Tuesday 31/03/2020

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Climate change: the United States, between victory and indignation

Responsible Investment Strategist

The victory of Exxon Mobil’s shareholders forcing the US oil juggernaut to be more transparent regarding its impact on climate change stands in stark contrast to president Trump’s announcement that the United States is withdrawing from the Paris Agreement.

Cheers versus indignation

On the one hand, the past two days have been marked by the victory of Exxon Mobil’s shareholders as the oil giant has finally been forced, after several failed attempts, to be more transparent about the threats posed by climate change to the company. On the other hand, however, Donald Trump announced that the US would be withdrawing from the Paris Agreement.

We had already written that it is not that easy to withdraw from the Paris Climate Agreement, meaning that the US president’s decision will only be able to be implemented over several months. And who knows, by that time he may have been impeached. Nonetheless, a major ally is withdrawing from the discussions on CO2 emissions, and putting international relations on the back burner.

A symbolic ‘no’

Soon after Trump’s statement there was a flurry of reactions and comments, all confirming that the US withdrawal from the Paris Agreement will remain first and foremost a symbolic ‘no’. As a matter of fact, investors, the financial community and large multinationals acknowledge the major climate challenges, the scope of which is increasing. Moreover, the impetus to maintain the Paris Agreement and to aim for low CO2 energy sources comes from the private sector. The victory of Exxon shareholders is not a one-off, and it follows similar successful cases filed against other US oil companies, for example Occidental Petroleum and PPL Corporation. The decisions taken at shareholder meetings are a good illustration of the changing attitude of shareholders, who are pushing for increased transparency on climate risks.

Limited risk

States such as California, New York and Iowa have been hit hard by climate change and therefore have already overhauled their energy production methods. As such, a radical shift is not an option for them. Economic sectors are nowadays driven by technological progress, which aims for greater energy efficiency and economic gains, and not by public promises made by political leaders. Although we cannot fully exclude that other countries will go the same the same way as the US, the risks are nonetheless quite limited:

  1. due to the immediate reactions of Europe and in particular China, which have positioned themselves as the main proponents of the Paris Agreement;
  2. due to the timeframe of several years which the withdrawal entails.

China’s position is key, as this country is currently one of the major emitters of greenhouse gases. However, let’s not forget that China is one of the largest investors in wind and solar energy, and that it does not have sufficient oil resources to meet its energy needs. Moreover, the country is being obliged to reduce its use of coal as its population is suffering greatly due to air pollution, which for that matter is also slowing down economic growth.

At least four years

The US rapidly ratified the Paris Agreement prior to the presidential elections in the fall of 2016. Its withdrawal from the Paris Agreement will officially take four years, unless Donald Trump decides to pull out of the 1992 United Nations Framework Convention on Climate Change (UNFCCC),[1]) the predecessor to the Paris Agreement. Notification of the withdrawal cannot be given prior to 4 November 2019, with the formal exit only entering into force one year later, namely on 4 November 2020. The odds are low that the agreement will be renegotiated during the COP 23 in Bonn, presided by Fiji, later in November this year.

Isolated nation

President Trump’s announcement must first and foremost be seen in the light of his ‘America First’ election pledge. The US could have easily stayed in the Paris Agreement without proactively negotiating a transition towards other energy sources, and by regularly presenting limited progress with regard to reducing greenhouse gas emissions. However, the president’s prime objective is to give a strong signal: to pull out of a global agreement on behalf of the US as a superpower and a strong and prosperous nation.

Nevertheless, what he is actually doing is giving the impression of a closed nation isolated from the 194 parties which signed the Paris Agreement. Or worse, of a president who has decided to increasingly isolate himself. He will not just be confronted with the increasing discontent of his international partners, but also of a large share of his citizens and companies which are transitioning towards a low-carbon economy and which realise that in the end there is no alternative.

[1] UN Framework Convention on Climate Change