US exit from Paris agreement could disrupt clean tech financing in short-term
Fulfilling a major electoral promise, President Donald Trump has announced that the United States will withdraw from the landmark Paris Agreement on climate change. It’s ironic that, as per the UN rules, the US would have to wait for four years to get out of the pact, which means that it will be election time again by the time the formal exit happens.
The US departure has a range of impacts on global trade, efforts on climate change and financing of the clean energy technology. However, industry experts opine that, notwithstanding current politics around climate change, it’s the economics of the clean tech sector that would be the key driving factor for the sector. India’s renewable energy sector, in particular, would continue to be guided by government plans and technological breakthroughs, though a disruption in financing could emerge.
What does the US leaving the Paris agreement mean?
No Commitment on Emission Reduction
Once out of the Paris agreement, the US would no longer be committed to reduce emissions by 26-28 percent by 2025 (from 2005 levels) while it accounts for more than 15 percent of total worldwide greenhouse gas emissions.
Rescind the Clean Power Plan
A major policy push from the earlier Obama’s administration on climate change, considered the centerpiece of the effort to meet the Paris agreement objectives, is already under review. The plan aims to reduce carbon dioxide emissions by 32 percent by 2030 (from 2005 level) from the power generation sector.
Other measures by the US, which also take a backseat, include new fuel economy standards for heavy-duty vehicles and measures to curb emissions of methane from landfills and the oil and gas industry.
Financing
This also means that US may no longer be contributing towards financing the Green Climate fund for developing countries as required under existing obligations under the parent treaty of the Paris accord, the 1992 UN Framework Convention on Climate Change.
The decision by Trump should not impact the individual clean energy mandates the US states have. There are 29 states that already have a policy framework for the use of renewable electricity and provision of tax breaks and other support for technologies to cut emissions. As hinted by Environmental Protection Agency head, Scott Pruitt and the energy secretary, Rick Perry, there is the likely scenario of the Trump administration trying to block climate policies at state level.
What is the Impact?
There is a bit of political gain for Trump out of this event by consolidating the core electoral base but the businesses involved in the clean energy technology industries worry that the signal sent by US action would deter investment.
Interestingly, corporate lobbying for the Paris agreement was also from the utilities and industrial sector (eg: General Electric and Exxon Mobil) wherein their interests lie in selling the new technology and energy sources needed to cut carbon emissions.
Even representatives from the coal industry, World Coal Association, have said that they see the agreement as an opportunity to get more financial support for technologies to cut coal emissions. So, moving out of the agreement can be a setback to both such technical innovations and the financial conduits to such technologies.
So, in the medium term, this can have various implications. There could be an opportunity for closer cooperation between China, India and the European Union, as pointed out by the energy consultancy, Wood Mackenzie, for a low-carbon economy.
Further, US companies involved in environmentally-friendly technologies can relocate renewable technology research and development centers to Asia closer to end markets.
Long Term Outlook
Market participants suggest that the structural themes of higher energy efficiency, declining renewable energy prices, the rise of electric vehicles and smart grids will continue to gather more force. And this entire sector would continue to be governed by its economics. Interestingly, the coal industry, too, is expected to become less and less labour-intensive with industrial automation.
Impact on India
US-India Clean Energy Finance Task Force is one of the ways the two countries collaborate on energy and clean energy. Industry experts suggest that such efforts will likely continue as India represents an enormous market for US suppliers. Further, industry experts are optimistic about India’s renewable sector plan which is dictated by its own economics and the government’s targets for the renewable sector. The government intends to achieve 40 percent cumulative electric power capacity from non-fossil fuel sources by 2030.
Industry experts point out that the US has been providing valuable financial and operational assistance in this sector to India but assert that withdrawal of these schemes can be mitigated by suitable planning and recalibration of other programs. But even if the funding vacuum created by the US is partially filled by other foreign investors, there is a risk of higher refinancing costs. The debt undertaken for project financing solar projects in India could be repriced in such a scenario, adversely impacting debt service coverage ratio and IRR.
So though lower raw material cost (PV modules, 50 percent of PV system cost) has been a major catalyst for the recent traction in solar projects, subsidies and soft loans continue to be another lever.
So, all in all, in our view, the US exit from the Paris agreement could bring in a disruption in the financing of newer, cleaner, low carbon technologies. Impact on the sector, however, depends on the overall acceptance of technologies governed by improved economics.
