The Paris Agreement: Horizon of a New Economy

TERESA RIBERA

 

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The alarms have gone off on many fronts, and the sensation is spreading that we are in the middle of a difficult race against the clock.

“We’ve known about this for decades, and the problem seems to be getting worse and worse,” says Leonardo DiCaprio in his documentary Before the Flood.

Today, more than ever, recognition is due to the environmentalists and scientists determined to seek joint strategies for tackling climate change. It has taken us forty years to realize that only on the basis of a dense network of mutual understanding and support among energy suppliers, financiers, government leaders and social and economic agents of very different kinds can we come up with an adequate response to the great challenge ahead of us. It will otherwise be impossible to generate the transversal response that is required, and instead we shall have only small marginal adjustments, barely enough for a temporary palliation of the need to act.

Now that the importance of climate change is beyond all doubt, the Paris Agreement offers an innovative proposal on how to arbitrate effective mechanisms of governance to confront it on a global scale. Perhaps because we have realized there is no alternative, or because of the firmness with which heads of state and governments have put forward their convictions, or simply because of the unstoppable evolution of social demands, there are certainly interesting signs after the adoption of the Paris Agreement of a profound change in patterns of investment and economic activity.

The adoption of the accord in December 2015 took the world by surprise, since it went further than anyone familiar with the process had imagined beforehand. Moreover, its implementation has broken records, showing that when there is strong political commitment, it is possible to make changes in a short time. Paris represents hope and willingness, but it admits of no delay or carelessness. It points to new mechanisms and helps to recover confidence in our collective capacity to change things, but it warns of its own insufficiency and calls for a constant tension that still awaits consolidation. Confirmation is still pending of the most important thing of all, namely its capability to create a different dynamic of development, bolstering the confidence of our societies in their ability to do things differently by ensuring a future low in greenhouse gas emissions and resilient to the effects of climate change.

In the context of a planet with more human beings and the same resources, solving the equation that will allow a reasonable level of prosperity for all while avoiding the dangers of climate change requires a transition to a different economy. This is the commitment undertaken in Paris. To be able to work against climate change and in favor of the eradication of poverty and the achievement of the goals of sustainable development, the average temperature of the planet must not be allowed to rise by more than 2ºC with respect to the pre-industrial era (and efforts should be made to restrict the rise to 1.5ºC), our capacity for adaptation and resilience must be strengthened, and it must finally be ensured that financial flows are compatible with these two goals. In other words, there will be no lasting development or eradication of poverty on a planet that is two degrees warmer. And the time has come to start to understand what that means and how it can be prevented.

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We are now beginning a new phase in which the emphasis needs to be placed on action. How to impel the transition to a new economic model that must of necessity be “ecological”? The countdown has already begun for the achievement of a triple objective with profound implications for the economic model.

Given its responsibility in the causes behind climate change and its undeniable relation to human development and well-being, energy becomes the priority target for climatic action, and so also an area of real and perceptible change. It changes where demand grows, and also where there is finance to invest in it. This shakes up traditional suppliers and stimulates innovation. We are now witnessing a succession of announcements by very different agents: China is canceling new coal projects; numerous long-term investment funds are withdrawing investment from fossil fuels, demanding much more serious attention to the evaluation of risks, or even threatening to veto decisions that show an irresponsible neglect of climatic risk; there is an (uneven) effort among industrial players, who are announcing commitments on which they are prepared to report rigorously and transparently; and we were surprised to hear talk of revolution from traditional institutions and accredited observers in the field, such as the International Energy Agency, which put forward scenarios and prospects that differed greatly from those of barely a decade ago. We are fascinated by innovative and enterprising enthusiasts for novel solutions like electric mobility (preaching a speedier end to the hegemony of petroleum), solar roofs, and alternative ways to accumulate energy. And we impatiently await the response of financial regulators, who have announced their intention to favor more rigorous risk evaluation frameworks that will incorporate and discriminate what until not long ago went unnoticed: the immense cost—and consequent risk—generated by greenhouse gas emissions.

It is a complex puzzle with many pieces, many of which are starting to change shape. Winning the battle against climate change means decarbonizing energy, which makes it essential to generalize energy efficiency and carbon-free solutions. There is a large range of technical options available, and a huge deficit in our capacity to assume them, which is not accompanied by the regulatory frameworks and signals on which we base the rationality of our decisions. It remains easier and more comfortable to opt for conventional solutions, and even so, ground is starting to be gained by a new way of measuring expected profits, and it is beginning to make economic sense to invest in efficient and renewable alternatives!

Paris has meant a first exercise in diagnosis and commitment for each of the 196 countries that form part of the multilateral system, but it remains an instrument for achieving the goal of a coordinated and effective response that must materialize on every front. Energy is the central nucleus of this response, but not the only one. Changing soil use, deforestation, agriculture and livestock farming make up the other battlefield in which our future is at stake.

Since the agreement represents only the first step, the measures already identified by each signatory must be implemented at once, and favorable conditions must be created for the generalization of those which prove effective while boosting regional and sectorial action in different areas. Examples that ought to inspire us when it comes to establishing priorities are an aviation industry committed to the reduction of emissions, a maritime transport sector that assumes its responsibility, cities, service providers and mayors committed to different urban models, and citizens applying and demanding different products and policies. The coming decade is decisive. It will be the one that makes the difference between a real possibility of slowing down climate change or the road to unprecedented disaster.

While we may be in the middle of an unfinished race against the clock, it is also important to activate the tools that will prove most effective for accelerating change. We cannot permit ourselves the luxury of failing to take advantage of resources or compounding the problem, and so the signals that orient investment decisions have to be clear and coherent. We must learn to evaluate risks and benefits differently, and for this we need tools that help to show the cost (damage) caused by the emission of greenhouse gases in terms of a price or a rate, greater transparency with respect to the characteristics of the risks faced and the means necessary to palliate them, rating agencies with the ability to assess them, financial instruments that make low-emission investment attractive, and a beneficial use of the resort to debt or bond issues by associating the application of resources with a particular goal, as exemplified by “green bonds” and “climatic bonds.” Perhaps this is one of the greatest revolutions currently under way. Development banking (headed by those of China and Brazil), long-term investors, commercial banks and the insurance and reinsurance industry are currently immersed in this task. Some countries such as France and the United Kingdom have already adopted mandatory reporting rules or even limitations on public institutions. There is a growing conviction that for success to be achieved in this enterprise, it is of prime importance to foster coherence among the signals that orient any public or private investment decision. But it is not easy to reorient the functioning of financial systems that have been operative for decades. Ethical challenges are among the components of the increasing level of analytical sophistication introduced by academics, regulators and financial agents. So are effective instruments which allow losses to be anticipated and risk reduction on operations to be incentivized, or which make the cost or damage that will foreseeably be generated in the future visible today, together with the acceptance of margins of uncertainty in novel contexts. Nevertheless, it is worth drawing special attention to the work carried out by the Financial Stability Board at the express commission of the G20, with the support of a working group co-presided by Michael Bloomberg and AXA, dedicated to the assessment of alternatives that would ensure climatic risks were taken more into consideration.

Paris represents hope and willingness, it points to new mechanisms and helps to recover confidence in our collective capacity to change things, but it warns of its own insufficiency and calls for a constant tension that still awaits consolidation.

On the other hand, in order to anticipate rational decisions, fully compatible with the climatic challenge, and prevent short-term pressure from diverting us from the Paris objectives or making them hard to achieve, we are obliged to generalize the use of retrospective scenarios and backcasting techniques. Setting a clear goal for 2050, and proposing scenarios in which different combinations of measures would ensure its fulfillment, is a good way to promote a debate on how to structure the transition, securing coherence between short-term decisions and the vital goal of decarbonization. Understanding this, the Paris Agreement invites signatories to share any national progress that shows how the main socioeconomic objectives can be reconciled in the domestic sphere with the processes of decarbonization and resilience. Not that such techniques should be understood as applicable only to states. Sub-national governments and boards of directors may also find them useful instruments for taking complex decisions. A good understanding of the alternatives will be decisive for the question the Paris Agreement proposes addressing by 2020–2023: how to cover the breach between the measures and commitments announced in 2015 and the objective of staying under a temperature increase of 1.5ºC–2ºC, equivalent to zero (or negative) emissions before the end of the century. Here again, the prior political orientation of the leaders of the G20, which will be under German presidency in 2017, seems of capital importance for fueling an informed political discussion on how to guarantee fulfillment of climatic commitments, and also for fostering coherent decisions on questions of investment and infrastructures. It is not possible to promote strategies of economic recovery or investments in infrastructures based on the reading of an unviable model. For example, what additional port capacity is needed in a world where carbon, petroleum and gas transport is bound to decline? What terrestrial mobility is needed, and what supporting infrastructures would facilitate it? What consumption and what urban services are required by a carbon-neutral society resilient to climate change? And so on.

The construction of a new economic horizon after the Paris Agreement goes beyond its technological and financial implications, beyond the fiscal system and beyond the use of good planning techniques. It also requires the incorporation of the obligations that accompany the effects of climate change so that answers can be anticipated for a reality we can glimpse today, with changes in hydrometeorological patterns affecting both infrastructures and demand for services, and with impacts on the physical conditions of the territory, on crop yields (and so on the welfare of much of the world’s population), on migratory movements or tensions within or across borders, and on markets for raw materials. It would be illusory to suppose that a defensive strategy which eluded these changes could be a success. A systemic reading of the Paris Agreement therefore obliges us to reinforce our knowledge of the vulnerabilities that need to be addressed.

In this respect, two significant conclusions should be highlighted. The first is that in a closely interdependent world, economic and social prosperity and the prospect of development and economic activity beyond the OECD countries are critical for humanity as a whole. The matter of climatic vulnerability therefore needs to be taken seriously if we want a better understanding of the real prospects of success and return on any investment, public or private. Finally, it is essential to reinforce solidarity, both between and within countries, with the social groups most vulnerable to the effects of climate change and/or the change in production model. This is not only for ethical or moral reasons, important though these are, but also because of the negative economic effect of a lack of suitable strategies for those who regard themselves a priori as losers, and who see no choice but to resist change or fight for survival. A greater role needs to be played in this case by public institutions, but it is not their exclusive concern, nor is it reasonable that civil society should refuse to be involved in this process.

Paris may be insufficient, but it is certainly a useful tool for accompanying the construction of a new economic horizon, a twenty-first century necessity that must not be renounced.

BIOGRAPHY

TERESA RIBERA

The director of the Institute for Sustainable Development and International Relations (IDDRI) in Paris, an institution for which she was previously an international adviser on climate policy. From 2008 to 2011 she was the Spanish government’s secretary of state for Climate Change, with responsibilities for environmental and climate policies in conjunction with the State Meteorological Agency. She belongs to the State Civil Administrations Corp. She has also been a lecturer at the Autonomous University of Madrid. She frequently collaborates with various think tanks and nonprofit organizations, as well as with various international institutions. She is a member of the board of the Stockholm Environment Institute, the Institut pour la Recherche du Développement, and the Leadership Council of the United National Sustainable Development Solutions Network (UNSDSN), of whose Spanish chapter she is copresident. She chairs the Advisory Council of the Momentum for Change initiative within the United Nations Framework Convention on Climate Change.

Download Paths to sustainability S.M.A.R.T. (PDF)

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