It was the best of deals, it was the worst of deals

Both these perspectives on the Paris outcome have been submitted in the days since the agreement was finally gavelled through on Saturday.

On some points, everyone agrees. The deal does two things that have never been done before: it commits all the 195 signatory nations to holding the increase in the global average temperature to “well below 2 °C”, and to reaching a balance between greenhouse gas emissions sources and sinks (otherwise known as net zero emissions) “in the second half of this century”.

That’s why it is being hailed by some as an historic victory.

What it doesn’t do is set any kind of quantitative budget on the amount of greenhouse gases that can be emitted before then, make any effort to apportion that budget amongst the nations of the world, set a global carbon price, or establish a framework of enforcement. Furthermore, it fails to offer any supply-side measures at all, a result that was deemed politically impossible from an early stage.

The Intended Nationally Determined Contributions (INDCs) to the deal are voluntary, and currently only aggregate to a pathway consistent with 3°C of warming, rather than the deal’s stated target of 2°C, with an effort to reach 1.5°C. There will be no consequences for those nations — and there are likely be some — that do not achieve them.

All these things are necessary to turn the words of the deal into actions, argue those who are branding it as a catastrophic failure.

But it was precisely the fact that it did not try to achieve any of these things — unlike its predecessor the Kyoto Protocol — that enabled a deal with a strong long-term goal to be agreed. Furthermore, the flexibility provided by the voluntary framework of the Paris outcome could become the very key to its success.

In terms of how the deal is enforced this could very simplistically be seen as a shift from the use of the stick to use of the carrot. It was a shift driven not by a brilliant behavioural economist or a political mastermind, but by two bald facts.

The first was the political makeup of the US Congress. US negotiators knew from the beginning that Congress would never ratify any deal that imposed upon the nation a legally binding requirement to reduce its emissions. That awareness gave birth to the proposals of the INDC structure, whereby countries bring what they can to the table and then ratchet them up over time, rather than the previous structure of the Kyoto Protocol, which set a central target and then assigned national budgets on the basis of that target.

The second fact was that global efforts to decarbonise had begun to outpace any obligations imposed by the UN Framework Convention on Climate Change (UNFCCC) structure for some time.

Businesses, non-state actors, and even some regions such as the EU were taking it upon themselves to act, not as the result of a legally binding top-down mandate, but because they felt they should. As a result of these efforts the cost of renewables deployment in recent years has fallen faster than even the most starry-eyed economists could have predicted.

Why was the shift away from the Kyoto-style to the Paris style important?

Because a Kyoto-style agreement is strong if it is adequately ambitious, legally binding for all parties, and has provisions for its ambition to be increased over time. The Kyoto Protocol was none of these things. At best it did not stand in the way of global efforts to decarbonise. At worst it actively hindered them, by awarding those who had reduced their emissions (often as a result of recession, rather than decarbonisation) with permits that could be sold on to allow others to pollute.

The new approach means the Paris agreement can avoid these bear traps.  A system to review pledges every five years will allow the targets set in the INDCs to catch up with a decarbonisation progress that will be driven primarily by external initiatives such as Bill Gates’s Mission Innovation, tightening the notches on the belt in case the temptation arises to break the diet. And a new transparency framework will allow the laggards to be easily identified.

This more flexible style of agreement at a national level enabled the French Presidency and the Coalition of High Ambition to push for much greater ambition than they would otherwise have been able to in the core text.

Furthermore, there is now much less danger of nations exiting the agreement (as Canada did from the Kyoto Protocol) because the whole deal is built on voluntary participation from the start. Paris covers over 95pc of global emissions whereas Kyoto covered less than 30pc.

That will mean that Paris will provide the strongest signal yet to markets that the governments of the world are serious about decarbonisation. It’s clear that Kyoto has failed to send any such signal to investors over the past twenty years.

Despite this failure, thanks to initiatives such as Carbon Tracker, institutional investors have started to ask more and more questions about climate-related risks in their portfolios in the past few years.  And thanks to initiatives such as the Financial Stability Board’s Taskforce on Climate-Related Disclosures, they are going to get more and more answers.

As Bank of England governor Mark Carney said last week on the sidelines of the talks: “Investors can’t express their views on these things in the capital markets at the moment.”

When they can, things may start to change. The current low levels of fossil fuel commodity prices are already in investors’ minds. They are even now starting to take flight from the most capital-intensive projects in these sectors.

In a normal commodity cycle that money would eventually start to trickle back.  The answer to whether the Paris outcome is the deal, or the failure, of the century will only come then, when that money is used to finance the infrastructure — whether it be renewable or carbon-intensive — that will subsequently be locked-in to our global energy system for years to come.

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