In 2016, all the world, with the exceptions of Nicaragua, Syria, and the Vatican, signed the Paris Climate Change Agreement. The agreement aims to limit global average increase in temperature to “well below two degrees Celsius” compared with preindustrial levels. In simple terms, this will require reducing global greenhouse gas emissions from human activity by as much as 80% in the next 30 years.
The agreement marked the first time that rapidly growing economies such as China and India and more-mature economies such as the U.S., the EU, Japan and others had agreed on a framework for stabilizing and then reducing GHG emissions. The agreement covers 99.75% of 2015 emissions, 18% of which are from the U.S.
In 2017, President Donald Trump announced that the U.S. would withdraw from the agreement; this will take effect in November 2020. However, because there are no penalties for noncompliance, the formal timing is moot. This seemed a good time to reflect on climate change policy and national competitiveness, both historically and moving forward.
Policy ambiguity on climate change and energy in the U.S. is not new. Attempts to find a global agreement resulted in the 1997 Kyoto Protocol. This agreement had a mix of binding and aspirational targets. The U.S. withdrew support before it came into force, and other countries followed suit. Energy policy is largely established on a state-by-state basis and often is subject to electoral pressures. In contrast, other actors, most notably the EU and Japan, have been somewhat more consistent with energy policies since the 1980s.
So where are we after the past two to three decades of energy and climate policy? At a macro level, the U.S. economy is about 30% to 40% more energy-intensive than Japan’s or the EU’s. Closing this gap represents a $400 billion annual cost reduction. The obvious competitive question is whether just closing the gap is sufficient, given that most other countries plan to further increase efficiency.
Large industrial players in the U.S. have energy intensities on par with those of similarly sized players around the world. This is understandable given that most of them have global operations and proliferate best practices across their operations. These also are the companies that have well-structured energy management practices and are well able to manage variations in price and policy. Ironically, this performance is an unintended globalization of policy effects from more-stringent to less-stringent regions.
The average city in North America has energy intensities two to three times higher than those of comparable communities elsewhere. This largely results from the average efficiency of homes and buildings, transportation, and urban energy supply. This performance gap will be closed only when a city’s policy and planning have horizons longer than election cycles. It is probably no surprise that U.S. cities are increasingly focused on moving energy planning forward with or without wider national policy.
The move to decarbonize power supplies is accelerating, driven by policy and by decreased renewables technology costs. Currently, roughly 25% of global power is renewable. In the U.S., this share is about 16% and rising. Countries with a longer policy history, such as Germany and Denmark, are at about twice this amount and on some days can export renewable power.
Where there is long-term commitment to sustained efficiency and clean and renewable supply, investors and suppliers are willing to make bets to serve these markets. A good example is wind power. In the early 1980s, the U.S. was a clear global leader and innovator. In the years that followed, policy uncertainty led the U.S. to surrender this early lead. Today wind power is a $110 billion annual market globally, yet only one of the world’s top 10 suppliers is from the U.S.
There is much evidence that sustained policy aimed at increasing energy efficiency and reducing greenhouse emissions has stimulated energy innovation, reduced costs, and created new world-leading businesses. The Paris Agreement, even without the U.S., represents a commitment to dramatically reduce global emissions through efficiency and reconfigured energy. That creates a big market opportunity for U.S. companies. Failing to address it would be a major competitive risk.