Paris Cop21. The Force Awakens?

In 1994 came into force the United Nations Framework Convention on Climate Change(UNFCCC), adopted during the Earth Summit in 1992. It was ratified by 196 states, which constitute the “Parties” of the convention.

The COP21 represents the twenty-first Conference of the Parties to the UNFCCC and oversees the implementation of the Kyoto Protocol in 1997 that specific reduction targets to be undertaken by developed countries were fixed. Which eventually were ratified only by 37 States, of which 28 belong to the European Union, and only represent 12% of global emissions. Outside, remained the major polluter countries: China, not being in the group of developed countries and the US, which has not ratified the protocol. Kyoto took effect in 2005 and, after ten years of implementation, has achieved a 22% reduction of emissions in the 37 signatory countries, well above the 5% set as a goal. But not being involved the major polluters; global emissions have continued to grow.

The main objective of the cop21 is keeping global warming below the 2 ° C compared to pre-industrial levels (1850). Another objective was to be able to mobilize 100,000 million dollars annually from the US, international organizations and the private sector from 2020. Despite the agreement of almost all countries, the text must be ratified by all countries next spring, will not come into force until 2020 and will be reviewed every five years for the countries to update their commitments and reduction targets.

What would be the effect on the energy market?

The more than 180 national action plans (also called Nationally Determined Intended Contributions and corresponding to 95% of emissions of greenhouse gases) will define the major investment plan for clean energy ever. A new economic system in which the future of fossil fuels is uncertain will be created. Although the term de-carbonization has been replaced by a more decaffeinated “emission neutral”, few believe that a 2 degree target can be achieved without a near elimination of fossil fuels.

The main difficulty in the proper implementation of the measures will be to distinguish between more and less developed countries and transparency in the monitoring and verification system that has to carry out the actions of the agreement. All this, in an environment of competition and ambition among the participant countries.

Will it lead to the gradual elimination or substitution of fossil fuels?

The proposals of the summit could achieve the objective of limiting the global average temperature change of to 2 degrees Celsius, but also urges find an additional 1.5 degrees objective. The goal is to get “the peak of emissions of greenhouse gases as soon as possible” and “neutrality greenhouse gas emissions in the second half of the century.”

What is becoming clear is that long-term, carbon-intensive energy will be one of the most expensive investments that any government can do and that will have its impact on the current energy paradigm.

However, we will continue extracting oil and gas for many years to come but to nations whose economies depend directly on the production of hydrocarbons, they are already investing heavily in renewable energy.

Without being a priority at the summit, the discussion on the effectiveness of the systems of carbon emission rights that are still standing and in recent years have not yielded the expected results, is reopened. But just look at the recovery of market prices and the urgency of China to establish its own ETS system in 2017 let us  think that it will again be relevant in the coming years. The discussion on carbon markets has become more difficult since the introduction of the need to define the “differentiation” and that makes it less clear who is doing what and who should be allowed to compensate where.

After two weeks of intense negotiations, we they reached the following agreed principles:

1. Countries should ensure to achieve emission targets they self-imposed from 2020.
2. The targets shall be reviewed every 5 years.
3. Emissions of greenhouse gases should reach their peak “as soon as possible”
4. For the second half of the century, emissions of greenhouse gases must be balanced.
5. Developed countries must contribute at least US $ 100 billion per year from 2020 to help poorer nations curb climate change.

Magnus Conclusions

In positive terms, we should see with satisfaction that it has reached a series of five-year review of the objectives and the successive contributions must be a progression from the previous ones. However, until 2030, there is no obligation to review existing commitments. Although eventually they can voluntarily anticipate changes.

Everyone knows that this is a minimum agreement and still has many uncertainties. However, the success or failure of the signal launched in the Paris summit will be seen next spring 2016 by checking g up how many countries ratify the agreement.

All this draws significant changes in coming developed countries will continue to lead the projects in renewable technology. And the concept of “climate change” will be, more than ever, on the tables where investments are decided in future generation sources.

The world will continue to consume oil and coal but pressure for a gradual change of global energy model invites us to think that, because of the unsustainability of the current model, will be almost leaving the total dependence on fossil fuels.

In terms of markets, this provides a clear threat to the oil and derivate products and coal.

Alejandro de Roca | Operations Director