US withdrawal from Paris agreement at odds with economics

President Donald Trump has announced that the US will withdraw from the Paris Agreement to combat global climate change. Mr Trump's decision, while fulfilling a campaign pledge, will create further divisions with America's allies, many of whose leaders have expressed disappointment about the US withdrawing from a leadership position on this critical global issue.

President Trump claims that the deal would hurt American industry and would lead to job losses in the US while other carbon emitters, notably India and China, would be dealt with less harshly. Indeed throughout the campaign, President Trump criticized the Obama administration for taking steps to weaken America's coal industry and has said that pulling out of the Paris Agreement means other countries won't be "laughing at the US anymore."

However, he may have been ignoring market dynamics that were probably more instrumental in changing America's energy balance away from more polluting coal to cleaner burning natural gas and renewables. Coal's share of America's power generation has fallen from nearly 50% as recently as 2005 to barely a third in 2016. It has largely been displaced by natural gas, now around a third of total generation, as the shale technology that is catalysing growth in the US oil industry was pioneered in natural gas fields. But renewables have also made a dent in coal’s use, taking up more than 7% of total power generation in 2016 compared with just over 2% in 2005. This change away from coal was already underway before President Obama was elected and before his administration introduced the Clean Power Plan, which placed the onus on individual states to cut carbon emissions.

Natural gas and renewables are becoming cheaper sources of power and consumer awareness of the origin of their electricity means that coal's share of US power demand is probably not going to recover to its historic levels. Surveys of American opinions on pollution and climate change show overwhelming support to limit carbon emissions - 75% of all Americans according to a recent Yale University study - although there is a lack of concern about how climate change directly affects individuals. But even if the US walks away from its Paris Agreement commitments there may not be a sudden spike in carbon emissions in the US as companies have spent heavily to accommodate sustainability and pollution issues. As recently as this week, ExxonMobil accepted the need to address carbon emission regulations more seriously as a threat to their business under pressure from shareholders.

America's withdrawal from the Paris Agreement won't happen for at least four years but in the interim the significant impact will be further marginalization of the US's role on the international stage. The Paris Agreement brought together enormously disparate economies and already China and the European Union are highlighting their support in fighting climate change in response to the US withdrawal. The US decision to walk away from a hard fought diplomatic achievement, will make it all that more difficult for the US to be seen as a reliable foreign partner, even among its closest allies. While it is fair to be sceptical about China's ability and seriousness in cleaning up its economy away from heavy polluting industries, China is currently winning the communications battle of appearing the pro-globalisation and pro-diplomacy candidate for global leadership.

There will be pockets in the US that will be celebrating the walk-away from the Paris Agreement, the coal industry most obviously. But with a domestic market that may not be prepared for an immediate switch back to coal fired power, coal companies will need to rely on export markets. Most of the coal the US ships abroad ends up in Europe, hardly fast growing markets for the fuel, and to nations which are more likely to tighten rather than loosen their environmental regulations.

But oil producers in the US may also be cautiously optimistic about looser environmental regulations that allow for more drilling and greater output. Oil prices fell in response to Trump's statement as the market anticipates an even greater increase in US production. If Mr Trump was serious about wanting to support the oil and gas industry in the US, encouraging greater production at a time when the market is only tentatively in balance may not be the best way of going about it.