"Is Paris burning?": Looking anew at the significance of the Paris Climate Change Agreement

While that question hung over the last days of World War II, on December 2015 the world media definitely projected a cheerful resolution for the recent climate change negotiations there that "no", the ballyhooed Paris Agreement inked there should provide a new pathway to avoid such fate. Seeing the multitudes of various politicians all in good cheer though, one could not help but be a wee bit skeptical.

The Agreement was indeed breezy on specifics and as the skeptics noted in particular – just like the doomed Kyoto Protocol, there was lacking an enforcement and compliance mechanism. Was that perhaps then, a too familiar "been there-done that" being replayed?

Rewind a decade or so and we can recall the Kyoto Protocol as a groundbreaking first major concerted global effort to counter climate change via attempting to incorporate private sector-style mechanisms such as tradeable emissions credits. The edifice was rather formidable looking as the attempt was in fact one to establish from the gound up an entire market sector in itself complete with national review committees, a UN review committee, technical review bodies, various third-party auditors and certifiers, as well as the ecosystem of market traders, investors, lawyers, accountants, etc. etc., seemingly ad nauseum.

Yet – the results were politely mixed, with such ambitious ecosystem establishment being in practice, sideswiped by two major external economic shocks. The first was the collapse of the former Soviet Bloc and the resulting severe contraction of those economies. If such downturn were to be translated into emission credits, it threatened to overwhelm the entire Kyoto markets.

The second was the global downturn of 2008 which hit just when negotiations on extending Kyoto were at a critical juncture and nations worried about domestic jobs and economies, put the additional burdens from the Kyoto framework on a back burner and by and large, the climate change debate mostly disappeared from the radars and media screens for the duration of the downturn. 

But phoenix-like, as the global economies began to re-emerge, the issues of climate change again rebounded as well, resulting in the Paris Agreement. Yet, again, without an enforcement or compliance mechanism, would any so-called agreement be a national policy equivalent of well-intended New Years’ resolutions to lose weight, quit smoking, etc., where Paris merely repeats the sorrowful warnings of the 18th Brumaire?

And yet, one distinction was that in this seemingly second go-around, the general background has largely not even been a matter of debate, and the landscape and terminology of the ecosystem had been one very quickly acknowledged and utilised. Whereas before players groped to figure out the rules of the game, this time they immediately delved into the game itself. 

Also too, enforcement and compliance mechanisms – while nice to have – are not necessarily critical to the movements of markets, as any investor or participants into emerging markets can attest to. Rather, the empirical movement of the market itself sets its own practical rules by which the game is played.

In that light, the speed at which the themes of the Paris Agreement and climate change resurfaced in force (for all practical purposes just in the past year), were discussed, and acted upon, may itself be the strongest signal to the markets that this on this second go-around, the depth and tempo of the climate change sector and markets would be much more robust and fast.

Not heeding and preparing to react to such new speeds and weights risks leaving those not prepared for such changes being overwhelmed and swept as bystanders having prepared for the last war and not the current one.

As we saw before, last time the CER program under the Kyoto Protocol reshaped energy markets across Asia. Everything from kickstarting renewables programs from the biomass and VSPP program boom in Thailand to the explosion of hundreds of MW of wind farms across Inner Mongolia and massive new investment interest in cleantech manufacturing in China directly impacted.

Mass public and policymaker focus on shifting energy sources development resulted too ranging from the setup of national emissions programs impacting all power companies in Korea and China to investor reassessments on Indonesian-listed coal producers to even new support for nuclear as being climate-friendly.

In corporate boardrooms across Asia, gencos, utilities, and industry participants were challenged by investors and policymakers alike to set forth their strategic management responses to such challenges too – or saw their share prices punished.

However, while the Kyoto system took over a decade to get agreed to in place – the Paris system looks like its timeframe is already much more accelerated to just a year thus far. With the renewed climate change focus having proceeded so swiftly this time, the power sector in Asia in particular needs to be ready to position itself "now" for that resurgence of focus from the public, governments, and investors.