In Conversation with Pamela Mar: On The COP21 Climate Deal

Q: Why is this climate agreement a big deal?

When was the last time over 190 countries – including every member of the G20, every member of the UN Security Council, and the largest developed and developing countries – agreed on anything, much less on one of the contentious issues of our day? Climate change is a classic case of free riding, where the incentives for individuals and countries to act are unclear, in some case intangible, or collected by others in the future or in other countries. So, COP21, where countries worked together to overcome collective inaction and responsibility shirking, should go down in history as one of the most promising, hopeful moments of contemporary history.

It is true that the agreement fails to provide a clear path towards the aspiration of keeping the global temperature rise to within 1.5 degrees of pre-industrial levels. Indeed, many have cynically remarked that the pledges (Intended Nationally Determined Contributions) of over 95 per cent of the emissions in the world, would amount to a temperature rise of between 2.7 to 3.0 degrees, with little certainty on how the gap will be closed.

Through this agreement, countries have committed to funnel funds, expertise, and policies to support a transition to a low-carbon global economy that leaves no one behind.

Q: Is the agreement legally binding or non-binding and does that even matter?

Laurent Fabius, France’s foreign minister and one of the heads of the COP21 negotiations famously said that this deal is the first “universal, legally binding climate deal” and the EU has also stated that the agreement is “legally binding.” Meanwhile NGOs have lambasted the deal as “too little too late,” unenforceable, and fit for around 1995.

In my view, the semantic discussion about whether the deal is binding or non-binding is not useful at this stage. What matters is that countries, of their own free will, mapped out their carbon reduction pledges and agreed that more needs to be done by a long shot, and committed to efforts to achieve that. In an ideal world, perhaps it would be useful to have a way to hold countries to their commitments, or to punish those who fail, and particularly if they have failed willfully. In reality, such punishments or the threats of punishments won’t do much good when it comes to climate change.

Countries have made their commitments and will start the process of allocating resources, making trade-offs, and filing their gaps in order to meet their climate pledges. In doing so, they will be reaping benefits as well as paying costs, and their commitment to the COP21 agreement shows that they have sensibly about these and prepared for them.

Invariably, as they move, they will pick up knowledge, markets will shift, and technology will advance. These will all expand the realm of the possible beyond what is visible in pledges today, whether binding or not. If the COP21 agreement gets countries moving – as it has already, even before ratification stage – it has already served part of its purpose. In other words, don’t focus on the legal language; focus on how the agreement helps move actions from the pipeline into reality.

Q: Is the business community happy about the deal and what’s in it for them?

Happy is probably the wrong word. In viewing the reactions of major brands, multinational companies as well as business organizations, I think what most are feeling is relief that we now have a little more certainty on the shape of future markets with regard to environmental and climate issues and the pace of change ahead. Until now, there has been a great deal of uncertainty and a noticeable lack of consistency between governments as some moved faster towards a low carbon future, while some didn’t move at all, and the actions that each took were very diverse and uncoordinated.

All of this uncertainty and inconsistency created challenges for any business that might have been motivated to act, to actually do as much as it could: the incentives were skewed and there was a lot of inefficiency built in. So any additional certainty on the shape of future markets and pace of change that this deal provides, to some extent, will make it easier for businesses to invest and structure for the future.

It may seem ironic that a deal that almost certainly promises more “government interference” and regulation of markets has been welcomed by international business. But I think the “free market” is a misnomer, and there are no such things as free markets. Rather, markets reflect the policies and rules which govern them, and it’s certainly not the case that additional regulation is always bad.

With regard to climate, for too long, lack of regulation has allowed valuable public resources to be exploited for private gain, to the detriment of the public’s health and the long-term sustainability of our planet. That’s definitely bad for the economy and bad for business. This loophole is finally getting smaller, with a bit more certainty on how economies and markets will protect the environment. It will make markets fairer by rewarding those businesses who are concerned about the future and are willing to invest around that. What’s not to like?

Q: How does certainty help business?

Let’s say I have $100,000, which I can spend either on research and development to develop a low-carbon version of a product, or on producing the current “loaded carbon” version as is. If I know that in the future, carbon pricing or even more attention on the carbon embedded in products will expand the market for the low-carbon version as of a definite date in the future, I become more willing to invest in low-carbon r&d, as the smart thing to do from a business perspective, regardless of whether I personally care about the environment.

Until now, there has been a lot of talk about a “low carbon” future but relatively little certainty, either about how fast it will come, or even that it will come at all in some countries.  The additional certainty provided by the COP21 deal makes those investment decisions easier to make.

Q: Does the deal make Developing Asia a winner or a loser?

The struggles of China with pollution have re-opened a debate about the collateral damage that takes place in the course of economic development. Put simply, must countries trade off growing rich with growing green? Or in other words, are pollution and environmental degradation inevitable consequences of industrialization that brings countries out of poverty?

These questions are relevant not just for China, which faces a massive cleanup bill, but also for India, emerging markets in Southeast Asia, as well as much of sub-Saharan Africa, all of whom are looking to industrialize their way out of poverty.

In previous years, developing countries seemed to put their faith in the China growth paradigm: that the road out of poverty was bound to be dirty, and that cleanup would only start after a country reached middle-income levels. They therefore resisted any efforts to constrain growth by requiring it to be green. Getting out of poverty was too important. As long as developing countries held to that position, a climate agreement, which necessarily put limits on emissions would be out of reach, as was the case at Copenhagen and every COP meeting until now.

Clearly the consensus has shifted. Looking at China– with much of its arable land contaminated, air pollution at sky high levels, and its severely polluted waterways — perhaps developing nations realized that dirty growth is no longer an option, particularly because the worst effects of pollution invariably fall on the poor. On the positive side, with falling prices of renewable energy, better technology, and more financing available, they may also have realized that clean growth is no longer such a costly endeavor.

Of course, all the answers are not yet on the table, but everyone acknowledges the need for a new growth paradigm and important stakeholders have now put money on the table to help Asia figure it out.   That Asia’s largest countries have committed to this vision is a victory, not just for the world seeking to temper the ill effects of climate change, but also for Asia’s poor, who stand to benefit from the global quest to chart the path toward fast, clean growth.