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posted on 11 June 2017

Why The US Pulling Out Of The Paris Accord Was A Real Mistake

by Elliott Morss, Morss Global Finance

Introduction

Last week, President Trump followed through on one of his campaign promises - to pull out of the Paris Accord. Since he has been prevented from implementing several of his campaign promises, he was under pressure to follow through on at least one of them. The irony is that few of his core supporters had any idea of what the Paris Accord was and why the US was involved. Below I explain what the Accord is and why the US should not have pulled out.


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Global Warming: A Primer

a. Evidence of Warming

There is general agreement the earth is warming. And while temperatures can vary widely by year or region, data do support the warming hypothesis. NOAA has recorded 2015 as the hottest year since records began in 1880. The 16 warmest years ever recorded are also in the 1998 - 2015 period. 2015 was characterized by one of the strongest El-Niños and record warmth in the global oceans with an annually averaged temperature for ocean surface waters around the world that was 0.74 °C higher than the 20th century average.

b. Emissions

So the earth is getting warmer. The real policy question is whether man's actions are part of the reason for it. The vast majority of scientists say yes, pointing to man-created growing CO2 emissions as evidence of it.

Table 1 provides data on CO2 emissions by country. The US was the leading emitter until China took over in the first decade of the 21st Century. But there are some hopeful signs. Global emission growth has at least leveled off. And China's emissions declined for the first time in 2015. China is working hard to reduce emissions for two reasons:

  • China is a resource-poor country and

  • Country leaders are worried about citizens' complaints about high air pollution levels.

European countries have led the way in reducing emissions, down overall by 11% since 2010. The US, with rapidly growing and low cost natural gas supplies, has also lowered CO2 emissions. The US and other countries with large fossil fuel reserves lead the list of countries with the largest emissions per capita.

Table 1. - CO2 Emissions from Fossil Fuel and Cement Production 1970-2015 (MT (Gg) CO2 per year)

Source: Netherlands Environmental Assessment Agency

c. Is There a Causal Link?

So the world is getting warmer and manmade CO2 emissions are up. The fact that both are growing does not mean one caused the other. But keep in mind, scientists can rarely definitively prove anything. Instead, they look at data and when there appear to be regular linkages, they infer causality. And here, most climate scientists believe man's actions are contributing significantly to global warming.

Policy Implications

We can't be sure manmade activities are causing temperatures to rise, so what should we do? It would appear prudent to prepare for what global warming is expected to bring - more violent storms and rising sea levels.

But there are reasons to do more:

  • Mining fossil fuels is dangerous, expensive, and we still do not know the long term effects of fracking.

  • There are limited supplies of all fossil fuels.

  • The combustion of fossil fuels generates dangerous air pollutants.

This all suggests it would be beneficial to find ways to make more use of the non-polluting "green" energies. Now, renewable are still only 15% of total energies, but they are growing far more rapidly than any other source. And technologies are advancing. The cost of solar panels in 2013 was about 100 times lower than the cost of solar panels in 1977. And the real missing ingredient to turning this all around is finding something that can store large amounts of electricity. Such an invention would have huge implications. The periodic energy supplied generated by wind, tides, and solar could generate electricity that could then be stored for use when needed.

Why Trump's Pulling Out of Accord Makes No Sense

Fossil fuels pollute the atmosphere and are probably contributing to global warming. And it is quite evident that the momentum for renewables and new technologies to support them are advancing rapidly worldwide. Admittedly, The Paris Accord and the Green Climate Fund are voluntary vehicles to support more rapid implementation of green energies. But why should the US pull out? It makes no sense. When we do, the US loses its influence over how pressure is applied to laggard countries and how the $1 billion it has already contributed is used.

Table 2. - Green Climate Fund Commitments

Source: Green Climate Fund

Coal is a special case. Trump said the Paris Accord allows China to build hundreds of additional coal plants while the United States can't. This is pure nonsense. The Accord is voluntary. And as it happens, China just canceled the opening of 103 coal plants. The US? Trump is working to open new coal mines. This is backward looking. US policy should be to facilitate training and support for ex-coal miners to get them out of the coal business.

Huge pools of money are watching what happens with the Paris Accords and the growth of green energies. The US should be part of the accord and work with the private sector to hasten the growth of new green technologies. Trump pulled the US out of the Accord, thinking it would appeal to his basically ill-informed core supporters. It was a mistake. This decision will work against the interests of all Americans.

Investment Implications

History tells us it is a very tricky business to pick winners and losers during a global energy transition. All we really know is that a lot of money will be made and lost. Table 3 provides a few of the publicly traded companies "in the game." The company on that list of greatest interest to me is Brookfield, a huge Canadian real estate company. It has some holdings that will benefit from the growth of renewables. It should be kept in mind that the largest oil companies are not "sitting on their hands." With almost unlimited investible funds, they are watching where they can make money as renewables grow.

Table 3. - Publicly Traded Companies with Renewable Energy Exposure

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