The Paris Agreement: What's the Practical Effect for Your Business?

4 min

On December 12, 2015, representatives of 195 countries adopted the "Paris Agreement" under the United Nations Framework Convention on Climate Change. The Agreement drew a lot of media attention but its immediate impact on business interests likely is less exciting. In the short term, the effect of the Agreement is largely aspirational. It announces a global framework for addressing climate change but does not impose binding emission limits. In the long term, however, the Agreement signals a desire to shift toward a zero-carbon economy and the Obama administration will likely use the Agreement during the remainder of its tenure to bolster domestic efforts at curbing carbon emissions.

What Does the Agreement Do?

The Paris Agreement aspires to keep global temperatures less than two degrees Celsius above pre-industrial levels by curbing human-generated greenhouse gases to levels that soil, trees, and oceans can absorb naturally. Importantly, though, the Agreement does not impose emission limits to reach this goal; rather, it utilizes voluntary plans called Nationally Determined Contributions (NDCs) submitted by participating nations. Through the NDCs, countries set domestic limits on greenhouse gas emissions and determine their level of contribution to the Agreement's goals. Every five years, each participating country must submit a new NDC with more stringent commitments to carbon emission reduction. Success under this model relies heavily on voluntary actions of present governments and yet-to-be-made commitments of future governments. To counterbalance this reliance, the Agreement requires countries to report anthropogenic emissions and track progress on implementation. The hope is that global peer pressure will encourage countries to keep pace with their proposed commitments.

The ambitious tone and the structure of the Agreement strongly signals a desire to shift away from carbon-based fuels, such as coal and oil, to zero-carbon energy sources, such as wind, solar, and nuclear energy. For instance, the Agreement allows countries to use internationally transferred mitigation outcomes to meet NDCs. This policy opens the door for international carbon markets and allows countries to maximize mitigation efforts. The ratcheting down of emission targets in NDCs also indicates a long-term goal to phase out carbon. One hundred eighty countries have already submitted NDCs, but these contributions account for only part of the reductions required to meet the Agreement's goals. Many more reductions are needed.

What is the Agreement's Effect in the U.S.?

The Agreement goes into effect when at least 55 countries representing at least 55% of total global greenhouse gas emissions have ratified the Agreement. In the United States, the Agreement can be entered into force either as a treaty through Senate approval of ratification or as an executive agreement through the President acting alone. The Obama administration likely will not submit the Agreement to the Senate because, given its current political composition, it is highly unlikely that the Senate would grant approval. The administration took a hard line at the negotiation table in Paris to ensure the Agreement did not impose any new legally binding commitments on the United States. For instance, the Agreement does not contain binding emission targets, does not require developed countries to provide financial assistance to developing countries, and does not provide a basis for any liability or compensation for damage caused by climate change. The non-binding nature of the Agreement bolsters the Obama administration's legal argument to enter the Agreement into force through an executive agreement without the advice and consent of the Senate. However, while this approach bypasses any present Senate opposition, it potentially leaves domestic implementation of the Paris Agreement more vulnerable to challenges by future Congresses and administrations.

Regardless of the Agreement's domestic legal status, the Obama administration, and potentially sympathetic future administrations, likely will use the international accord to push for more ambitious domestic climate change policy. The United States' NDC is already more aggressive than the current administration's Climate Action Plan. Therefore, during the remainder of the Obama administration, United States business interests should expect more domestic climate change policy and regulatory initiatives designed to close the gap between the NDC and current climate change policy.

For more information on how the Paris Agreement may affect your business, contact the authors of this alert.