Abacus: Consequences from Stepping out of a Leadership Role

Above are the highlights from the President’s announcement to pull the U.S. from the Paris Climate Agreement. To understand what this power move means for us, let’s ask what the Agreement is attempting to do:

In late 2015, 195 countries came together to discuss and address global climate change, and humankind’s impact on it. Signed in Paris during November of 2016, the Agreement aims to limit global temperature rise to 2 degrees Celsius above pre-industrial levels by 2100. To achieve this, they estimated that emissions will need to be cut by 40 to 70 percent by 2050, and by 2100, the planet needs to have a net zero carbon footprint. The 2 degree level is the estimated threshold for climate change, wherein change above that level would have grave global consequences; for example: more detrimental climate events, more often. In the accord, each government submits its own plan, voluntarily, to reduce emissions. For instance, the U.S. committed to decreasing 2005 emissions levels by 26 to 28 percent by 2025. It’s not legally binding, and won’t discipline any country failing to meet their promises. However, it does get governments involved in the private sector by almost forcing plants to implement the overall plan. Obama, and many other climate change advocates, consider the agreement to be the best shot we all have at stopping the global climate epidemic.

Trump, despite his claim (in the above speech) that he “cares deeply about the environment,” is not quite as keen on the Paris Accord as his predecessor was/is. Essentially pushing how the agreement was more about taking financial advantage over our country, and not putting enough of the burden on countries with higher pollution levels (Despite the fact that the U.S. is the world’s second largest emitter of greenhouse gasses). Trump was “elected to represent the citizens of Pittsburgh, not Paris,” as he pushes in his withdrawal speech.

Trump’s open claim that he wants to be a leader for Pittsburgh, and not Paris, essentially means he wants to end America’s leadership role in the fight against climate change. In fact, there are some that argue Trump doesn’t want to deal with climate change at all, despite his apparent fervor for renegotiating and then re-entering the deal. Economically, however, Trump is just pushing laissez-faire policies - i.e. get rid of all the regulations and let the free market rule. It’s a strategy often used by conservative economic policymakers, and one that, in theory, should be positive for our friends producing these high levels of fossil fuels. Here’s a couple highlights from Trump’s “America First Energy Plan”:

“For too long, we’ve been held back by burdensome regulations on our energy industry. President Trump is committed to eliminating harmful and unnecessary policies such as the Climate Action Plan and the Waters of the U.S. rule.”

“The Trump Administration will embrace the shale oil and gas revolution to bring jobs and prosperity to millions of Americans.”

“The Trump Administration is also committed to clean coal technology, and to reviving America’s coal industry, which has been hurting for too long.”

Fundamentally: Fossil Fuels rock! Trump is jerking America away from any and all regulations in these sectors, as he promised he would while campaigning anyways. He’s trying to protect American jobs in the very industries that essentially the entire planet is trying to shut down, for the sake of saving the polar ice caps. To be honest, at first glance, I’m not entirely opposed to Trump’s political strategies here. Hasn’t all of American economic history been built on the back of oil and gas?

Having said that, Trump is taking serious gambles with our economic situation in at least 2 ways. First: He wants every government on earth to come back to the bargaining table. Bargaining is tough, and Trump’s speech basically elicited this response from every government on earth:

A.K.A., the agreement is non-negotiable. This kind of advertising from Trump isn’t going to play well for him in global negotiations, and could push our friends towards non-American markets. “With the US stepping away from its role as a leader of the global fight against climate change, Beijing is already moving to fill the void, giving it a chance to benefit both diplomatically and economically." On the back of America’s pull from the TPP, and the administration’s uncertainty surrounding NAFTA, China is becoming a much more “reliable trading prospect.” As China continually moves into a global leadership roles on forward-thinking issues, such as climate change, their government will only become closer to profitable trading partners. These America-first policies seriously roll-the-dice on America’s current trade ties (trigger-warning to those in import and export industries.)

Secondly: One of the biggest disagreements to Trump’s withdrawal decisions came from ExxonMobil, the world’s largest publicly traded oil and gas company. Furthermore, in just October of last year, the Institute for Energy Economics and Financial Analysis (IEEFA) “Red Flagged” Exxon for being in a potential irreversible decline. Rising debt, decreasing cash balance, revenue, and net income, combined with poor performance on the S&P 500 for 10 quarters in a row are all cited as reasons to be cautious while investing/holding Exxon stock. Therefore, no way this is right! Trump’s pro-oil policies must be positive for Exxon or consequences will be faced.

Exxon’s management, who must be well-aware of their slow growth, aren’t concerned with changes in global climate; they’re concerned with changes in global economic climate. “Fracking has made gas so cheap that both coal and oil have lost market share to it,” Nick Stockton writes in an article for Wired.com. Oil prices, and the industry as a whole, have currently been recovering from quite the slump, and the collapse isn’t because of global and governmental regulations. Blame forward thinking energy policies and market forces, which have pushed more and more towards renewable energy, causing the oil industry to become oversupplied. “As our research has shown, a fast-moving energy industry transition is occurring around the world”, Tom Sanzillo writes for IEEFA.

Leading economies involved in climate change (noticeably major Asian economies like China) have been pushing further and further away from fossil-fuel reliance, and more towards renewable energy. The global economic climate is changing, and Trump’s plan is risky in the sense that it may cause substantial drag on America’s economic future as the rest of the world transitions away from fossil-fuel dependence. In short, America can get left behind. Meanwhile, China and India and Europe will continue to align economic interests with market forces “that seek to lift fossil-fuel industries supported by state monopolies in Saudi Arabia, Russia, Iran, Iraq and Libya that want higher oil prices.”

However, House Majority Leader Kevin McCarthy released this statement shortly after President Trump’s decision:

“The American energy renaissance has been good for our country and the world. It created American jobs, freed the United States and our allies from OPEC price controls, and helped to reduce emissions at the same time. The previous Administration refused to recognize that private innovation and American natural gas have achieved more than government mandates and misguided international agreements—and that naiveté led President Obama to sign a climate deal that will impose great costs with little gain. President Trump made the right call in leaving a deal that would have put an unnecessary burden on the United States.

“America is once again a world energy leader. We have shown other nations that a growing economy and cleaner energy are not only possible, but best achieved though the power of free enterprise.”

Maybe this “power of free enterprise” will push America towards cleaner and more renewable energy anyways. I mean, I did just made a strong argument that market forces are pushing the globe towards renewables regardless. Instead of government mandates and international agreements regulating the transition, why not just let the free market do it and get rid of the “unnecessary burden on the United States.”

My one concern with McCarthy’s statement: What does it mean for my generation if we aren’t the world leader in this transition. Will we continue to be a “world energy leader” if every major economic market moves quickly away from fossil-fuels, and we only move slowly? Will that cause more long-run economic loss than short-term economic gain?