FFI Perspectives

Leaving the Paris Agreement: When Politics Trump Economics, Science, and Reason

By Christopher Ito and Lucy Di Rosa

This afternoon, President Trump announced his intention for the US to withdraw from the Paris climate agreement. We’ve written about the risks, difficulties, and expense of withdrawing from Paris before; you can read our posts about that and our observations about Trump and energy policy here and here.

In terms of the logistical, political, and financial impact, it is not clear at this moment what it will mean for the US to remove itself from the agreement, or to attempt to negotiate to re-enter at a future date on new terms (as the president indicated today that he might do). However, we would expect the impacts of today’s decision to be both negative and notable for the US’ role as a global leader and innovator.

What we do know is that the coming together of 195 signatories to sign the landmark agreement demonstrated a worldwide pledge to reduce carbon emissions in an effort to prevent global average temperatures from rising more than 1.5-2oC.[1] The very existence of this agreement signaled an unprecedented global commitment to mitigating the many risks that climate change poses.[2] And with that commitment have come several changes in direction for policy makers, along with opportunities for innovation and employment for the energy industry. There is no question that a US reversal with respect to Paris will slow down the policy changes, but successful businesses will remain attuned to economic trends, which continue to point to the acceleration in growth of renewable energy sources. By ignoring this growth, and the threats to human safety and security that extreme weather events are posing every day, the mere announcement of withdrawal from the Paris agreement shows an abdication of responsibility and a disregard of economic trends, scientific research, and, quite frankly, reason. We can only assume that the president’s decision to stay the course on this campaign promise is motivated by politics alone. But this rigid stance comes at an enormous cost in terms of economic capital and US leadership on carbon emissions, not to mention the potential human toll that an acceleration in global warming could cause.

The president’s remarks today omitted several key points regarding the transition away from fossil fuels, a significant factor in the reduction of carbon emissions. We cannot list them all here, but we will leave you with one: during this administration’s four-month tenure, large investors have continued to show awareness of and action on climate risks. Strategies vary from investor to investor. Some choose divestment; others, such as several high-profile Exxon shareholders, opt for engagement. Meanwhile, financial institutions around the world are working to enhance their impact investing and ESG offerings to meet the needs of investors.

At FFI, we will continue to expand our ability to support diverse investment profiles, while adhering to one common theme: that the move away from fossil fuels is inevitable, and that the world, despite today’s announcement, will continue its path towards a clean energy future.

[1] The “2 degree scenario” for global warming was established by the Intergovernmental Panel on Climate Change (IPCC). In their Fifth Assessment Report, the IPCC established that to prevent extreme climactic changes that could increase the frequency of catastrophic weather events, global warming needed to be contained by 2oC relative to pre-industrial levels. The parties involved in the Paris agreement acknowledged the importance of the 2oC threshold. In addition, they agreed to make best efforts to cut emissions to avoid a rise greater than 1.5oC, a more ambitious but more comfortable target from a risk perspective.

[2] Only two countries in the world are not part of the Paris agreement: Syria and Nicaragua.

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