Trump announces exit from the Paris Agreement

On 1 June 2017 Donald Trump announced that the United States would withdraw from the Paris climate agreement. Europe and China reaffirmed their commitment to the pact. The decision by the president of one of the world’s largest emitters had a major political impact, and the immediate reactions of other large countries sought to convey that the agreement did not depend on the presence of any one of its signatories. For companies, what mattered was working out whether that gesture changed the environment in which they operate.

Beyond the political debate, the announcement posed a practical question for companies: to what extent were the rules of the game changing on environmental and energy matters? The answer, in the short term, was that they were changing less than the headlines suggested, because much of the world, including Europe and China, was holding its course. But that did not remove the uncertainty over how long the commitments would last.

What the Paris Agreement is

It is an international pact in which countries commit to limiting the rise in global temperature through emission-reduction targets. Each state sets its own goals, and the agreement works through political pressure and cooperation among the signatories. There is no central mechanism that forces compliance, which explains the importance of each country’s political will.

That design has an advantage and a drawback. The advantage is that it allows the participation of countries in very different situations, each with its own targets. The drawback is that it depends on governments keeping their commitments over time. A change of policy in an important country can weaken confidence in the whole, even if it does not on its own cancel the agreement. That is why the positions of the major countries in these negotiations are followed with such interest.

The signal it sends

The withdrawal of one of the world’s largest emitters weakens the agreement, but the response from Europe and China suggests the energy transition would continue in much of the world. Companies with business in those areas remain exposed to growing environmental rules, incentives and requirements, which can affect their costs, their products and their relations with customers and lenders.

For a company, the signal is twofold: on the one hand, it is unwise to assume that environmental tightening will stop because one country withdraws; on the other, it is also unwise to take for granted that the rules will be uniform everywhere. Operating in several markets means following each regulatory framework closely and being ready for requirements to differ from place to place.

What a company should weigh

It is worth analysing how energy costs, emissions requirements and the environmental expectations of customers and investors could affect the business. Anticipating allows processes to be adapted calmly and the opportunities of the transition to be seized, from energy efficiency to new products or services. A planned investment usually costs less than an urgent adjustment imposed by a rule.

A practical first step is to know how much energy the company uses, from what sources and under what contracts, and how much room for improvement there is. Then, to review what environmental requirements major customers and financial institutions set. An adviser can help prioritise measures, realistically and without grand promises, so that adaptation moves at a pace the company can sustain. The essential thing is not to wait for the requirement to arrive by obligation.

Environmental rules advance in stages; adapting early usually costs less.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.