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Paris Agreement : With the US abdicating its responsibility, the leadership will be taken up by others

With the US abdicating its responsibility, the leadership will be taken up by others. China has already signalled its keenness to take up the mantle. Other countries may also see an opportunity to get ahead in the race to a low-carbon future.

Donald Trump’s decision to pull the US out of the Paris Agreement on climate change has not come as a complete surprise given his numerous intimations to this effect, but is startling nonetheless. It is clearly a spanner in the works for the global project of decarbonisation and not without consequences – both economically and diplomatically – for the US. Thankfully the resolve among the other 194 signatories remains strong, with major greenhouse gas emitters including China, Australia, Russia, India and EU members having reiterated their commitment to the Paris accord ahead of Trump’s announcement. The following are a couple of high-level observations from us as long-term investors.

  • The questionable economic rationale aside, there is little doubt that this will neuter US foreign policy further – we’ve already seen widespread criticism from other governments including a joint statement by France, Germany and Italy underlining that there will be no renegotiation of the agreement. It is worth noting that only two other UN members – Syria and Nicaragua – are outside of the deal.
  • The process of withdrawing is not an overnight one and that the earliest the US can formally leave is 4 November 2020 – just after the next presidential election. It goes without saying that a lot can change over this time period.
  • With the US abdicating its responsibility, the leadership will be taken up by others. China has already signalled its keenness to take up the mantle. Other countries may also see an opportunity to get ahead in the race to a low-carbon future.
  • Trump cites ‘unfairness’ to US business as a key reason to leave, when the corporate world – including much of the fossil fuel industry – understands the imperative of decarbonisation. Indeed, it is somewhat ironic that his announcement coincided with the news that a significant majority of US oil giant ExxonMobil’s shareholders voted in favour of increased disclosure around the risks it faces due to climate change.
  • Importantly the increasing adoption of lower-carbon energy sources in the US is in no small measure guided by state rather than federal policy – California being one of the most conspicuous cases in point. Not to mention the rapidly improving cost-profile of renewable and storage technologies which is diverting capital away from conventional power sources.

Again, Trump’s decision to break rank with the rest of the globe rests on very brittle foundations, and will make the already ambitious goal of limiting the global temperature rise to 2% above preindustrial levels harder. But the US contribution to global greenhouse gas emissions is just over onetenth (and falling), and the probability of Trump reversing the slide of coal and other polluting technologies is very slim for the reasons outlined above. As stewards of our clients’ capital we take the long view, and although we are disheartened by the announcement, will continue to rigorously assess how the companies we invest in are prepared for the eventual demise of the fossil fuel era.

Legg Mason 12 June
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