Something to make a song and dance about: the US-China joint announcement on climate change and energy

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The recent US and China climate change accord spells opportunity and risk, but should give more oomph to the UN talks towards a global climate deal in Paris.

Like an opera failing because its two main stars are missing, the UN’s efforts towards a binding global accord on climate change has struggled while the US and China, the world’s two biggest economies – and polluters – have loitered non-committally off-stage. Then , suddenly, on November 12 we got a dramatic overture as China, for the first time, declared its intention to limit carbon emissions (China being by some distance, the world’s largest emitter of C02 in absolute terms – 28% in 2014).

Carbon emissions: great libretto, realistic plot?

At the Asia-Pacific Economic (APEC) Cooperation meeting on 12 November, Presidents Obama and Xi Jinping announced a bilateral agreement on climate change (Click here to see the White House’s statement, and click here to see China’s NCSC statement). Talking of long-term co-operation, they each committed to specific carbon emissions targets that would demand ‘a sharp transition’ towards low-carbon development. We see this as a major breakthrough – it suggests to us that a new era just began in the global politics of climate change.

The US’s 2025 target of cutting 26%-28% of emissions based on 2005 levels means reducing its annual greenhouse gas (GHG) emissions by 2.3%-2.8% from 2020 to 2025 – more than twice the average 1.2% annual reductions from 2005 to 2020. China’s goal of reaching peak CO2 emissions and a 20% non-fossil energy mix by 2030 means it will have to reduce its CO2 emissions per unit of GDP at a greater rate than GDP growth itself while increasing the share of non-fossil energy sources at 6% a year. The required 800-1000 gigawatts of new non-fossil-fuel installed capacity would rival the total installed capacity of all coal-fired power generation in China today.

With President Obama having to spar with (largely oil-company friendly) House and Senate Republican majorities, and President Xi Jinping battling to reshape China’s fiscal and economic landscape, these environmental ambitions certainly look… ambitious. Cynics may mutter that the agreement is vague and the target levels too high. But it’s a start and the first step is always the hardest….

carbon emissions from energy consumption - climate changeSource: New York Times, as at 12 Nov 2014

For investors – the high note is innovation…

The pursuit of these two giants’ stated aims could offer enormous potential investment opportunities via cooperation on climate change and low-carbon development. For example, as the Chinese statement puts it: “China could deploy its FX reserves towards acquiring US clean energy assets, e.g. importing natural gas or oil as less carbon-intensive fuel from the US to partly replace coal; investing in environmental technologies, services and skills; and helping to update and even rebuild US infrastructure. This would reduce the bilateral trade gap, create jobs and ease the budget deficit in the US, and further open China’s market for high-tech and clean energy innovation while improving environmental quality and economic efficiency.”

…and the discord is carbon risk

The US and China’s low-carbon development ambitions also spell the risk of stranded assets, the ‘carbon risk’ that some investors are already seeking to avoid. Reducing the world’s reliance on coal and oil, in particular, brings into question the validity of many carbon-based energy companies’ strategies in hunting out increasingly difficult-to-access reserves that may simply not be needed. Some of the major oil companies are already starting to feel the investor fall-out effects.

climate change - carbon emissions

Source:  UCSUSA (Union of Concerned Scientists USA), as at 18 November 2014

This agreement does away with any idea that China would not participate in an international climate agreement. It sets the stage for a major breakthrough at the 21st Conference of Parties to the UNFCCC (to be held at Paris-Le Bourget in December 2015).

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Alexandre Jeanblanc

Investment Specialist, SRI

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