USA Running Away: American Isolationism and the Paris Accords

November 13, 2017

“6.5 million jobs and $3 trillion in lost GDP” – Trump’s solemn duty to protect America once again proves the dangers of policy myopia 

 

In a week where the UN’s annual review realises the emissions gap remains ‘alarmingly high’, Syria’s agreement to join the Paris accord puts US isolation on Paris back in the limelight. The review merely reinforces what we already know. Whilst fossil fuel use declines and climate policies are heading in the correct trend, as illustrated by UK’s concerted efforts to phase out coal by 2025, the UN continues to predict a 3 degrees C rise by 2100, with current pledges only covering 1/3 of the cuts needed to keep temperature within the limits set out at Paris, as shown in the diagram below.

 

 

 

                                                US Policy Impact on Global Temperatures

 

Indeed, as we face the perils of Business as Usual (BAU), the White House continues to downplay the anthropogenic impacts on climate change and findings from https://science2017.globalchange.gov/), published by government scientists this week.

 

Policy myopia is a real concern as Trump’s “solemn duty to protect America” continues to ‘justify’ US policy actions to save ‘6.5 million jobs and $3 trillion in lost GDP’, catalysed by US participation in the Paris accord. As US nears its natural rate of unemployment and global synchronised upturn continues to accelerate, at a predicted pace of between 4 to 4.5% in Q3, investment and expansion of the renewable sector makes this unlikely to be true. Furthermore, the addition of 2.5ppm CO2e per year, coupled with the 70% increase in food production needed to feed world population by mid-century ensure the long term implications of laissez faire policy have detrimental impacts on poverty and inequality, far greater than today’s discount ratios account for.

 

Short term impacts on the US economy has been muted by its inability to exit Paris immediately. Unravelling Obama’s clean power plan to lower emissions from power plants burning fossil fuels ought to bring optimism to the coal sector. However, in what is a declining, sun set industry, employment and sector growth depends far more on external shocks and market conditions. Although, declines in recent supply gluts have prompted current upticks in crude prices, triggering a minor upturn in coal mining jobs, as illustrated below, market prices will quickly be counteracted by increased production of cheap shale gas, and demand in the sector will fall.

 

 

                  US isolation on Paris has had limited impacts on the sun set mining industry

 

 

However, industry fears lie mainly in the dampening effects of US environment stance on investment in the renewable sector, which represents a key source for long term growth. This may generate further retaliation from countries holding an unfair share of the climate burden. Indeed, many similarities can be drawn with the Kyoto Protocol, where the exclusion of China wiped out all gains made by all other participating countries.

 

On a positive note, one can always hope that current US bottom up approach to climate change can mute the adverse ramifications of a full blown US exit. Currently, 29 states already have mandates for the use of renewable electricity, whilst tax breaks and subsidies are also available to support green technology investment. At the forefront of this is California, who has set out targets of cutting greenhouse gas emission by 40% from 1990 levels by 2030.

 

Many however, are sceptical current climate plans and emission trading schemes will be sufficient to steer us away from the worst of climate doom, as the Stern review predicts BAU will cost 5-20% of World GDP, with severe, regressive impacts on the poorest, developing nations.

 

Solutions:

 

Heavy investment and policy commitment to decarbonising the supply side, and focus on energy productivity is ultimately the way forward to secure sustainable growth. Particular attention needs to be placed on sustainable infrastructure, energy and cities through the channels of energy efficiency, decarbonisation and electrification of the economy.

The expansion of Multilateral Development Banks who act as trusted partners with sectoral knowledge is the crucial catalyst to private investment. Furthermore, we agree with industry experts in seeing the need for MDBs to increase their gearing ratio towards 2, to accelerate development through these channels.

 

The African problem is perhaps the most significant of all, as the only place on earth where urbanisation is not correlated with poverty reduction. As an economy driven by consumption and rent seekers, capital flight has resulted in insufficient investment, high business costs and poor connectivity, as nominal wage rate continues to remain high.

 

As a whole, we need to promote growth, not just sprawl through infrastructure investment and by increasing the proximity of jobs to houses. Demand nudges will be crucial prompts to guide the development of the next China and India in a green, sustainable way, whilst ensuring inclusive and long term growth. To achieve this, the rest of the world needs to lead by example, and Trump’s stance marks a major set back.

 

 

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