Leaving the Paris Climate Agreement

July 17, 2017
Four predictions about the departure



President Trump's decision to withdraw the United States from the Paris Agreement distressed environmental advocates the world over. But it's important to take a measured approach in assessing what impact this move may ultimately have.

No one can know with certainty what the global economy, or the planet, will look like in 2050 or 2100. Still, we can offer a handful of reasonable predictions, in particular with regard to what the departure means for oil and gas exploration and production, voluntary emission goals, the coal industry, and energy infrastructure.

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For US-based oil and gas companies, leaving the Paris accord may lessen a near-term uncertainty around compliance. Importantly, it also reduces a worry about potentially greater operating costs. Note the choice of words - lessen and reduces, not removes entirely. While US companies might have gotten a reprieve from having to adhere to the Paris Agreement guidelines, unenforceable though they may be, these firms still will need to adapt to a degree. Assuming other countries continue to follow the climate plan, as many have indicated they will do, along with individual states, US companies might continue to face pressure based on the provisions of the Paris document.

Of course, some of them have made a point to talk up their environmental commitment. A number of companies, including ExxonMobil and BP, have previously expressed a preference for the accord or another environmental effort. Why? Because these days, companies in nearly every sector view having green credentials as good business, even if it comes with a price tag.

On the practical side, E&P companies want gas-friendly rules. They also would rather have a seat at the table when foreign leaders are threatening to make hydrocarbon deposits inaccessible. So while oil and gas companies get a win for now, their work isn't over.

Understand that going green isn't going to happen quickly. According to the Energy Department, fossil fuels were responsible for 81% of the energy consumed in the US in 2016. Melting Arctic ice and rising sea levels may be genuine, critical concerns. Regardless, the economic worries associated with remaking the $18 trillion United States economy aren't simply going to be brushed aside, nor will optimistic projections about the value of going green be assumed to be true. As noted, oil companies may be willing to take certain steps on their own. Also, if they're planning for the long term, as they should be, they'll assume a future with regulations that are less friendly to petroleum. That doesn't mean they're going to turn into windmill builders.

Carbon reductions on a grand scale will require extraordinary logistics. In 2015, nearly 68 million US residential consumers used natural gas. Even if every new home built today and going forward were to rely on renewables, those old homes have to be fed with gas or retrofitted. How would the latter be carried out? Taxes paid to the federal or state governments? Would home owners be responsible? What about transportation? Will commercial airplanes run on lithium-ion batteries?

As of 2016, 6.4 million American jobs were in traditional energy or energy efficiency, a figure that includes renewables. Perhaps each one of these can ultimately be a solar, hydropower or wind role. Let's not forget however, the related jobs such as commodity traders and project financiers - or the employees at software companies such as Allegro. Are those replaced? The point is it's far easier to have strong opinions about pollutants than it is to entirely reshape the world's biggest economy.

Regardless of Paris, coal probably isn't coming back as a preferred power-generation source. Realistically, coal-fired plants are going to be with us for a few more decades - they can't be turned off or replaced without an expensive and detailed plan. Coal in the US still leads to 30% of generation, and you don't simply flip a switch to change that. Reworking those plants, continuing to build new non-coal facilities and upgrading transmission and delivery infrastructure takes a great deal of time and a tremendous amount of money.

What it means is coal has some time left. Still, considering the regulatory efforts and voluntary drives to reduce emissions, as well as extensive supplies of natural gas and decreasing costs of renewables, the best days of coal are likely over.

All this said, we can't ignore the fact that climate-related efforts are already under way, and others will follow in the years ahead. In joining the Paris Agreement, the Obama administration vowed to reduce domestic emissions by 26% to 28% below 2005 levels by 2025. As of 2016, US carbon dioxide emissions related to energy had already declined by 14% since 2005, driven by the increase in natural gas and renewable energy sources and a drop in coal-fired generation. Meanwhile, jet fuel consumption is 11% below what it was a decade ago. That said, transportation-sector emissions overall have edged upward, with motor fuel being the main contributor.

On the whole though, the US has lowered emissions considerably, even before signing the Paris pact. That's not enough for some, but it shouldn't be minimized, either.

Ultimately, although it's tempting to focus on the potential for utterly dire outcomes, the reality we encounter likely will be much more manageable. There will continue to be efforts from corporations and regulators to aid the environment. It's a guarantee that free-market engineering solutions will emerge. Government-funded solutions will, as well.

The US departure from the Paris Agreement - which can't even happen before November 2020 and which may not even be permanent - clearly was a disappointment to many. It is not, however, the end of the world.


Michael W. Hinton is the Chief Strategy and Customer Officer at Allegro Development Corp., a developer of commodity trading and risk management software for companies that buy, sell, produce, or consume commodities. Headquartered in Dallas, Texas, Allegro has offices in Calgary, Houston, Jakarta, London, Singapore, and Zurich, along with a global network of partners.