COP21: If Paris really was a success the world will truly look very different

It would be churlish not admit that the agreement struck by 195 countries at the climate change summit in Paris was not a success. Yet over the coming days many people - some climate sceptics, some climate evangelists - will take that view, chiefly because the deal does not fit with their world view.

But the reality is that the ability of the world’s leaders, with often diametrically opposing views on how global warming should be tackled and who should take the action and pay for it, is a once in a generation achievement.

Yes, it's not perfect and, no, it won't guarantee a cap on the rise in temperature of 2 °C or less. But really how many instances can you recall when all the countries in the world agreed on one issue? Thought so.

The summit has sent a clear signal that the world - and most importantly, the major powers - are treating climate change as a clear and present danger, in the same category as financial instability, world poverty and Islamic terrorism. In other words they may not succeed immediately but they will start doing a lot of things along the way.

The message from Paris is that it is no longer an option to sit back and think this is just a political debate. Assuming that all the countries follow through on the whooping and cheering of 12 December at Le Bourget, then life is going to change.

The first is a determination to end the rich economies' dependence on fossil fuels: the days of coal as a form of fuel are clearly numbered. The only thing that will save it is the development of economically viable clean coal technology, which would be fantastic news (see later).

Oil and gas usage will also have to fall if countries are to change their economies in a way that allows temperatures to rise by 1.5-2.0 °C or less by the end of the century rather than the 4.5 °C forecast ion current trends.

This has huge implications for both the fuel companies but also for the investment industry. As countries take action to wean themselves off their use of oil and gas, fossil fuel companies will find themselves sitting on huge amounts of reserves marked down on their balance sheets as assets.

CARBON WILL BECOME AN INTEGRAL BUSINESS COST THAT MUST BE TAKEN INTO ACCOUNT WHEN TAKING DECISIONS

Once it becomes clear that those reserves can never be burned, their value will vanish and the assets will be stranded. This concept was popular only among climate enthusiasts until September when Mark Carney, the Governor of the Bank of England, gave an extraordinarily blunt speech warning of the risk to financial stability of a failure to understand the implications of action on climate change.

He said: "Alongside major technological, demographic and political shifts, our very world is changing. Shifts in our climate bring potentially profound implications for insurers, financial stability and the economy. The exposure of UK investors, including insurance companies, to these shifts is potentially huge."

More and more institutional investors are either putting their stakes in fossil fuel companies under review, or have gone ahead and started to sell them off in what financiers call “divestment”.

The corollary of that is that entrepreneurs and investors who have quietly been innovating new low or no-carbon designs for vehicles, fuel cells and power generation will suddenly find that the wind has changed in a favourable direction.

At the Sustainable Investment Forum, held on the sidelines of the main summit, there were hordes of entrepreneurs who had launched businesses in areas such as plant-based burgers and battery-fuelled, high-performance motorbikes. Perhaps the most stunning idea was to “mine” carbon out of the atmosphere itself and turn into soil. We have seen the future and it works.

Hopefully, the British government’s crass decision to end a number of subsidies for clean energy and - most bizarrely - to impose a carbon tax on solar power on the eve of the Paris summit will be go down in history as an egregious aberration of political strategy.

Finally, a price or a tax on carbon will become as ubiquitous as a levy on smoking, drinking and driving. Some 57 jurisdictions around the world including US states, Canadian cities and the European Union already use carbon permits and cap and trade systems to create a market to incentivise firms to cut their emissions. They account for account for 40% of global GDP.

Other governments may prefer taxes in order to gain the revenue but the effect is the same. Carbon will become an integral business cost that must be taken into account when taking decisions on allocating resources and energy. Investors will recalibrate the returns on different investments opportunities and see that the low carbon options have a likely greater rate of return.

At the end of the day the key questions businesses and investors will ask is whether they are more likely to make money from a new fuel cell or a solar panel rather than a diesel engine or a coal mine. Once it is clear that the winners are the first pair, and then it will be game over for climate sceptics.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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