The Paris Agreement sets a path towards eliminating net greenhouse gas emissions this century, both by defining this overall long-term goal, and a series of five-year targets towards achieving it.
The real-world economic impact will therefore fall on those sectors with the greatest emissions. The energy sector is the biggest single polluting sector, responsible for 36% of greenhouse gas emissions, according to the Intergovernmental Panel on Climate Change (IPCC) (See Chart below). Most energy sector emissions come from burning fossil fuels, for example to generate electricity, whether for use in other sectors such as industry and buildings (indirect emissions), or by the energy sector itself (direct emissions).
Following energy is the land use sector (or Agriculture, Forestry and Other Land Use, AFOLU), at 24% of emissions; industry 21% (including metals, chemicals and cement); transport 14% (gasoline and other fuels); and buildings 6.4% (for example gas heating).
As a result, the biggest economic impacts of the Paris Agreement will be in energy, and especially sectors such as power generation and transport where alternative low-carbon technologies already exist. Coal is likely to suffer most, as the most carbon-intensive fuel, followed by oil and gas. Forest conservation should also benefit. Meanwhile, the Paris Agreement may have spawned a new generation of carbon markets, after the demise of carbon offset markets under the 1997 Kyoto Protocol, by introducing two new carbon trading approaches. For more detail on the Paris Agreement, see below, and a more lengthy, article-by-article, analysis.
The Paris Agreement includes two broad signals to slow growth in fossil fuel consumption. First, it sets a long-term goal for peaking of greenhouse gas (GHG) emissions “as soon as possible”, and to achieve net zero emissions in the second half of the century, balancing emissions sources and “sinks” such as forests. Second, the Agreement holds countries to account to meet this long-term goal. It requires them both to offer new goals for climate action every five years, from 2025, where each would be more ambitious than the last. It also requires countries to meet every five years for a “global stocktake”, to ensure that they are on track to meet the long-term goal.
Everything in the Paris Agreement that suggests a turning point for fossil fuels implies the opposite for low-carbon technologies, both at the small scale, for example roof-top solar power, and to achieve system-wide carbon cuts, such as greater municipal support for mass transit and LED lighting in cities. Benefiting technologies may include: energy efficiency; electric vehicles; nuclear power; and natural gas (replacing coal in the short-term). The biggest winner may be renewable energy, given recent momentum, and especially solar power, given recent cost reductions. Other winners will include enabling technologies for intermittent renewables, such as battery storage, transmission manufacturers including DC cables, and innovators in digital energy services, for households or automotive services for electric vehicles.
The Paris Agreement will give a further boost to a recent renaissance in carbon markets, with China about to launch a national emissions trading scheme in 2017; several countries such as Meixco planning national schemes; and sub-national regions like Ontario, Quebec and California recently linking schemes.
Article 6 of the Paris Agreement could give rise to two types of market. The first is a bilateral trade in emissions allowances, between nations or groups of nations, called internationally transferred mitigation outcomes, or ITMOs (Article 6.2). The idea is that if a polluter undercuts a carbon cap in one country, it could generate a carbon credit which it might then sell to another polluter which faces a similar emissions cap in another country. Given that this is a trade in emissions allowances between capped systems, accounting of these carbon credits should be relatively straightforward. The second type of carbon market would be allowed under a “sustainable development mechanism” (Article 6.4). In this case, the seller of a carbon credit would not face an emissions target, but would cut carbon emissions compared with a potentially arbitrary counterfactual. In this case, the accounting is more difficult, with possible credibility concerns which dogged the Clean Development Mechanism (CDM) under the 1997 Kyoto Protocol.
Forests get a boost under the Paris Agreement, with three potential hooks for funding and investment in conservation and management. First, as mentioned above, the long-term goal refers to “carbon sinks”. Countries may therefore protect forests more carfully, as they work towards the goal of balancing fossil fuel emissions. Second, Article 5 states that countries should protect forests, and where they can, provide support for other countries to do the same (Articles 5.1 and 5.2). Third, forests may be a beneficiary of carbon trading provisions, if forest conservation generates tradeable carbon credits.
The Climate Agreement puts a greater focus on adapation to climate change. That might see new investment in measures which prepare peoples for unpredictable climate change, from new insurance services, to investing in drought-resistant crops or strengthened flood defences. First, the Agreement includes a global goal for adaptation (Article 7.1). Second, it requires a regular review of whether countries are on track to help countries adapt to climate change. And countries agreed that $100 billion would in future be a floor for annual climate finance, from developed to developing countres, beyond 2020 (Decision, Paragraph 54).