This article was originally published in the journal Climate Change—The New Economy.
This December, the Paris Climate Conference will conclude four years of negotiations toward the first universal climate agreement in nearly two decades. While a great deal rests on the heads of state and ministers coming to Paris, the ultimate test of success will not be whether they reach a diplomatic agreement, but whether this agreement paves the way for business to invest in a low-carbon, climate-resilient economy.
To achieve this, the Paris Agreement must include ambitious government commitments that reduce projected warming, and show how governments, business, and civil society will collectively limit warming to 2°C above pre-industrial levels. A catalytic Paris Agreement will send strong signals that the decarbonization of the global economy is inevitable, irreversible, and irresistible.
At the Business and Climate Summit in May, French President François Hollande said that the Paris Agreement would have four aspects: a universal international agreement; national commitments from governments; climate finance to seal the Paris deal and to build the low-carbon economy; and the “Action Agenda” from businesses, cities and regions, and civil society. The strength of the signals from these four pillars will determine whether businesses act with enough ambition to decarbonize the real economy in the years to come.
For the first pillar, the universal international agreement, we will be watching for the right political signals. Chief among these are a clear, collective goal to decarbonize the global economy by reaching net zero emissions this century, and an agreement by governments to update and strengthen their commitments every five years to enable and incentivize new low-carbon technologies. These signals will provide the policy certainty that businesses need by showing that there is no turning back from the transition to a low-carbon economy. For this agreement to be effective, it should also include a binding transparency regime that holds governments accountable for their commitments, and that tracks our collective progress toward decarbonization. This will provide a higher level of predictability about the direction of public policy, which delivers the certainty businesses need to invest in a low-carbon future.
Second, we expect that all of the major economies, and many more countries alongside them, will adopt national commitments to reduce emissions and build resilience to climate impacts. Governments recognize the irresistible benefits that come from climate action, including clean-energy jobs, improved public health, energy security, and poverty reduction. Collectively, these commitments will mark a clear departure from our current trajectory toward warming that exceeds 4°C. They will provide a regulatory environment within each country that encourages businesses to innovate and enables them to scale-up climate action. But this first round of national commitments alone will not bring us to a 2°C world—continuous improvement every five years will be necessary to close this gap.
Third, climate finance will help seal the deal. During the Copenhagen Climate Conference in 2009, developed countries pledged to mobilize US$100 billion per year in climate finance by 2020—and that commitment remains essential to the trust we need for a strong Paris Agreement. In fulfilling this pledge, investors should work alongside governments to maximize the leverage of private climate finance. To catalyze a shift of the trillions of dollars needed to build the low-carbon economy, we need clear market signals such as carbon pricing, which will help businesses access low-carbon investment at scale. Already, 40 countries and more than 20 cities and regions have established a price on carbon, and hundreds of companies are using shadow prices for their own investment decisions. They are about to be joined by many more.
Finally, alongside the diplomatic negotiations at COP21, the Action Agenda will showcase the climate action being undertaken right now by business, cities and regions, and civil society. A fundamental shift is taking place in the business world, which is showing increasing leadership. More and more companies are setting ambitious targets to decarbonize, which they are doing by embracing renewable energy, working toward greater efficiency, developing new technologies, working with supply chain partners, and advocating for stronger public policy solutions. The business community is moving, and will move further, faster, with strong policy signals from the governments assembling in Paris. In this way, the Action Agenda marks not the end of an international negotiation, but the beginning of a low-carbon world after Paris.
In his speech at the Business and Climate Summit, President Hollande said that finding agreement among 196 countries would require working miracles. Reaching consensus on a text will indeed be an achievement. But the Paris Agreement must be measured by changes in the real world, not by handshakes behind closed doors. Businesses and investors play an essential role in translating a diplomatic agreement into a catalytic step worthy of its place in history.