The USA and the Paris Agreement

On April 26th the Washington DC based Center for Climate and Energy Solutions (C2ES) sent a letter to US President Donald Trump urging continued US participation in and support of the Paris Agreement. Shell was one of thirteen signatory companies. The arguments offered in the letter provided a perspective on the benefits that continued participation in the Agreement could bring to the business community in the United States, in the form of investment opportunity, cost minimization and risk management.

While these business benefits also translate into a benefit for the United States as a whole, the letter was not particularly specific on this matter. Benefits at a national level can be difficult to assess, but it is worth looking at these to get a full picture of where the Paris Agreement might take the US economy over the decades to come.

At its core, the Paris Agreement calls for a global shift to net-zero emissions of greenhouse gases, with carbon dioxide being the critical component of this given the scale and its accumulation in the atmosphere. The earlier net-zero emissions of carbon dioxide is reached, the lower the warming of the climate system is likely to be. That journey will require a major transition of the energy system, from one that emits carbon dioxide to one that doesn’t. This will require three core elements that have largely driven the economy of the United States over the last 150 years;

  • Innovation – the US has excelled in this area when challenged to do so, from the development of the first electricity grids by companies such as Edison Illuminating Company in the 1880s, through the moon landing in 1969 and the more recent landing of the Space X rocket on an ocean platform after launching a satellite into orbit. In the energy sector, this has included developments such as hydraulic fracturing (which enabled the rapid shift from coal to gas in the power sector), energy storage technologies, digital energy management and distributed energy systems.  Particularly in the case of the USA, diverse, state level energy systems enable the unique ability to experiment with market and policy innovations on a smaller, sub-national scale.
  • Trade – the US is a trading nation and this is likely to be at the core of the implementation of the Paris Agreement. A world of net-zero emissions is not going to be a world of no emissions, but as the Agreement notes it will be one of balancing emission sources and sinks. Some form of trading, operating at significant scale, will be required to match these two parts. Significant trade will also arise from energy system deployment.
  • Scale-up – perhaps more than any other aspect of industrialization, the US has demonstrated time and again its ability to rapidly scale the solutions that innovation opens up. It has done this more recently with hydraulic fracturing for natural gas and now oil production, but during WWII the optimization and scale-up of various manufacturing disciplines led to Liberty Ship construction at the rate of three vessels per day. Today, we are seeing scale-up again with the construction of the Tesla Gigafactory in Nevada. More will doubtless follow.

A world heading towards net-zero emissions is one that the USA has the potential to thrive in;

  • It has vast natural resources, which almost certainly includes very significant geological storage capacity for carbon dioxide. That means the USA could position itself as a net-negative emissions economy, effectively selling stored carbon dioxide as an export. This would encompass its capacity for trade and scale-up in particular, as much of the innovation has already taken place, notably in the USA.
  • American innovation in the energy sector is well known, from the speedy development of nuclear power in the 1950s to the current rush towards ultra-low-cost solar PV and battery storage. Several start-ups are working new angles on nuclear fusion, an entrepreneurial approach to energy development that is hardly contemplated anywhere else in the world.
  • The USA is moving rapidly to become a major exporter of natural gas as LNG, a development that wasn’t even on the horizon just a decade ago. Natural gas demand could increase with energy consumers and national governments looking to reduce emissions, thereby offering the USA the opportunity to be a leader in the LNG space.
  • The US is the leading global developer of carbon capture, with more projects than any other country thanks to its sizable enhanced oil recovery industry. It has a mature and expanding carbon dioxide pipeline system, a key infrastructure requirement for the full development of CCS.

While none of the above specifically required the Paris Agreement as the enabler, there is equally no doubt that the UNFCCC process, fraught as it may sometimes appear, has catalyzed change in the energy sector over many years. For example, it has brought additional focus to renewable energy development, raised the profile of CCS and helped companies such as Tesla gain valuable traction as EV proponents.

The Paris Agreement has sharpened the emphasis on energy transition, along with other economic signals and drivers that continue to push the global economy forward. While the Agreement would continue without US involvement, the focus would be blunted to some extent, thereby weakening the global economic signal coming from it. With innovation, trade and scaled deployment at the core of the Agreement, those countries which excel in these areas, of which the USA is pre-eminent, may miss new growth opportunities.