When President Donald Trump last week withdrew the United States, the world’s second-largest emitter of greenhouse gases, from commitments made at the COP21 climate agreement in 2015, it sparked global outrage, and much hand-wringing at home, too. Led by former New York Governor Mike Bloomberg, at least 30 mayors of U.S. cities, three governors, more than 80 university presidents and more than 100 businesses have pledged to maintain their individual commitments to combat climate change, regardless of Federal policy.
A more dispassionate – and bleh – response comes from Morgan Stanley. The investment bank believes Trump’s decision changes nothing on the ground. In fact, he could even have done nothing because the COP21 commitments are not legally binding. If he still went ahead and announced the U.S. withdrawal, it was probably to “appease a support base, as opposed to remaining neutral by taking no action,” the bank said.
Morgan cited three reasons for its conclusion that Trump’s decision has no material impact.
Coho Capital 2Q20 Commentary: Podcasts, The New Talk Radio
Coho Capital commentary for the second quarter ended June 30, 2020. Q2 2020 hedge fund letters, conferences and more Dear Partners, Coho Capital returned 46.6% during the first half of the year compared to a loss of 3.1% in the S&P 500. Many of our holdings, such as Netflix, Amazon, and Spotify, were perceived beneficiaries Read More
Firstly, the nationally determined contributions made at the Paris climate change meet were inadequate in the first place to meet the goal of lowering global temperatures by 2 degrees Celsius.
Secondly, fundamental economics and rapidly emerging technologies, rather than regulation, are driving the U.S. shift away from fossil fuels and toward renewable energy sources.
“Our energy commodities team’s fundamental analysis of power generation economics shows that longer term coal cannot compete with natural gas or renewables (even on an unsubsidized basis),” Morgan Stanley said.
In a recent report, the firm cut the 2017 coal burn forecast by about 4%, and now expect a modest year-over-year improvement, with a majority of gains lost by 2018 due to ongoing competition from gas and growing renewables.
Also, the rate of change in solar and wind economics is gaining ground “more rapidly than investors appreciate, with a nearly 50% price reduction in solar panels over just 2 years.” Wind power has an all-in cost of US$0.015-0.025/kWh with tax credits in windier portions of the country that is between one-half and one-third of the all-in revenue needed for a new gasfired plant at $0.055-0.065/kWh, it pointed out.
“This progress is largely driven by improvements in wind turbine technology — taller tower design and wider rotor diameters — which could drive net capacity factors to nearly 60%,” the bank said.
Thirdly, the process of U.S. withdrawal from COP21 will take up to four years unless Trump also takes the more drastic step to exit altogether the 1992 parent treaty establishing the United Nations Framework Convention on Climate Change, or UNFCCC. In such a case, U.S. obligations to both agreements could become void in one year.
Climate change and COP21 – risks
Still, Morgan Stanley cited some risks arising from Trump’s decision.
The first is of other countries following suit, further undermining the global pact. The second is that the U.S. might fall short of its targeted 26-28% reduction below 2005 levels by 2025 on account of a dilution of Corporate Average Fuel Economy (CAFE) standards. A third is potentially thorny issues on account of bilateral agreements on action against climate change that the U.S. has signed in the last couple of years, notably with China and Canada. It is unclear whether the administration intends to walk away from these commitments as well.