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08 November 2019 5 min read

Scenario planning in the wake of US withdrawal from the Paris Agreement

The US pull-out from the Paris Agreement, although not a surprise, is certainly bad news for the global fight against climate change. We expect the withdrawal to slow the global effort to curb carbon emissions and may also increase the costs for other nations as well.

President Trump has been talking about withdrawal since 2017, however now that it has finally happened, companies need to assess what it may mean in terms of the opportunities and risks for their businesses and the sectors and geographies in which they operate.

We view the impacts from two lenses, looking at both political and economic factors within each.

Lens 1: US decarbonisation rates

The first lens focuses on what the absence of a targeted reduction through a global agreement might mean for the rate of decarbonisation of the US economy.

Economic factors

Two key economic factors are currently accelerating the rate of decarbonisation – the reduced carbon impact of shale gas versus coal and low cost of renewable energy sources. We don’t view that these factors will be directly impacted by the withdrawal.

Political factors

Key political factors include the emergence of state-mandated carbon reduction measures and relaxed federal environmental restrictions on emissions for coal and other high carbon-emitting sources. In the absence of federal targets, we are seeing the emergence of more localised state and city carbon reduction commitments. In some cases, these seem to be more enforceable than global agreements. However, federal efforts to rule these state measures illegal (e.g. California vehicle emission limits) are undermining local initiatives.

Lens 2: Impacts for the rest of the world

The second lens focuses on the absence of the US in the Paris agreement, and what it will mean for the global outlook for emissions.

Economic factors

First is the impact of an expected improvement in the relative competitiveness of US goods which would not have higher costs of carbon included in them. However, recent EU proposals to potentially introduce carbon taxes on imported goods could offset this competitive advantage.

Another factor that will prove challenging is the lower level of government spending on driving down the costs of low-carbon technologies and infrastructure such as carbon capture and storage (CCS) mechanisms.  All else being equal, decreased investment can be expected to delay CCS commercialisation and deployment.

Political factors

On the political front, other countries lowering or removing their carbon reduction targets since the US have removed theirs presents a heightened risk.  In addition, in the absence of a globally agreed target and burden sharing, we may see an emergence of 'regulatory arbitrage' for companies in trying to anticipate the unintended consequences of country or regional-level agreements.

Updating your scenario planning

The US withdrawal from the Paris Agreement is expected to increase the complexity and risks of carbon to businesses. Companies need to develop their own long term strategies to maximise growth opportunities where they can (or position themselves to do so in the future) and minimise downside risks from reputational, physical and financial exposures. Companies will need to consider the impact of these new risks into their risk and scenario planning tools to assist in identifying strategies and potential new pitfalls.

In a world where state actors have failed to reach agreement on how to fairly share the costs of decarbonising the world's economies, it is becoming increasingly likely that society generally will ultimately end up footing the bill for higher costs with less certainty of positive outcomes.

Need help with your transition risk scenario analysis? Our Prospect tool can help.