Yes, we know, the US hasn’t gone yet; and four years is a long time. In reality, it will be in the next Presidential term before the country can formally depart the Paris Agreement. Donald Trump’s decision to join Syria and Nicaragua as a ‘Paris Pariah’ seems to be a combination of a Fossil-Fuel Industry’s last gasp alongside a Steve Bannon-inspired attempt at systemic disruption. But what is the deal with Trump and climate change? Whatever the underlying cause, there must be consequences for America’s relationships with the Convention and the many other actors in the complex landscape we have been describing over the past few weeks.
We’ve identified six markers – posed as questions – which could feed through into threats to the finance order starting to grow around Paris. We put these questions to NDCi.global’s advisors and other commentators and colleagues from the finance and legal worlds.
1. Is the drive to sustainable energy now so “sticky” that it can’t be derailed, or is there some encouragement in Trump’s action for banks, for example, to continue to finance dirty coal?
The dominant thread from everyone is that technology and costs have now passed a tipping point; as the ODI’s Darius Nassiry put it, “progress to sustainable energy is now being driven mainly by cost reductions in solar, wind and battery storage, which will continue to decline. Long-term investors see that the fossil fuel-focussed U.S. president can’t hold back global solar and wind power deployment or renewable energy price trajectories”. On top of this, for many countries, pollution is also a factor, if not the major one driving decisions towards clean energy.
Just as Paris is a bottom-up agreement that can’t be as easily derailed as a top-down one, so the US constitution, designed to stop someone like a mad British king ever holding sway again, is now showing its mettle
Many people see the states, cities and other US actors holding the line, some defiantly. Just as Paris is a bottom-up agreement that can’t be as easily derailed as a top-down one, so the US constitution, designed to stop someone like a mad British king ever holding sway again, is now showing its mettle in terms of the powers of States within the federal system to “do their own thing” – including, in the case of California, chumming up with China. Renewables business leader Laurence Mulliez points out that the same holds true for major corporations such as Unilever, which will “continue to finance green investments despite any central government efforts [to stop them]”. A coalition of 125 cities, 9 states, 902 businesses, including giants such as Amazon and Apple; investors and 183 colleges and universities have signed a pledge to uphold Paris. C40 cities network has also blogged on this.
E3G’s Helena Wright also observes “Trump’s companies risk becoming a toxic brand. You can imagine civil society groups now calling for a boycott of products relating to Trump. Public opinion polling in the US shows 71 percent of Americans in support of the Paris Climate Agreement.”
For Clare Shakya of the IIED, there are dangers: “The economics of renewables are definitely on our side, but we still need to watch whether there is more legitimacy for dirty industries. Luckily US aid cuts will reduce the likelihood of US tied-aid promoting coal and so on elsewhere. We also need to watch whether donors count “clean coal” as part of their climate finance contributions.”
Climate funds expert Charlene Watson also sounds a note of caution in that “renewables and energy efficiency have been supported by concessional public finance in the past (including from the US and multilateral climate funds) and though these sectors are increasingly at a stage where concessional flows are less important, other sectors such as agriculture still require concessional finance to pilot technologies and approaches and that’s a cause for concern.”
<strong”>2. Will there be any effect on the growth of the Green Bond Market?
Trump’s announcement is very unlikely to materially affect the market. Commentators pointed out that much of the growth is in markets outside the USA with China and other emerging economies as key players because this is where much of the sustainable infrastructure investment is needed. In addition to IFC’s new green bond initiative with Amundi, Dileimy Orozco of E3G notes “incentives have been introduced to help the market grow, for example, the Monetary Authority of Singapore is launching a Green Bond Grant Scheme to offset the cost of external reviews for GB issuance. Other countries are also innovating, for example, Kenya has recently issued a Green Bond exclusively over mobile phones targeting retail investors.”
Darius Nassiry also points out that “domestic US markets, for example, New York state and California, will look at issuing green bonds as a way to demonstrate continued alignment with Paris Agreement objectives”.
3. We wondered what the effects might be on “hybrid” finance. This is finance that’s critical to much NDC funding, bringing together private and concessional sources for projects that are more difficult to fund. Who will replace the US contributions to funds such as the Green Climate Fund (GCF)? Bloomberg Philanthropy is promising money and other foundations will likely follow, but even the richest foundations can only supply millions, not the billions needed. Alternatively, can we find more effective ways of using concessional money that makes the loss of US contributions less damaging?
While there is some concern about the US impact on the funding intentions of other ‘strapped for public cash’ developed governments, both Helena Wright and Charlene Watson think there’s good momentum to keep the GCF going even with US withdrawal. Once the Green Climate Fund has spent 60 percent of its funds, it begins a formal process of replenishing its pot of money. So while the US withdrawal will mean the pot is replenished sooner, it is not likely to run out of funds. Even though Charlene estimates a $2billion gap, Helena comments “Plenty of other countries are still making climate finance contributions so I do not think it will have a major impact on the goal to reach $100 billion of climate finance by 2020.
The ‘Roadmap to $100 billion’ process from last year revealed that several important countries such as Norway, Sweden, Denmark, and Finland are yet to make a climate finance pledge for 2020. These countries could still step forward with significant pledges making the impact of the US less damaging.”
More broadly, Charlene points out that the US also provides bilateral finance. “In 2014 this was over $2 billion, the fourth largest of the G20 countries”. If this stops, some beneficiary countries could suffer but “other developed countries provide far more than the US through bilateral channels – $24 billion in total (taking the annual averages of 2013/2014)”. So we shouldn’t take a defeatist attitude on that front either.
There’s a strong view that with or without the US, climate finance has to become smarter. One observer singles out the GCF for wasting scarce concessional funding on projects with little scope for scalability or replicability. Clare Shakya notes “Currently public climate finance is focusing on middle-income countries. Can we instead find ways for private finance to come in earlier and in greater volume into these economies, so scarce public climate finance can be used to de-risk investments in poorer countries?”
Looking more widely than “pure” climate finance, the Trump administration threatens to do away with the Overseas Private Investment Corporation (OPIC). This would be a major blow, given its importance in funding energy and infrastructure projects, and with a quarter of its portfolio in Africa. Major defunding of the aid agency USAID would also be highly damaging for similar reasons.
4. We wondered about governance issues that could affect financial arrangements around Paris. While the US formally retains its seat at the UNFCCC until the day it actually leaves, will the fact of its eventual departure change the influence it has meantime? Might this turn out to be a good thing, freeing things up for the governing bodies of, for example, the GCF?
We Brits have recently re-discovered the age-old truth that once you announce you’re leaving, you might as well have gone. Witness the EU telling the UK it can’t be involved in certain decisions now it is leaving. Will the US relationship with the UNFCCC begin to breakdown? At the recent Bonn inter-sessional meetings there was still no sign of this, the US delegation was significantly reduced in size but apparently not in any way obstructive.
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Regarding the GCF, Helena thinks the US will likely retain its seat “since it has already provided $1 billion out of its original $3 billion pledge, I suspect they will remain at the table at the GCF in order to manage the funds already committed.”
A big concern is the funding of the UNFCCC itself. Charlene Watson says “The US has been contributing about 20% of that, and the Secretariat also needs a 7% increase from countries to cover the new responsibilities for the Convention following the Paris Agreement.” Paying for more bureaucrats is not an easy sell back home, that’s for sure, hence the reason for Bloomberg and its partners stepping into the White House breach with a $15million grant for UNFCCC
5. How will rating and disclosure agencies now view the US (and indeed any other country that followed them) out of Paris? Will credit rating agencies see a higher climate risk factor for the US economy and if so could that mean a downgrade for the country and/or corporations and knock-on effects for cost of capital? How will the Financial Stability Board’s TaskForce on Climate-Related Disclosures respond?
In Part 2 of our Paris Landscape series we saw scrutiny on the “carbon intensity and accountability” of companies – everything from the activities of organisations like CDP in herding companies into carbon reduction programmes; to the divest/invest movement shaping asset allocation strategies; to the deep analysis around “unburnable carbon” by the likes of CarbonTracker.
Despite rating agencies developing green bond assessment products, it’s not yet clear (to us at least) how they are translating the far greater carbon disclosure information that’s available into rating actions at a company let alone a sovereign level. Even if Darius Nassiry says “it’s unlikely that credit ratings agencies will impose a higher climate risk factor in the near to medium term.” we think it’s worth watching this space. For Clare Shakya, the TaskForce is “critical now to reduce the likelihood of rogue action by individual companies using the US leaving Paris as an excuse to continue dirty or exploitative actions.”
6. Finally, we wondered about China. Lots of warm words, with everyone from the EU to Emmanuel Macron to Governor Jerry Brown of California queuing up to say they’ll partner China as new leaders on climate change. But given the known stresses on the Chinese economy, can it really afford such a leadership role?
We have seen from Bloomberg’s Climatescope tool that China is one of the few countries to have complete supply chains in renewables. We’ve also seen China’s willingness to front up grand finance-cum-infrastructure-cum-diplomacy initiatives such as the “One Belt One Road” super-project. On the downside, China’s credit-rating has recently been downgraded by Moodys.
It’s not that it couldn’t afford it, says Darius Nassiry, but would it want to?
Clare Shakya and Kanini Mutooni flag questions about China taking a leading role, Clare says they don’t have“the instruments or mature institutions to move rapidly into this space, except through the tied aid model they run, so the ‘value’ of their investments (in terms of quality of aid) would likely be lower.” It’s not aid, but we have seen a Chinese willingness to export pollution via its support for new coal mines in Pakistan.
Dileimy Orozco says this is an “opportunity for China to show leadership and commitment to a rule-based global order that is not determined by the US”. He notes that the country has been willing to be pro-active, working around existing multilateral institutions when they have moved too slowly, for example, by creating the AIIB and the NDB. China is learning by doing, it works closely with the World Bank and IMF and although it doesn’t always follow their advice, it has become more flexible in its management of the yuan, for example. Even still, China will need support from the EU, Japan and others to help fill the gap.
All in all, there’s still great optimism and the great test will be the period when Poland takes over the COP Presidency next year. But we leave the last word to the lawyers, Client Earth’s Alice Garton says “Overall, we certainly don’t think Trump’s withdrawal impacts on our legal arguments around climate risk and the legal duties of companies, directors & trustees. As always, the rate of the energy transition is debatable, but we are going in one direction only”.