The 21st Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC) concluded on Saturday, December 12, 2015. The conference concluded with a much anticipated and landmark agreement, the Paris Agreement, by 195 countries to “keep global temperature rise this century well below 2 degrees Celsius and to drive efforts to limit the temperature increase even further to 1.5 degrees Celsius above pre-industrial levels” (http://newsroom.unfccc.int/unfccc-newsroom/finale-cop21). While it is a major coup to get universal diplomatic agreement on what must be done, the question of how this will be done is still somewhat open. Success depends on the Intended Nationally Determined Contributions (INDCs) submitted by countries. These contributions are made through voluntary actions that cannot be legally enforced. Moreover, the INDCs submitted at the time of the Conference were estimated to fall far short of achieving the 2 degrees Celsius goal (eliminating about half of the necessary greenhouse gas emissions according to a report from the UN Environment Programme).
Going into the Conference, the business community – particularly in energy and utilities – was hoping for concrete requirements or guidance on carbon pricing or metrics. In July 2015, the Summer Committee Meetings for the National Association of Regulatory Utility Commissioners (NARUC) featured a panel on the topic with a description asserting that, “Any agreement that emerges – or the absence of an agreement – will have an impact on US energy policy and utility regulation.” The panel discussion was moderated by Hon. Robert Kenney, then the Chairman of the Missouri Public Service Commission, and featured presentations from Karl Hausker, Senior Fellow at the World Resources Institute (WRI), and Nathaniel Keohane, Vice President of Global Climate at the Environmental Defense Fund (EDF). Two interesting themes arose during the discussion amongst regulators, utilities, and other observers:
- Without any kind of enforcement mechanisms, clear reporting and transparency through measurement will be necessary to ensure that commitments are honored.
- Amongst Commissioners and other attendees there was a range of opinions on climate change, though most (even a self-avowed conservative) said they believe in the science, and they are looking for leadership and realistic answers on solutions.
Fast-forward to December 2015. At the same time heads of state and diplomats were hammering out the details of the Paris Agreement at Le Bourget, there were several parallel events taking place, including the Caring for Climate Business Forum, the official platform for business at the climate negotiations. Companies from many sectors including energy and utilities came together to discuss the business case for mitigation, adaptation, and emissions reduction. Two representatives in particular emphasized a similar theme – that businesses in the energy and utilities industry are looking for regulatory certainty and guidance.
- In the Opening Plenary, José Manuel Entrecanales Domecq, Chairman of infrastructure, renewable energy, water, and services company Acciona, called for greater regulatory stability and returns for sustainable investment through consistent carbon pricing policy.
- In a panel entitled “How do Companies Set Science-Based Targets?”, Sébastien Pellion, Sustainable Performance and Business Prospective Manager of Suez S.A., a leading French-based multinational corporation with operations primarily in water, electricity, natural gas supply, and waste management, emphasized that governments must set solutions and policy, while the private sector can provide the solutions and commitments necessary to implement them.
The unanimous adoption of an agreement that specifies how much warming should be limited is unprecedented, but it still does not provide the business community with guidance on how that will be achieved or measured. Paths to compliance will be determined at the national level, based on the commitments governments have made in their Intended Nationally Determined Contributions (INDCs). The INDC for the United States calls for “an economy-wide target of reducing its greenhouse gas emissions by 26-28 per cent below its 2005 level in 2025 and to make best efforts to reduce its emissions by 28%.” Much of this will be driven by the Clean Power Plan that President Obama and the EPA released in August 2015, and so the required reductions and paths to compliance will be based on the states where utilities and other companies have their operations. In addition, it seems clear that as countries turn their attention to implementing their INDCs and US states look for strategies to meet their reduction obligations under the Clean Power Plan, the number of markets implementing carbon pricing (voluntary or mandatory) will increase beyond the nearly 40 countries and more than 20 cities, states and regions that already have carbon pricing in place. In the face of uncertainty, companies in energy and utilities ought to start including potential carbon pricing in their forecasts and business models to understand sensitivity under different scenarios.