Update Country Report Curaçao 16 Dec 2015

Late on Saturday, December 12th, delegates representing over 190 countries at the Paris climate conference formally adopted the Paris Agreement, which will set the tone for international action to tackle climate change. The agreement reinstates a global consensus on the need for broader action to reduce greenhouse gas emissions, among both developed and developing economies, and provides an agreed framework for increasingly ambitious future action.

The outcome of the Paris conference in itself will not solve the problem of climate change-it was never intended to-but the trajectory towards more interventionist policies aimed at reducing emissions could become irreversible as a result of it. What is less certain, however, in part because the agreement does not include specific targets on emissions reduction, is the pace at which countries will move along that trajectory. This will ultimately be decided by policymakers at the national level, but they will be operating in an environment where the actions of countries will come under increasing scrutiny at both global and national levels.

The agreement is a potential catalyst for more substantive action to reduce the carbon intensity of the global economy. Given that over the past few years there have been noticeable shifts in the attitudes of key nations, such as the US and China, towards reducing emissions, we believe that the Paris Agreement will facilitate meaningful action at a global level over the longer term.

The features of the agreement

The Paris Agreement will "come into force" once at least 55 countries covering at least 55% of emissions have signed up to it: the US, China and the EU alone will be virtually enough to clear the emissions hurdle, making ratification highly likely, as the wording of the text means that the US president, Barack Obama, can approve it without going to Congress. It allows for considerable flexibility among countries to determine how they will contribute to realising the overarching goal of placing a limit on the global average temperature increase. For example, there is no specific emissions-cutting target that is required for nations to adopt, nor a requirement to introduce a specific policy such as a carbon-pricing scheme, although market-based mechanisms are likely to play a more prominent role. The strength of the agreement, however, is that it facilitates a framework where countries will be encouraged, on the basis of ongoing review, to deliver on meeting emissions-reduction targets that are expected to become more ambitious over time.

The highlights of the Paris Agreement are:

• To hold the increase in the global average temperature to well below 2°C above pre-industrial levels. This is a more ambitious objective than in previous international agreements on climate change. Furthermore, in a concession to small island states and other highly vulnerable states, the text also includes an aspiration to limit the temperature increase to 1.5°C.

• To aim to reach global peaking of greenhouse gas emissions as soon as possible, while recognising that peaking will take longer for developing countries. While no target year has been set for this emissions peak, there is a long-term commitment to "achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century". This effectively translates into a goal of net zero emissions to be achieved at some point beyond 2050.

• To put in place an ongoing framework that will encourage countries to communicate and update their climate policy targets, in the form of intended nationally determined contributions (INDCs), on a regular five-yearly basis. The agreement establishes a framework of five-yearly "stocktakes" of progress made on climate policies from 2018, and these in turn will form the basis of submissions to be made by countries to strengthen their commitments to reduce emissions. These periodic national commitments are to be submitted every five years from 2020. The agreement therefore sets in motion a framework for an ongoing review of strategies to strengthen emissions reduction commitments over time.

• To guarantee continued and enhanced climate finance from the developed world to assist developing countries to adopt a lower emissions pathway and build climate resilience into their economies. A target of US$100bn is to be provided annually by 2020, with a floor of US$100bn in annual finance to be pledged by 2025, although delivered assistance is likely to be less than the amount pledged.

What the agreement means

The paths that countries must take to try to reach these goals are not prescribed. The agreement calls on countries to submit progressively stronger commitments, but there is no specific emissions reduction target for countries to reach by a certain year (although many, such as the US and EU countries, have targets in place anyway). This will be facilitated through a collective (but largely voluntary) framework that seeks to reach a peak in emissions and to limit the global temperature increase to below 2°C. While the specific national targets of earlier agreements are missing, provided that countries live up to their commitments under the framework now set, the Paris Agreement could prove to be a more durable one with a better chance of facilitating a speedier de-carbonisation pathway.

Over the past few years there has been a noticeable shift in the approach towards tackling climate change among the world's biggest emitters, namely the US and China. Unlike the Copenhagen conference in 2009, which was largely seen as a failure brought about by divisions between developed and emerging economies over who should do the most to cut emissions, the Paris Agreement avoided focusing on the mandated distribution of effort in order to achieve consensus. Promises of additional climate financing by developed countries and commitments by China and India to reduce the carbon intensity of their economies reflected a more co-operative approach between developed and emerging economies. While the agreement tactfully states that it will allow for a longer period of time before developing economies reach a peak in their emissions, there is also recognition that they have to act to curb emissions, and will be able to do so with financial and technical help from advanced economies.

Furthermore, in leaving it up to countries themselves to make emissions-reduction commitments, there is a greater chance of reaching climate goals than of enforcing a prescriptive global treaty without universal support (such as the Kyoto Protocol). The agreement is open to the criticism that there is nothing to discourage countries from making weak commitments. But it is unlikely that there will be a slide back to inaction given that the policy environment at a global level is shifting towards greater intervention to reduce emissions, the promotion of lower-carbon sources of energy, and the implementation of carbon pricing and trading schemes.

Conclusion

In the short term progress is likely to be incremental, however, and we do not expect any immediate changes to business activity as a result of the Paris Agreement. Yet, for longer-term investment, it would be prudent to consider possible scenarios of future regulation designed to meet climate-related goals. The response of businesses is also likely to vary widely according to the countries and sectors in which they operate. In many countries the electricity and transport sectors, which are responsible for most greenhouse gas emissions, are already subject to tightening environmental rules. Air-quality regulations in China and the US, for example, have already had an impact on coal-fired power capacity. Yet in the absence of specific policy tools such as a carbon tax or effective carbon trading systems, the biggest emitters will feel little incentive in the short term to drastically amend their business plans in response to the Paris Agreement. But in the longer term carbon-pricing measures and other policy tools could become more widespread as countries adopt more far-reaching emissions-reduction goals. Indeed, several major oil and gas companies have already called for a carbon price to guide investment decisions in the fossil fuel industry, prioritising policy certainty.

The Paris Agreement is fundamentally different from previous ones: it is less about specifying targets and more about agreeing a process for action and monitoring. This may be an inflection point in global efforts to reduce emissions. The policy environment on climate change, which is shifting towards more intervention, has been given a workable global framework under which collective action can be taken. The trajectory of climate policy has been set, but the pace remains to be seen.