Whatever the Outcome of COP21, Businesses Face Unstable National Climate Legislation in the Short-Term

This week 190 governments from around the world are meeting in Paris at the annual Conference of Parties (COP) to review the nations’ progress in dealing with climate change and continue efforts to develop a political response.  The ambition for this year’s COP is to agree an international and legally binding deal on climate change with the aim of keeping global warming below 2°C. Previous attempts to reach an agreement to succeed the Kyoto Protocol have stumbled, largely due to a lack of acceptance by China and the US to join a global climate change treaty. What makes an international deal in Paris more possible is that the Chinese government has now announced that it will cap its emissions. The key moment came in November 2014, when the US and China unveiled a secretly negotiated deal where China agreed to cap its overall carbon emissions by 2030, and the US pledged to cut its emissions to 26-28% below 2005 levels by 2025.

Whilst the outcome of COP21 remains unclear, the important question for businesses worldwide is: what are the near-term impacts if a global agreement on climate change is (or isn’t) reached?  Our analysis finds that whilst international climate deals can inform the medium-term outlook (as goals are often based on a 5-10 year time horizon) in the short-term business leaders should take their cues from national-level regulations. But the outlook is sharply asymmetric: a positive deal at COP21 will gradually translate into new national regulations, but a weak deal may give politicians a license to weaken existing related laws – something that could happen very fast indeed.

For example, in industrialized countries such as Australia and the UK, there has already been a flurry of weakening policy signals on the energy and climate front, as governments look to lower business taxes, scale back government intervention and reduce public spending. The UK government has announced plans to further ‘simplify’ the energy efficiency tax landscape – suggesting more policy will be watered down or removed. That pretty much doubles the stakes of the negotiations in Paris.