How will the formal withdrawal from the Paris Agreement affect our growth industries?
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By now we have overheard lots of rhetoric on the ins and outs of the Paris Agreement. More quietly as far as the general public is concerned, but well known in the energy industry, was the executive order to undo the Clean Energy Plan.1 This article is not about supporting—or refuting—climate change. It is about the U.S.’s economic future and what impact leaving the accord may have.
Whether we want it today or not, our role has been one of international leadership since Woodrow Wilson entered us into WWI. That leadership was cemented after WWII into covenants such as the UN, NATO, The World Bank, and hundreds of trade agreements and treaties.
This is the second time the U.S. has formally withdrawn from international agreements2 since the Trump administration came to office and there may be more to come. Since we are most concerned with ‘putting America first,’ questions arise as to what impact these moves will have on the U.S.’s economic outlook.
A Bit of History
President Trump’s withdrawal from the United Nations Framework Convention on Climate Change, informally known as the Paris Agreement, will turn off further financial commitments3 to the fund set up to support poorer nations; but beyond that and more important to this discussion, it abandons a commitment to reduce greenhouse gases and, de facto, a leading place at the table in the green-tech world trade.
President Obama did not actually seek ratification by the Senate for this treaty, since his and previous administrations’ policies had set the U.S. on the course to reduce greenhouse gases with regulations and incentives for alternative energy.
Though the motive of the current administration is the reinvigoration of the coal industry, it remains to be seen what the government can actually do to achieve that goal. (Again, this article is not to debate whether that is advisable or not.) For any sector to be sustaining, they have to have a profitable market. Yet, the coal sector has been in decline for a number of years, not due to regulations, but due to the fact that it has become less and less competitive with other sources of energy for electricity production, especially natural gas.
In the early 2000s (~2004, 2005) coal’s share of the energy market began to decline. Various initiatives at state and national levels, which often had bipartisan support, began to help catalyze new energy sources.4 A decade later many power plants (major purchasers of coal) have been reducing their reliance on coal by converting to alternate sources,5 and in some cases, have shut down. So the truth is that the current level of production meets demand and that demand is likely to continue shrinking. Moreover, even if emission standards are loosened at a national level, the states generally still dictate what type of power sources reside in their domain.
Climate change aside, we all remember that the major concern from the late nineties onward was more about supply—with oil prices gyrating and often at astronomically high rates—which severely impacted other industries from transportation to housing. As well, there was/is an ongoing concern about national security and reliance on foreign oil sources, which was also a driver in the focus on renewables.
Since then, new sources and methods (fracking, oil sand, natural gas, liquid natural gas exporting, as well as solar and wind) have taken much of the pressure off high demand for carbon sources. There have also been improvements in technology (more energy-efficient vehicles, machinery/plants, and buildings; more people working from home; converting trucks to natural gas, hybrid automobiles, and so on).
Faced with losing their biggest customers and supply outstripping demand, the biggest producers in the Middle East then led the way in reducing prices to try and keep their grip on world markets.6 That, plus their ongoing attempts and pronouncements of friendship to the U.S., has lessened supply fear somewhat as a policy driver. In the short run consumption may vary, but over the long run prices will increase again, and accelerate the push for more hybrids and other methods to reduce our gas guzzling habits.
Though not as dramatic as coal, our drive for all types of carbon sources of energy is just shrinking. Though the climate change buzz had become the overarching policy driver by the time Obama arrived, as previously stated, there are many other reasons there were/are policies to reduce our carbon dependence.
Although President Trump’s withdrawal signals disinterestedness in cooperating with the world on reducing greenhouse emissions (on our terms), it may actually have the opposite effect than he intended. Though at a Federal level the U.S. will not officially sustain its formal agreement, it turns out that we can—and probably will—participate in a more credible way over the next four years.
Going green has been discussed and committed to by most major corporations and some state and local governments7 for some time.8 And they are not about to lose a competitive edge in an industry with jobs in one of the largest and still growing markets in the world. (An interesting read is Power Forward 3.0, which lists companies and their carbon savings and goals.)
Thus, rebound initiatives such as the United States Climate Alliance, which has many states as members, represent huge markets on their own for clean energy. “Following the Thursday announcement, Mr. Brown (governor of California), New York Gov. Andrew Cuomo, and Washington Gov. Jay Inslee said they would form a coalition of states committed to upholding the American side of the Paris Treaty deal,” stated the Wall Street Journal.9 (June 1st) So far the alliance has 13 formal members and, with other states, passes various clean energy commitments. “The member states represent about one-third of the U.S. population, roughly 102 million people, and also about one-third of the U.S.'s overall Gross Domestic Product at $6.83 trillion combined, according to Jaime Smith, communications director for Inslee.” USA Today.
It is likely that more states will yet join. Many states were already engaged in various green strategies.10 Associations such as the Climate Mayors (see chart of cities, Figure 1) will also provide an extra boost, as more governors and mayors take more public stances on their commitment to reduce greenhouse gases, and most importantly, support industries in their domain that can provide jobs and profit from the worldwide commitments that other countries have made.
“Former New York Mayor Michael Bloomberg, the United Nations Secretary-General’s special envoy for cities and climate change, said through an adviser on Friday that those three states, along with a coalition of at least 100 businesses and 30 cities would on Monday submit a letter of intent to the U.N. indicating the coalition would meet the U.S. goals through their own commitments.”11 (June 1st)
Figure 1: Climate Mayors across the U.S.
So it seems that the U.S. is actually very committed to reducing our greenhouse gases. And in fact, the Paris agreement was not overly aggressive by some standards. So with this little extra effort a lot can be achieved in spite of the President.
Where It Hurts
But where it could really hurt is our overall relationship with modern, progressive world leaders who we need to cooperate with on a range of issues. We don’t want our allies to take their marbles and go home. From the war on terror, jointly solving conflicts, and emergency response to national or regional disasters, to healthcare, transportation, new technology developments, and of course, trade, we need to cooperate.
Significantly, the U.S. is involved in several trade negotiations where we seek cooperation with countries like Germany. In fact, there is a major international trade deal in negotiation right now. Called the Environmental Goods Agreement, its goal is to reduce or eliminate tariffs on a range of environmentally friendly products: significant technologies such as turbines, solar cells, and hybrid batteries, as well as consumer products. This is reported by the WTO, who is leading the negotiations, to be a $1 trillion market. Surely we want to play in this arena.12
Interestingly, the U.S. is working on a trade deal with China for liquid natural gas, which can be worth billions to the U.S. Sourced from Pennsylvania, Texas, and probably other states where natural gas is plentiful, natural gas is taking its place as a cleaner energy source and, again, represents a significant market opportunity for the U.S.
The energy sector is a big part of our economy, with over 6.4M jobs and growing,13 according to the U.S. Department of Energy. Technology—clean-tech manufacturing, services, construction, and the automotive industry, to name a few—is part of the clean-tech job boom. Here is where jobs are being added to our economy.14
Companies that are producers of clean energy (solar, wind, etc.) and green technologies are competing against the traditional sources in many markets. Though it is true that there are U.S. government subsidies for those technologies, it is also true that every country that does clean tech subsidizes its own national companies. It is also true that carbon producers also get huge breaks from the government to the tune of about $5B per year.15 In fact, one of those subsidies is the lease of public lands (another current debate in Washington) for astronomically low rates.
Conclusion: America First?
When you think of it, there aren’t that many significant growth industries out there. So we have to ensure a flow of capital and ready welcoming markets for green tech and green products.
The U.S. has often subsidized emerging technologies. For example, during the ‘80s when we were most worried about Japan in high tech, the U.S. government funded many programs to catalyze developments in semi-conductors, internet development, wireless, and other elements within the high-tech world. So supporting a growth industry should probably continue if we want a strong place in a growing global market—rather than leaving it.
Thus, most importantly, by withdrawing from the Paris Agreement, the U.S. erodes its position as the global leader. Instead of leading the world, we would become the last in the race for green energy (and other technologies). As in the Transpacific Partnership, China is quick to step in to fill the void. Where will that leave us a few years from now? Will American be first?
The Paris Agreement (this document is pretty boring), but a more interesting read is the submission by country known as the NDC Registry. These documents are in plain English and insightful on the thinking of various nations on their commitments to reduce greenhouse gases.