the value at risk to manageable assets from climate change is US$4.2trn in present value terms. The Paris Agreement offers a real opportunity to deal with this substantial risk.

5) Economics matters: lack of focus on carbon pricing

The Paris Agreement, despite all its promise and the support it has garnered, mentions carbon pricing only in a short sentence on recognising the importance of emission-reduction activities. The lack of focus on adopting carbon pricing across the board has been criticised and could seriously undermine efforts to actually implement the Paris Agreement.

A carbon price is a powerful economic signal that gives polluters an incentive to stop their polluting activities and reduce emissions. Carbon prices are a much better way to support the shift to a low-carbon economy than subsidies for renewables. In order to establish a carbon price, carbon taxes have been introduced in parts of the world, such as Ireland in Europe, Chile in South America and Quebec in North America. These efforts may be a more promising way of establishing a carbon price than emissions trading schemes, which tend to lower the price by issuing too many tradable pollution permits. Even the fossil-fuel industry is starting to come round to the idea that carbon prices may not be such a bad idea, as exemplified by the oil and gas giant Exxon Mobil's support for a carbon tax, which was reiterated again by the company at COP21.

Without a widely established carbon price it will be much more difficult to actually reach the targets agreed at COP21. The costs of greenhouse gas emissions need to be accounted for, and a price can help to do so. Moreover, the revenues from taxes (or pollution permits) could actually be used by governments to invest in the necessary infrastructure and technology to build a low-carbon economy.