Exiting Paris climate accord creates risk for US businesses
If the US stays out of the agreement, there will be consequences for American businesses with a global footprint, and even for some without
Washington — The outcome of the US general election is not yet clear. What’s been obvious for months is that climate change was on the ballot, and the US election matters for global climate action. And one thing is certain: the US exited the Paris Climate Agreement on Wednesday, formally casting off the signature international commitment to cut carbon emissions and limit global warming.
The Paris agreement is a landmark in global co-operation, and the US played a significant role in making the pact happen five years ago. Now, the US has essentially no role in global climate discussions, no input, and no leadership. That’s unfortunate, but more important for the global climate — and for global business — are the developments underway without US input at all.
When the Paris agreement was signed, many agreements to limit emissions already existed in countries, regions, and US states. None that I know of had a net-zero emissions commitment in place in 2015. Today, 60% of global greenhouse gas emissions are covered by some form of governmental net-zero commitment.
If the US stays out of the Paris agreement, there will be consequences for American businesses with a global footprint, and even for some without. These consequences all stem from a simple truth: the lack of a plan to substantially (or entirely) eliminate net carbon emissions creates an unfunded liability for companies. Whether that plan is international and set by treaties and agreements or voluntary and set by a board of directors, it prepares companies for a world in which more and more governments and corporations are drawing down emissions.
Climate change isn’t coming; it’s here and will have more of an impact on businesses as time goes on. Planning to limit its causes is also a way to limit its consequences — and the liabilities those consequences create.
The unfunded liability of climate inaction could undermine American companies’ global market position in a couple of ways. The first is competitive — with the world moving on in an emissions-constrained fashion, products from unconstrained US companies could become unattractive.
There’s a hint of that already in the liquefied natural gas (LNG) market, where French utility Engie has scrapped plans to buy LNG from a US exporter because of the company’s environmental impact, including flared gas at production wells in Texas’s Permian Basin.
The second is financial. Where capital markets are concerned about climate, they might find US companies wanting. The Institutional Investors Group on Climate Change, a European membership body representing €33-trillion of assets, has already urged the US to recommit to Paris.
US-based businesses would probably benefit from continued access to global capital, which might be choked off if investors go beyond merely encouraging companies to stick to environmental commitments and start demanding it.
On top of all that, companies’ physical assets will also likely be in danger due to climate inaction. They could be imperiled by rising sea levels, rising temperatures, and more intense storms. They could also risk becoming stranded assets, designed for products that cannot be sold or targeting significantly shrunken markets.
Should it so choose, the US can return to the Paris agreement. As my colleagues Will Wade and Jess Shankleman noted, “It’s designed to be harder to leave than to join.” Leaving Paris has already created a liability for US companies. The longer the US is out of Paris — whether that’s just a few more months, four years, or even longer — the bigger that liability grows.
Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.