Can Markets Catch up to the Climate Challenge?

Earth Day in 2016 - April 22- was more notable than it has been in a long time, given that it was marked by the official signing of the Paris Agreement on Climate Change by 175 nations. It was one of those rare moments where signatories overcame their economic, political, geographical and countless other differences to agree collectively and simultaneously on how the world should combat combating global climate change.

Technically, each of the signing countries must still ratify the agreement, and at least 55 countries representing at least 55 per cent of global emissions must do so in order for it to take effect. Last December when the agreement was made in principle, some predicted that the ratification process might take one to two years. Today, the pact has been ratified by some smaller countries, China (the world's largest CO2 emitter) has promised to ratify the deal before the G20 leaders' summit in September. US President Barack Obama and the leaders of Mexico, France, and Australia have also committed to ratification within 2016. The US and China alone make up 38 per cent of global emissions already, so it is not unrealistic to expect that the agreement would come into force in just a few months time.

Countries will then need to commit to their climate pledges, which are essentially five-year movable targets for their emissions of greenhouse gases. Most countries have already submitted their "intended nationally determined contributions" (INDCs), and will begin to record their progress, and supporting measures, towards meeting their pledges.

Much has been made of the fact that the pledges are voluntary and flexible, and of the fact that a theoretically binding agreement may not be that enforceable in practice. Climate activists claim that it gives countries too much room to renege or fall short of the scale of action needed, without real means to force anyone to do more. They may have a point. If countries fully live up to their INDCs thus far, scientists estimate that the global temperature may rise as much as 3.7 degrees above pre-industrial levels, which is definitely outside the safe range. The Paris Agreement itself states that it aims at no more than 1.5 above pre-industrial levels.

What to make of the discrepancy depends largely on one's view of the role regulation and politics should play in tackling climate change. Those who see the Paris Agreement as the linchpin that marshals global action through political pressure and national regulation, may well be disturbed by the fact that the voluntary, flexible nature of the INDCs create infinite numbers of loopholes in the global push to limit the temperature rise to 1.5 or even 2 degrees. Some countries pledge too little, some pledge unrealistically, and others, like Saudi Arabia, refuse to participate at all.

If the climate agreement functioned like a multilateral trade agreement - where goals are supported by guardrails to channel resources and indicate ranges of allowable actions -their concern would certainly be justified. However the climate agreement is a political agreement, but its impact is unlikely to be felt through a cascade of regulations as with a trade agreement.

Rather, this agreement should be viewed as simply an important milestone in the world's response to the risks of climate change, driven largely by overwhelming global consensus on the matter. And, with the possible exception of the Republican Party in the US, the public consensus on climate change is clear. It consistently ranks at or near the top of lists of global threats and risks, whether by elitist institutions like the World Economic Forum, or in polls of ordinary citizens. For instance, in Pew Charitable Trust's 2015 global survey of over 43,000 people in 40 countries, publics in 19 of the 40 countries cited climate change as their biggest worry. The worry rate is even higher among Millennials.

As the public has become more educated on climate change and its risks, it has pushed businesses, investors, governments, and others to act, and this has shaped markets and industries, even in the absence of explicit regulation. Thus, solar power- whose price has fallen as much as 80 per cent in one decade - is now competitively priced with fossil fuel based electricity; electric cars are forecast to achieve price parity with combustion engine cars in the next few years if not sooner. In both of these cases, businesses have innovated and advanced technology because they recognized that public opinion has the power to create future markets, whether regulation is there or not.

At the same time, the absence of regulation offers no protection from public expectations. In other words, a compliance approach - where a company changes only in step with regulation - is no longer sufficient for companies that wish to compete in markets that are moving faster than regulation. So, will the future lie with Tesla and Chevrolet, who have invested heavily in EV technology, or with VW and Shell, which are lobbying to keep fuel based cars at the center of automobile markets at least in Europe?

The real question is whether governments should even be making choices such as these particularly where the challenges needing to be addressed stretch far into the future, and probably exceed the technology, knowledge and capabilities in our hands today.

In sum, governments do need to set markets in broadly the right direction, based on public interest and the protection of public resources. But beyond that, few governments have the foresight to know which technologies will progress the fastest, and bring us closer to the solutions we need to meet massive global challenges such as climate change. The same could be said about the global food challenge, or the global middle class challenge (what happens when 3 billion Asians start to consume like Europeans and Americans?).

In this regard, the Paris Agreement, despite its flaws, is sufficient for the present. The real test will be in how governments use the small reserve of political capital that has come with its signing, to help markets move faster, and thereby ensure that today's climate pledges become floors for actions rather than targets. Markets are already moving faster than regulation, but they need to move a lot faster to catch up with the real challenge of climate change.

The views expressed in this article are the author's own and do not necessarily reflect Asia Global Institute's editorial policy.