Looking at the Paris agreement fallout

E*TRADE Securities2

06/08/17

President Trump took to the White House’s Rose Garden on Thursday, June 1 to announce that he would pull the U.S. from the Paris climate agreement, citing economic concerns for American businesses and workers.

The agreement established an international cooperation to reduce greenhouse gas emissions in an effort to prevent the global average temperature from rising two degrees Celsius above pre-industrial levels. It calls for participating countries to voluntarily develop their own carbon emission reduction targets, put forward plans to hit those targets, and submit those plans for periodic independent review to the governing body, the United Nations Framework Convention on Climate Change. 

An unclear future

Market views seem mixed on the investment implications of a U.S. withdrawal, which won't become official until November 4, 2020, per existing stipulations. And many anticipate it will take years for the true market impact of the agreement to reveal itself. Painted with the broadest of strokes, renewable advocates believe this will hurt an emerging industry that carries with it the promise of new jobs. Fossil fuel advocates, however, believe clean energy comes at a hefty cost to the average consumer, and will not result in net new jobs, as they will come only at the expense of more traditional energy industries.

But politics aside, with the investment community’s attention drawn to climate policy, a few global themes appeared that investors may want to follow as this story unfolds:

  • Potential downsides for U.S. multinationals. Companies including Apple, Intel, Microsoft, and Morgan Stanley took the open letter route to outline possible downsides to non-participation. As they see it, “By expanding markets for innovative clean technologies, the agreement generates jobs and economic growth. U.S. companies are well positioned to lead in these markets. Withdrawing from the agreement will limit our access to them and could expose us to retaliatory measures.”1 Their view seems to be that companies doing business overseas could be hamstrung while on the outside looking in on global climate policy development, especially if advanced energy technologies become more pronounced. According to one estimate, the global revenue surpassed $1.4 trillion in 2016.2    
  • Potential upside for China. As the White House takes a step back from global climate leadership, China appears eager to take the reins. From environmental standards to trade, some market observers believe the U.S. withdrawal could open the door for China to exert greater economic influence globally. A potential vehicle could be its ambitious One Belt, One Road infrastructure project, in which a number of U.S. multinationals have expressed interest.3        

Going stateside

Even without formal participation from the federal government, cities and states also drive many of the energy policies in the U.S. today. And a number of them appear ready to uphold Paris agreement tenants. So, the decision to withdraw from the pact does not necessarily mean the renewable energy sector will stall in the U.S. In fact, it could still present investment opportunities.

For that and other reasons, how renewable energy infiltrates the global market is worth watching over the long term.

  

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1. Center for Climate and Energy Solutions, 5 May 2017. https://www.c2es.org/nyt/

2. Advanced Energy Now 2017 Market Report, “Global and U.S. Market Revenue 2011–16 and Key Trends in Advanced Energy.” http://info.aee.net/aen-2017-market-report

3. Bradsher, Keith. “U.S. Firms Want In on China’s Global ‘One Belt, One Road’ Spending,” The New York Times, 14 May 2017. https://www.nytimes.com/2017/05/14/business/china-one-belt-one-road-us-companies.html?_r=1