Climate change is one of the main challenges for societies worldwide. The efforts and agreements reached in the various negotiations for the fight against the reduction of greenhouse emissions from 1992 at the Summit in Rio de Janeiro have been characterized as little ambitious. The United Nations Framework Convention on Climate Change (UNFCCC) has failed to reach an agreement that can effectively meet the goal of limiting temperature increase to 2°C.

Current context: Economic Recovery vs. Emissions

We are in the process of emerging from the financial crisis, which began in 2008. The global recovery could lead to an increase in industrial activity, and thus a significant increase in emissions. Given this fact, the big challenge is to disconnect worldwide economic development of increased emissions. This requires developing, alongside technological knowledge, improving energy efficiency and social awareness, a strong political agreement among countries on environmental policy. In this regard, we note that, despite the unsuccessful negotiations between countries about climate change, according to the 2105 BP Statistical Review from a couple of years ago we can see a clear decoupling between global GDP growth (+3% in 2014) and the increase in energy consumption (+0.9% in 2014). This can lead in the near future to achieve growth rates with lower energy consumption.

In this context it will take place the twenty-first meeting of the member countries of the Framework on Climate Change of the United Nations. The event will be held from November 30 to December 11 in Paris. The main objective is to achieve a more ambitious global agreement to combat climate change than those achieved to date. To this end, the participating countries have sent their proposals (some more ambitious than others) to reduce the climate change. Plans that would take effect from 2020.

Reasons to consider a Global Agreement

Few Climate Summits have aroused so much expectation. Although there are significant differences in the level of ambition of countries proposals, there are also factors that have made us optimistic to reach an agreement leading to reduce emissions and thus, fulfill the main goal of the Summit: keep the temperature increase below 2° C.

Comparing Countries’ Emissions Targets

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Source: Bloomberg

Domestic policies carried out by key players in the forthcoming Paris, such as the US, China or the European Union, are intended to mitigate CO2 emissions. Recently, at a meeting between the leaders of China and the United States (“US China Joint Announcement on Climate Change”), they announced some commitments towards combating climate change. The United States has declared its intention to reduce their emissions by 26-28 percent (compared to 2005) by 2025. Meanwhile, China has said that by 2030 they will increase the participation of non-fossil fuel consumption on primary energy by 20%. Also, if we look at the intensity of emissions per unit of GDP, China has one of the most ambitious plans globally: reduce them by 54 percent. On the other hand, the European Union has strengthened its commitment to decarbonisation, agreeing to reduce their emissions by 32 percent (compared to 2010) by 2030.

As mentioned above, this means that the countries responsible for 50 percent of global emissions are prepared to reach agreement in Paris.

Furthermore, we are in an era of fossil fuel prices at historically low levels. Regarding production, this situation will create disincentives for investment in these technologies. When oil prices are in a downward trend for many investors is best to leave their resources in the ground (the short-run marginal cost of production is higher than the marginal income). In general, a sustained period of low prices over time (as it is expected to happen in the coming years) will discourage investment, which could lead to the decision not to develop such an expensive resource. Oil prices are at very low levels. The causes of the crash experienced since June 2014 are mainly due to the oversupply in the market. It is expected that the excess production does not diminish in the coming years; the OPEC member countries will not reduce their production and there are data that show how US stockpiles are increasing every month. Meanwhile, coal prices have also sunk, the drop in China’s imports (the largest consumer of coal in the world) was the main bearish factor. The struggle against the country emissions and fostering of renewable technologies has made its demand falls by 31% so far this year. This trend towards more respectable environmental policies can be extrapolated to other industrial countries.

Oil Price ($/bbl)

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Bloomberg

Coal Price ($/tn)

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Magnus M·Tech

With respect to consumption, low prices obviously create incentives to demand products from polluting fuels. However, and looking ahead to the struggle against emissions, low oil prices may provide an opportunity for governments to eliminate or reduce the subsidies of oil. This has been conducted in many countries, including China, which has increased taxes on oil consumption three times in recent months.

In addition, the drop in oil prices may also facilitate the controversial environmental taxation. In fact, many of the countries invited to the Paris Summit on Climate targets are introducing environmental taxes in their proposals. While it is not expected to reach a global environmental taxation, US plans to implement an environmental taxation before the end of the year. This could act as a trigger for other countries.

Thus, there are scenarios and willingness from the main industrial countries to mitigate climate change. More rigorous standards, through environmental taxes and investment in more efficient technologies will impact negatively on the demand for fossil fuels. In addition, the recently released annual report of the prospective global energy International Energy Agency, World Energy Outlook, predicts that renewables will dominate, overtaking coal as a primary resource in the early 2030s.

In a nutshell, while it is true that today there are still differences in the environmental policies of the countries, there are factors that lead us to think that an agreement to reduce CO2 emissions is possible as well. At the Paris Summit we will see if this can be achieved in order to clear the way towards a more sustainable economy.

Enrique Battistini | Energy Consultant

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