“Historic”, “landmark deal”, “decisive for the planet” – Several superlatives have been used to describe the success of the Paris agreement in the hope that it will usher global society into a new era. This blog aims to gain perspective on some main elements of the agreement and sheds light on the potential impact on business in Europe and Luxembourg.

“The agreement is the most balanced one possible”, Laurent Fabius, France’s Minister for foreign affairs and President of the Paris Committee told to the 195 country negotiators prior to the final committee session. At that point of time, the agreement was still a draft and open for further modification. Yet, this did not hold back President François Hollande and UN secretary general Ban Ki-Moon from holding an emotional appeal to favourably consider this version of the text. The symbolism of this act was strong and for the new universal climate change agreement to come into effect, the 195 Parties to the United Framework Convention on Climate Change (UNFCCC) needed to adopt the outcome document. And they proved to be right in the end.

So what did humanity sign up for?

  • 2 °C or 1.5 °C? Or both?

At the 2009 climate conference in Copenhagen, parties agreed, although the agreement has not been adopted, on limiting the global temperature rise to 2°C. This target was according to several parties – especially the SIDS (small island development states) – not ambitious enough. Meanwhile other countries such as China and India preferred to stick to the 2°C target. A 1.5 °C target would according to them require substantial mitigation efforts that might hamper their economic development. Despite those divergences, all parties managed to agree on a text that would allow them “to go back home with their heads held high”. A compromise wording has been found, reaffirming the 2°C goal combined with “increased efforts” to achieve an 1.5°C target, a vital threshold that would allow to contain a further sea level rise and to build up a significantly safer defence line against the worst impacts of climate change. This ambition was carried by the so called “high ambition coalition” which comprises well over 100 countries from the rich and developing world and among them the European Union which – under the leadership of Luxembourg due to the EU presidency – pushed hard in the final week of the conference to rally a maximum number of parties around the cause of a “strong recognition of the 1.5°C temperature goal”. In the end even some alleged “carbon footprint heavy-weights” such as the US and Brazil echoed the call to include the 1.5 °C target in the agreement. In this context it is worth mentioning the tremendous work done by the Luxembourgish Minister of environment Carole Dieschbourg and her delegation that managed through their keen sense of diplomacy to form a common unity within the European block.

  • The differentiation puzzle

A common goal! Yes. But the agreement should reflect as well “the equity and the principle of common but differentiated responsibilities and respective capabilities, in the light of different national circumstances.” The concept of differentiation between nations was a tough nut to crack. Developed countries should take more action on mitigation efforts and financing resiliency than developing countries and, where possible, support the weakest links in their efforts to improve their resilience and capacity-building. According to paragraph 1 of Article 4 of the final Paris agreement “Parties aim to reach global peaking of greenhouse gas emissions as soon as possible, recognizing that peaking will take longer for developing country Parties, and to undertake rapid reductions thereafter in accordance with best available science…” Each country’s contribution had to be clearly stated in an updated climate plan – called intended nationally determined contributions (INDCs) – outlining their climate ambitions within the limits of the country’s capabilities in the climate adaptation process.

The differentiation issues became especially clear just before the final agreement was supposed to be presented on the last negotiation day. The US expressed their disapproval with the wording used in article 4.4 of the agreement. i.e.: Instead of “shall” they proposed to use “should”, meaning that this passage would not longer be binding anymore: “Developed country Parties should continue taking the lead by undertaking economy-wide absolute emission reduction targets”. A motion heavily criticized by the representatives of Nicaragua and by other nations, hence endangering again the outcome of the agreement. Luckily, in the end nobody was really in the mood to ruin the entire deal.

  • Reviewing the Commitments

The current commitments (INDCs) handed in by almost all the countries, would only hold global warming to between 2.7°C and 3°C, well above target. In order to reinforce the commitments over the upcoming years, the signatories are required to communicate a revision of their INDC every five years. The revision will help to assess whether the “collective efforts” are sufficient enough. And this will be rather a delicate exercise for the upcoming years. Because the climate actions are supposed to be nationally determined, it is up to the countries how much they would like to contribute to those additional efforts.

  • Carbon or no carbon

It is widely acknowledged that the high concentration of greenhouse gas emissions in the atmosphere is largely caused by human activities, with burning of fossil fuels and deforestation among the main contributors. It is interesting to note that the agreement dedicates an entire article linked to the challenges of deforestation[1] while the terms “fossil fuel” and “decarbonisation” have been completely left out of the game in the entire agreement. Oil- and coal- producing countries successfully advocated the idea that we will eventually have to do without fossil fuels in the text. Does it really matter? Of course it would have been a stronger agreement if anywhere in the passages was mentioned that countries should/shall pursue efforts to move away from the use of fossil fuels. But then again, this might have endangered the outcome of the negotiations. But even without using the term “fossil fuel”, it is widely acknowledged that fossil fuels are the largest contributor to “greenhouse gas emissions” and “anthropogenic emissions”; both terms are widely present throughout the agreement, thus sending a clear signal that in the long-term the transition towards sustainable energy resources and energy efficiency will be inevitable.

  • Financing the transition, sharing technologies and building capacity

The Paris Agreement establishes the global goal of enhancing adaptive capacity, strengthening resilience, easing access to green technologies and reducing vulnerability to climate change through international cooperation and underwrites adequate support to developing countries with a view to helping them gaining access to a more sustainable development path. In order to reach this goal, a more foreseeable stream of financial resources should support the international cooperation. Hence, according to the agreement, developed country parties are urged to scale up their ambition and “to achieve the goal of jointly providing 100 billion USD annually by 2020 for mitigation and adaptation” in developing countries on a yearly basis. Given the reality of industrial development and its historical emissions “debt”, developed countries said to be willing to accept a lead role in financing climate resilience measures, however “other Parties (other than developed) are encouraged to provide or continue to provide such support voluntarily”. The distinction between developed and developing countries was a key sticking point during the climate negotiations. Rising economies such as China (the world’s largest emitter of carbon dioxide) or India were keen not to bear the same responsibilities as the developed country Parties. Moreover, some of the high-income economies such as Qatar are still considered to be a developing economy.

The so-called G-77 coalition, an intergovernmental organisation of developing countries, was in general very pleased with the outcome. However, they pointed as well out that there is still room for improvement concerning the financial flows, a topic that should be addressed in the upcoming COPs. Many questions still have to be addressed: How sure are we that those funds will flow? How will those funds be managed? A plethoric number of funding channels are currently in place and the past has shown us how difficult it can be for foreign aid to be entirely effective. And the commitment to pledge 100 billion USD annually must actually be implemented.

The voice of the business community – and what it means for the European Union and Luxembourg

The deal was also hailed for delivering a clear message to business leaders and investors. According to the ICC[2]:“This agreement will give business and investors the long-term certainty needed to scale up innovation and investment in climate solutions. The path to a low-carbon economy is now firmly set: business is ready to make that a reality”. During the Paris negotiations, the business community pursued the ambition that their efforts towards the threat of climate change should be recognized within the agreement. This was not necessarily the case in the first versions of the draft – but in the end it managed to get mentioned in the agreement at least twice[3].

  • A more stringent regulatory environment

Luxembourg has implemented several climate friendly measures in the past that encourage a more efficient use of fossil energy. Most of them originate from European directives, hence binding member states to set up national plans to further reduce their greenhouse gas emissions (e.g. National Plan for Energy Efficiency, National Plan for Renewable Energy). Europe is widely known to have one of the most ambitious regulatory frameworks regarding environmental issues and even in the case of a negative outcome of COP21, the EU would have probably continued its ambition to progressively converge towards a zero carbon economy.

It is clear that the new Paris agreement will bring grist to the mill. The European framework will evolve further and use the targets set by the European INDC (to achieve at least 40% domestic reduction in greenhouse gas emissions compared to 1990 levels by 2030) to shape future environmental policy. Companies in Luxembourg and Europe will in the end face tighter regulations that should further encourage the use of renewable and efficiency enhancing energy solutions. It is therefore important that the upcoming guidelines in climate change related policies remain technically and economically feasible within a reasonable timeframe and focus on promoting innovative solutions and investments to climate mitigation.

  • Revision and monitoring of the EU targets

The global temperature rise set by the agreement is very ambitious and requires actually taking action without delay on the global stage. The 5-year revision plan of the Paris agreement will serve as platform for countries to reiterate their goals over time and the EU, as a fervent supporter of the “high ambition coalition”, will almost certainly step up and reinforce its ambition over the upcoming years. The agreement established the principle that future national plans will be no less ambitious than existing ones, which means the climate action plans handed in prior to the COP21 provide a firm floor and foundation for higher ambition. Thus, it will be central to foster an open and transparent approach during the revision process with all major stakeholders on the boat. In the future revisions, it will be crucial to submit for opinion the targets communicated by Luxembourg to the European INDC plan and the business community, as an important stakeholder, may have valuable input regarding the feasibility of the submitted targets. Switzerland or Japan already used a “bottom-up” approach in order to determine their ambitions regarding the climate targets for the COP21. For instance, the Swiss surveyed their small and medium-sized enterprises about their capacities to cope with further emission reductions while major Japanese companies handed in their own contributions they are willing to make to reach the emission target.

It is as well positive to note the transparency system and accounting for emissions global stock-take, another major cornerstone of the agreement. Measurement, reporting and verification of greenhouse gas related activities will underpin the effective functioning of the UNFCCC, hence strengthening the signal towards civil society and the business community and making the decision process more transparent and easier and, most importantly, to avoid any double accounting of emissions. On a national level it means as well that companies might face stronger requirements when it comes to reporting and administering greenhouse gases.

  • Coping with higher adaptation costs

There is no doubt; mitigating greenhouse gas emissions will be costly and increase the burden on the shoulders of the stakeholders. In order to meet the national targets, countries will continue to implement policies in order to get the incentives right by focusing the attention more on low-carbon solutions. In order to win the climate game, the price of producing and using the remaining fossil fuels should become more expensive than the production and use of non-fossil fuels. This seems straightforward, however in the end it is the detail and implementation that will count. The scale of application of such a principle must however be global to be effective and to avoid competitive distortions, carbon leakage an simple relocations of carbon-emitting companies to less regulated jurisdiction; with detrimental effects not only on economic and social parameters in the “outbound” countries of production facilities, but also potentially negative climate-related outcomes related to a laxer environmental legislation provisions in some “inbound” countries. Non-production cannot be the solution for non-emission.

Carbon pricing tools – either in the form of carbon taxes or trading systems – are on the rise in developing countries such as in China who is planning to set up the world’s largest market based carbon pricing system while Chile and Mexico recently introduced a carbon tax. Europe has been the forerunner in carbon pricing, “flying solo” over many years. As more and more countries are introducing pricing mechanisms, or improving them, businesses on the globe have to expect higher adaptation costs. It is positive to note that Article 6 of the agreement provides a first rough basis for a global carbon emissions market stating that “The use of internationally transferred mitigation outcomes to achieve nationally determined contributions under this Agreement shall be voluntary and authorized by participating Parties”. How exactly the mechanism will materialise still needs to be defined, but the upcoming COPs may leave room for discussions on how to connect national and regional systems within the UNFCCC framework.

In the case of Luxembourg, the prospective of an international carbon market is certainly a positive aspect for companies covered by the EU ETS[4] mechanism. Focus should rely as well on supporting the local business community to improve their capacity building. Especially small and medium enterprises are often lacking the resources to implement new low-carbon technologies and climate-friendly solutions. The future tendencies will affect the way of doing business, thus it will be key to take proactive measures with regard to operational capability and value chain decisions. How will the national reduction commitments impact the business environment in terms of regulation and potential fines? How should businesses deal with the mitigation process in the most cost-efficient way? How to improve conditions for financing of climate mitigation measures and green technology development and deployment? Those are substantial questions to be dealt with. From the business community side, several initiatives have already been put in place. For instance, INDR, the national institue for sustainable development and corporate social responsibility, encourages national companies in their pursuit to balance and integrate their economic, environmental and social priorities while at the same time meeting the expectations of their stakeholders. Several companies in Luxembourg already signed up to embed sustainability into the core of their business operations to create shared value for business and society and still more are to come. Moreover the Chamber of Commerce launched in September, in collaboration with the Ministry of Economy and IMS the “Third Industrial Revolution Strategy” (TIR). Its objective is to get a holistic view on how to deal with the transition towards a fully integrated and sustainable economy, to assess the potential opportunities for the business community and to enhance capacity building of companies for a sustainable development in a more digitalised environment. The TIR strategy will be based on an open and non-discriminatory approach, hence offering a platform to all stakeholders to share their concerns.

[1] Article 5: Parties should take action to conserve and enhance, as appropriate, sinks and reservoirs of greenhouse gases as referred to in Article 4, paragraph 1(d), of the Convention, including forests.

[2] International Chamber of Commerce – The World Business Organisation.

[3] In the section of “Non-party stakeholders”, the agreement “Welcomes the efforts of all non-Party stakeholders to address and respond to climate change, including those of civil society, the private sector, financial institutions, cities and other subnational authorities;” and furthermore The agreement also “recognizes the important role of providing incentives for emission reduction activities, including tools such as domestic policies and carbon pricing; hence supporting market based tools as a method to further reduce global-warming emissions.

[4] ETS : Emission trading scheme

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