News Article

Wal van Lierop

August 2, 2019

The Paris Agreement Needs Teeth

As published on Forbes.com

On April 22, 2016, 196 member states of the United Nations signed the Paris Agreement, committing to limit average global temperatures increases to below 2° Celsius. Three years later, we have sadly little to show for these promises.

U.S. carbon emissions rose 3.4% in 2018. In China, regulations on coal mining have failed to curb rising methane emissions. Here in Canada, we emit more greenhouse gas per person than any other G20 nation, says Climate Transparency, a coalition of international climate organizations.

Collectively, we are not on track to achieve the goals of the Paris Agreement and the price of failure is high. In the U.S. alone, unmitigated climate change could cost $224 billion per year by 2090.

Of course, the financial costs can’t capture tragedies and loss of life caused by hot summers, wildfires, sea level rise, flooding, crop failure, water shortages and countless other impacts of climate change.

I believe we are managing climate change all wrong. We need an approach that can ignite real action and hold signatories to the Paris Agreement accountable.

The Paris Agreement is set up for failure, not success.

Clearly, we haven’t managed the Paris Agreement – or any of the UN Sustainable Development goals, for that matter – with a clear project mindset. We lack controls to ensure things are executed according to plan.

We have not even translated the 2° C (or preferably 1.5° C) target into actionable, measurable steps. There is no (immediate) consequence for failing to meet the agreement.

Here’s the kicker: just 25 corporate and state entities account for 51% of global greenhouse gas emissions. 100 of the world’s companies, including those 25, are responsible for 71% of emissions. In other words, there will be little progress towards reducing emissions unless these 100 companies are incentivized to act.

Perverse incentives.

It would be great if the top 100 emitting companies held themselves responsible for the Paris Agreement, but the incentives and cultures in major corporations make that unlikely.

For example, many oil and gas companies say they are concerned with the energy transition and therefore set targets for investments in solar, wind, battery storage, smart grids, etc. But these represent a tiny percentage of their overall investments and in reality, often come out below target. Executives at most oil and gas companies have little incentive to support sustainable energy projects.

Why? Executives at large energy companies rotate roles once every four years or so. To move up the ladder, they need to demonstrate prowess with the company’s core moneymaking businesses, its traditional oil and gas interests.

Executives temporarily assigned to a green project have every incentive to deem it too risky for commercialization – and kill it. If they took a risk on something new and sustainable, and it went wrong, the failure could terminate their career progression. If instead they hypothetically saved the company from the financial losses incurred by an unproven clean energy project, they would be rewarded and then promoted to a core fossil fuel project soon enough. So, they typically become risk averse and pile contingencies on contingencies to kill the viability of clean energy projects.

Accordingly, the risk standards for evaluating sustainable energy projects are often illogical in large oil and gas companies. If the same standards were applied to deep sea drilling in the Gulf of Mexico, no wells would ever have been drilled. As long as executives can move up the ranks by avoiding risks in sustainable energy, it’s hard to imagine that large oil and gas companies – the bulk of the 25 top emitters – will change their behavior.

Change requires carbon targets, taxes and penalties enforced by audits.

To align corporate interests with the Paris Agreement, the best starting option is to introduce a carbon tax. It is not controversial any longer. Many companies, including Exxon, have argued for a carbon tax. In British Columbia, my own home province in Canada, a carbon tax was introduced in 2008. Since then, provincial real GDP has grown by almost 20%, while net emissions declined by close to 4%.

But if the Paris Agreement is to be anything more than a symbolic gesture, we need more than carbon taxes. We need clear targets and enforcement mechanisms that hold the biggest emitters, many from the oil and gas industry, accountable.

How? Nowadays it is easy to monitor emissions, so the path is rather straightforward. First, a state, province or country sets its carbon reduction goals in line with the Paris Agreement, at levels that can limit average temperature increases to 1.5° C. From there, the pro-rata targets of each emitter can be calculated. Scientists, business leaders and policymakers may have to collaborate to determine fair, phased targets that grow stricter over time.

Second, those carbon targets and the progress against them should become another check in the annual audit. Some companies today do something like this voluntarily (e.g., sustainable accounting), but that is not enough. The audit firms should detail standardized rules for this carbon audit process and develop follow-up procedures so that companies know what to expect.

Third, failure to meet the emission reduction targets should result in clear penalties calculated to reflect the net present value of future damages. In the U.S., for instance, I mentioned earlier in this article that climate change could cost $224 billion annually by 2090, and there are various estimates about the global cost. Emissions are not confined to political boundaries, so emitters that fail to hit Paris Agreement targets ought to pay penalties proportional to the damage they cause globally.

This isn’t as much of a fantasy idea as you may think. In the European Union, automakers collectively are on the hook for €30 billion if they fail to cut their average fleet emissions to less than 95 grams of carbon dioxide per kilometer by 2021.

The combination of a carbon tax and audit-enforced targets with penalties can provide the teeth to hold companies immediately accountable for creating trillions of dollars’ worth of future damages. With that, the world may have a chance to meet the targets of the Paris Agreement. Let’s work on this practical, necessary plan so that humankind can continue to call earth home.

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