United States withdrawal from the Paris Agreement

On June 01st when Donald Trump announced the withdrawal of the US from the Paris Climate Deal, it came as little surprise for other world leaders. Withdrawal from the Paris Accord was one of the promises that Trump had made as part of his election campaign. Trump’s view was that the Paris Accord was loaded in favour of polluting nations like India and China and was pitted against developed economies like the US. While Trump is open to renegotiating the deal on his terms and conditions, it is clear that the US is out of the original Paris Climate Accord. 
 
But the global impact was really not too deep. For example, Mr. Narendra Modi and Angela Merkel pledged their commitment to the Paris Climate Accord irrespective of the actions of the US. Even China has agreed to be part of the Climate deal. The irony is that the US and other lobbyists had spend a very long time to get China and India on board for the Paris Accord and had finally succeeded only last year. Now that entire diplomatic effort appears to have been lost with the US ceding its leadership position in the climate negotiations. So what could be the likely outcome for the world in general and India in particular?
 
1.  A temporary blow to Clean Energy financing
Without a doubt the withdrawal of the US will be a temporary blow for clean energy financing. The $3 billion Clean Energy Fund that was created had the US as its major contributor. With the US walking out of the Paris accord, they are likely to withdraw their funding for financing clean energy projects. Many Indian companies in the renewable energy sector had also benefited from this fund. However, the fund is still quite small and that shortfall can be easily made up by countries like Germany, Japan or China. In fact, China may be keen to establish itself in the space vacated by the US for economic and for diplomatic reasons. While there will be a temporary impact on clean energy projects, we do not see this as a major challenge in the medium to long term.
 
2.  Innovation in clean energy may take a back seat
The fact is that alternate energy became a mainstream source  of energy only after China could manufacture the required equipment at a fraction of the cost. That was the big thrust for alternate energy across the world. But lower cost equipment is not the only criterion. The spread of alternate energy also owes a lot to enhancements and innovations in the production, storage, monitoring, transmission and distribution of alternate energy. The US and Germany were the two countries that were at the forefront of these innovations in alternate energy. With the US effectively withdrawing from the Paris Climate deal, Germany is the only country left to spur innovations in this space. That will surely be a setback for the rapid growth of alternate forms of energy.
 
3.  A temporary boost for fossil fuels
The big question is whether this will be beneficial to fossil fuels. The reasons are not far to seek. Trump wants to exploit the shale potential fully over the next few years by bringing more Federal land under shale exploration. That means more supply in the oil market. However, oil prices have not really reacted to the announcement from Trump. The reason is simple. If Trump withdraws from the Paris Accord, it means that the US will produce more oil and that will depress prices. But it will also mean that the OPEC and other friendly nations can run their oil resources for much longer and hence will not be too keen to deplete their oil resources in a hurry. The net impact on oil prices is likely to be minimal. 
 
The big question is not just about oil prices. It is about whether the shift towards alternate energies will suffer a setback or get delayed. We do not think that is likely! The shift to alternate energy is not just a choice but the absence of choice. Even within the US individual companies and states are having their own reservations of this move by Donald Trump. The shift to alternate energy is inexorable and will go ahead on schedule.
 
4.  US credibility will suffer and that is not good news
The impact of this entire exercise will be that the credibility of the US as an opinion leader in the world will take a hit. Walking out of a global agreement unilaterally will not be appreciated by other member nations. Over the last 60 years, both Europe and Asia have looked up to the US to take the lead in terms of global security, world trade, global finance and climate change. Trump has walked out of the Climate Deal and has threatened to make trade blocs redundant and has also announced plans to reduce US spending on NATO and global security. All this could hurt the US credibility immensely and the world will look to a new nation to give leadership to the world order. Whether this power centre shifts to China or not remains to be seen!