2015 In Review: The Paris Agreement’s impact on energy markets

2015 In Review: The Paris Agreement’s impact on energy markets

The historic Paris Agreement, which was agreed on Saturday, Dec. 12 at the COP21 United Nations Climate Change Conference in Paris, France, includes nearly 200 nations and several bold provisions that aim at reducing net global carbon emissions to zero by 2050 (where greenhouse gas sinks are sufficient to absorb sources (natural and human caused)). It also includes a climate change temperature target of 1.5 degrees, more ambitious than the 2 degrees target many expected in the lead up to the talk. From the perspective of environmental history, this agreement may well define the year of 2015. 

In fact, many believe that the Paris Agreement will dramatically change the financial dynamics that have allowed fossil fuels to dominate energy for the past century, and accelerate the shift toward renewable energies that we are already seeing in global energy consumption. 

"We very much expect the outcome of COP21 ... to spark growth in renewable energy deployment worldwide," said Kevin Haley, spokesperson with the American Council on Renewable Energy. "We’re seeing the COP agreement as a driver not only for increased clean energy, but also as a catalyst for improved energy access in developing nations." 

The agreement targets emissions from fossil fuels directly, as the energy is responsible for 65 percent of global greenhouse gas (GHG) emissions, whether from coal, gas, and petrol electricity generation, transportation, or industrial use. 

Coal – the most carbon intensive fossil fuel – has seen global prices tumble to both environmental concerns and oversupply. Petroleum too is facing similar challenges of oversupply and low prices, though there has yet to be any noticeable drop in demand as the transportation sector remains gas-dependent. 

Natural gas has, conversely, seen a boom in the past decade, partly due to it being seen as a transition fuel with lower GHG emissions than petroleum or coal. Its near-term future is bright, though advocates say that we must shift from natural gas to renewables sooner, rather than later, to meet climate change goals. 

"If the coal industry is a harbinger, the oil and gas companies would do well to come up with ways to adapt to a low-carbon world sooner rather than later," said Manish Bapna, with the World Resources Institute, in a statement. "To survive in the coming decades, energy companies will need to re-invent themselves." 

Solar and wind have grown dramatically in the past few years, though both still represent a tiny share of global energy production. That might soon change. At COP21, India announced the International Solar Alliance of developed and developing countries, which aims to mobilize $1 trillion in investment for some 100 sun-rich tropical countries. The inclusion of technology transfer and capacity building in the agreement may help expand solar and wind penetration in developing countries and provide more opportunities for renewable energy investors. 

"Even the most astute analysts tend to underestimate the speed of technological innovation in this area," said Bapna. "The International Energy Agency’s World Energy Outlook has consistently raised projections for the penetration of renewable energy, as renewables’ capacity consistently outperformed IEA’s short-run estimates." The Paris Agreement could make this process even faster. 

Another issue is that the valuations for many oil, gas, and coal companies are reliant on their existing reserves of fossil fuels. But the Paris Agreement's goals require that the vast majority of reserves must stay in the ground, leading to potential “stranded assets” and creating a conflict between valuations and scientific reality. A report from Cambridge University released in March 2015, estimated that climate-related risk could have a more adverse impact on portfolios dependent on fossil fuels. This echoes recent analysis from the Bank of England, HSBC, and numerous other global financial institutions. 

"We recognize that climate change is currently the largest and most complex of sustainability issues," said Francis Condon, Senior Analyst for Mining/Oil & Gas at RobecoSAM, in a statement. "The investment community is still very early on its dealing in how to address climate change and fossil fuels." 

According to the Asset Owners Disclosure Project, among the top 500 asset owners, only 7 percent are able to calculate the emissions associated with their portfolios, while only 1.4 percent have reduced the carbon intensity of their investments over the last year, and only 2 percent have an emissions intensity reduction target for the coming year. As more portfolios look to reduce carbon in their investments, both for environmental reasons but also to reduce risk, fossil fuel companies may be the low-hanging fruit. 

"If you remove just 10 percent of the carbon emitting companies from a portfolio, you can reduce 20 percent of the emissions," said Condon.

The main uncertainty, until earlier this month, was whether or not a global agreement on climate change could be achieved and how long of a window fossil fuels would still have to be exploited. 

"This marks the end of the era of fossil fuels", said May Boeve, Executive Director of 350.org. "There is no way to meet the targets laid out in this agreement without keeping coal, oil and gas in the ground." 

The Paris Agreement will be operationalized in the coming months and comes into force in 2020, though many countries will likely act before that. It is likely its impacts on the energy industry will be felt well before then. 

It will also be at the forefront in the U.S. Presidential elections.  A Republican White House would certainly change the tone and demeanor of U.S. foreign policy relative to climate change and its allies. Investors will have to track trends, including political ones, in the months ahead.

 

Companies to watch 

Exxon-Mobil (NYSE:XOM)  is the largest non-state owned oil and gas company in the world and is facing pressure to its support of climate deniers in the past. The first trading day after news broke of the Paris Agreement, its stock price fell by nearly 2 percent. 

Chevron (NYSE:CVX) has seen its stock fall by nearly 20 percent this year, and has limited investments in clean energies. 

SolarCity (NYSE:SCTY), which has Tesla CEO Elon Musk as its chairman, is one of the largest solar energy companies in the United States. 

Peabody Energy (NYSE:BTU) is the world's largest private-sector coal company, with revenue of $6.79 billion a year. Its coal fuels approximately 10 percent of the electricity generated in the United States. Its stock is down 85 percent in the past year.

Nithin Coca is a freelance journalist who focuses on energy, environment, and economic issues in developing countries, and has specific expertise in Southeast Asia. Nithin's feature and news pieces have appeared in global media outlets including Al Jazeera, Quartz, Atlantic Cities, SciDev.Net, Southeast Asia Globe, The Diplomat, Penang Monthly and numerous regional publications in Asia and the United States

Originally published on December 30, 2015