Beginning with the largest gathering of political leaders ever seen and finishing with 196 nations signing the most ambitious deal ever struck to tackle global warming, the Paris Agreement is a diplomatic triumph.
I was fortunate to head a Carbon Market Institute delegation of 18 companies, the largest of any Australian business association. We hosted Foreign Minister Julie Bishop and Environment Minister Greg Hunt for key stakeholder events and were involved in regular stakeholder engagement with the negotiating team. Our delegation also had extensive meetings and made valuable connections with international business, investment and technology leaders attending COP21.
Below I have highlighted important lessons Australian business can learn from the Paris Agreement and ways we can capitalise on this next period of economic growth in a low-carbon world.
The debate is over
The massive economic impetus to a zero net emissions global economy is unstoppable and business gets it.
Consensus has been reached among the world’s major political and economic actors that we are on an inevitable path to decarbonising our economies. The Paris Agreement states that emissions should peak “as soon as possible” with rapid reductions thereafter and includes a five-year cycle for reviewing emissions cuts with action to be continually ratcheted up. We are on a path to net zero emissions.
The significant presence and statements of businesses and investors in Paris are an unequivocal signal that leading corporations get it. Corporate leaders speaking at many high-level events demonstrated their support for carbon pricing and their desire for governments to set long-term policy frameworks to provide certainty, which would lead to investment and unleash innovation.
In Australia, with an election this year, it is time for the national conversation to mature. Major parties need to depoliticise this debate and detail clear, long-term policy measures to decouple emissions growth from economic growth.
Businesses need to identify what their own pathway is to navigating the risks and capitalising on the economic opportunities a low-carbon economy presents, and frame business strategy accordingly. The debate is over.
It’s time to act.
The global emissions trajectory is set and so Australian domestic climate policy settings will inevitably tighten.
The Paris Agreement sets the framework for the global emissions trajectory. It’s down, down, down. Australia’s plan to reduce emissions – our nationally determined contribution stipulates that the emissions reduction fund (ERF) is the primary mechanism to achieve Australia’s 2030 emissions reduction target.
The heavy lifting for emissions reduction must shift quickly from the public funding of abatement through the ERF auctions to the safeguard mechanism. The threshold for coverage and safeguard mechanism baselines have been set at generous levels to start with in 2016. However, for the safeguard mechanism to make a meaningful contribution to emissions reduction, baselines will need to decline, perhaps sharply.
The 2017 review of Australian climate policy will identify the conditions and criteria as to how baselines will be adjusted and at what point they will pivot to start to give covered entities a material liability. It is important for all large emitters to model their future emissions profile, assess their potential liability and when it will kick in, and start to factor in a carbon price.
To do this effectively, business will be looking to the government to provide more certainty and transparency on the safeguard mechanism framework and how it will evolve into an effective market mechanism.
Market mechanisms with international trading will become a feature of the suite of policies needed to meet emissions reduction goals.
The Paris Agreement highlights the role of carbon markets in international efforts to meet emissions reduction goals through a new mechanism to support sustainable development. With the Australian Government now signalling strongly that we will likely have international units as part of our mix to meet United Nations Framework Convention on Climate Change (UNFCCC) obligations, harmonisation of market mechanisms will be critical.
The new rules of the post-2020 global carbon market will be set over the next few years. How the rules are set and which framework is adopted will be directly relevant to all Australian companies that have a liability under a compliance market – the safeguard mechanism or an another form of an ETS – and want to participate in an international carbon market.
If the Australian Government is proactive, the way the rules are designed could also potentially open the door for the export of domestically generated credits into other emission trading schemes. It is important that as this new market is designed, the private sector has a seat at the table and is on the front foot.
Market mechanisms should be a central feature of Australia’s climate policy approach, but we will also need a suite of other complementary measures at the federal and state level to meet emissions reduction goals.
Competition will heat up, but Australia could be in danger of being left behind.
At a fascinating session in the China pavilion in Paris, the Chinese chief negotiator was speaking with California Governor Jerry Brown. Their key messages, directed at each other with pointed fingers were: “We are going to be allies with you, we are going to cooperate with you, but most of all we are going to compete with you!”
The competition for low-carbon development has injected the US and China relationship with a new vitality. This is the next great economic battle. The EU, India, Japan, Korea, and other major trading partners have signalled their desire to actively participate in scaling the global deployment of low-carbon solutions. New business models are evolving rapidly. Some old business models will die.
The low-carbon transition is on but many parts of the Australian economy are not yet harmonised with the global movement. The world is capitalising on this generational economic opportunity and if we don’t get savvy about it, there is the danger we will fall behind. It’s game on.
There is a global market for Australian services and innovations.
The Paris Agreement established the Paris Committee in Capacity Building (PCCB). To implement the commitments made in Paris, many of the 196 countries will need the services and significant expertise that Australia has built up over the years in legal, commercial, financial and technical know-how.
We can help developing countries – including our Pacific neighbours – and large emerging carbon markets, such as China, with expertise in emissions management, reporting, monitoring, verification, offset project development, renewable energy project financing and institutional strengthening.
We have unique professional services skills to deliver to a potentially massive export market. The demand is here now and will grow.
The financing gap needs to be bridged and will create opportunities for innovative ways for public and private funding of the low-carbon transition.
The Paris Agreement sends a very powerful signal to the world’s capital markets. Climate finance is a critical element of the Paris Agreement, and funding adaptation and mitigation efforts will require trillions of dollars over the next few decades. Developing countries need the funds to effectively leapfrog the fossil fuel age.
The magnitude of investment will require the involvement of the entire finance and investment communities. The Green Climate Fund’s (GCF) objective is to be a game-changer for climate finance through its innovative approach. The Paris Agreement predicts the GCF will be worth US$100 billion per year by 2020, and this is to be a floor for post-2020.
Green bonds have grown exponentially and will proliferate. Banks have committed to drastically increasing debt to fund clean energy and technology, and new funds and fund products will be needed to channel investment from multilateral banks and institutional investors. Smart venture capital will continue to grow the investment in clean energy and cleantech innovations that have the ability to scale.
At the same time, scrutiny of climate risk in investment portfolios and of listed companies is increasing. It is clear that globally, investors are reassessing fossil fuel investments and making definitive changes to their investment policies.
In Australia, we can expect to see an increase in the need for governance and disclosure of climate risk and subtle shifts in asset allocation and investment mandates. With our very sophisticated capital markets, Australian financiers and investors are perfectly placed to play a key role in our region to fund the transition to a low-carbon economy.
Connections and relationships will help create a competitive advantage for Australia.
There were over 200 Australians represented in Paris and the development of new interpersonal relationships will be a lasting legacy of the two-week conference. Australian government ministers and the official delegation engaged frequently and openly with stakeholders; industry delegates shared insights; journalists built new informed contacts; and in typical Australian style, there were many extracurricular social and networking functions where strong bonds were formed.
In Australia there are two degrees of separation (or should I say 1.5 degrees?) between any key stakeholder from policy, business, technology, finance, civil society and media. Together we can mutually support the actions required to set us on a path to decarbonisation.
The sharing of ideas, technology and solutions can be turned into commercial interactions to help Australia benefit from the economic growth opportunities that will ensue in the post-Paris world. Personal relationships and trust built up between key economic actors in this unfolding drama will need to be nurtured. We are all in this together. The future begins now.