On Thursday, June 1, 2017, President Donald Trump announced that the United States would withdraw from the Paris climate agreement, setting in motion a four-year process that is expected to be completed in November 2020 – in the days following the next U.S. presidential election.

While withdrawal should have little immediate impact on the markets or the U.S. economy, the potential for long-term consequences is significant. By choosing to withdraw, the U.S. is potentially giving up an opportunity to shape the future of clean energy, risking the estrangement of key allies and increasing the possibility of future trade disputes.

What Did the Paris Agreement Do?

The Paris climate agreement was a multinational accord aimed at reducing greenhouse gas emissions, with a goal of preventing global temperatures from increasing more than 2 degrees Celsius, a level considered dangerous by climate experts. The U.S. is currently the second-largest producer of greenhouse gases, behind China.

By withdrawing from the agreement, the U.S. becomes one of only three countries not participating, joining Syria and Nicaragua.

As part of the agreement, the Obama administration had proposed reducing U.S. greenhouse gas emissions by 26% to 28% by 2025. The agreement, however, was non-binding. There were no penalties for failing to meet those goals and participating nations were free to periodically adjust their targets should the need arise. The U.S. commitment also included $3 billion in aid for the United Nations Green Climate Fund, of which $1 billion has already been disbursed.

In his remarks on Thursday, President Trump expressed a desire to potentially renegotiate the terms of the agreement, which he feels are unfair to the U.S. However, the leaders of Italy, Germany and France have already rejected that possibility, and many are skeptical that the U.S. would have the leverage to renegotiate the terms as a non-participant.

Renewable Energy Offers Greater Potential for Growth

President Trump's primary motivation for withdrawal stems from a belief that the terms of the agreement would have a negative impact on job creation in the U.S., particularly in fossil fuel industries such as coal and oil. However, while regulations can be detrimental to growth, they are not a primary driver of employment. In fact, the move toward clean energy has been driven more by market demand than by regulations.

The decline of jobs in the coal industry, for example, is due to a number of factors, including increases in the production of natural gas, cheaper renewable energy, and advances in electricity storage. Demand for fossil fuels is falling, and the industry is increasingly more reliant on automation – meaning that even if output were to increase, it may not result in a significant increase in jobs. Withdrawal from the Paris agreement will not reverse these trends.

In 2017, more Americans are at work building, installing and maintaining solar panels than are employed by the coal industry. From a long-term, economic perspective, a shift toward renewable energy would likely be more beneficial for job growth.

The Long-Term Economic and Investment Implications

Withdrawal should not impact institutional environmental, social and governance (ESG) investing — in fact, it may be viewed as a positive, as investors commit more of their dollars to combating climate change and pushing for more companies to report on their impact.

The transition away from fossil fuels has opened up a huge global market for wind and solar energy, electric cars, advanced batteries and other related technologies. It's estimated that renewables could grow to be a $6 billion industry by 2030.

While withdrawal may not dissuade U.S. companies from pursuing these technologies, it could lead foreign investors to pass over U.S.-based clean energy projects out of concern that the Trump administration may further reduce government support for such projects.

Additionally, foreign governments may seek to apply carbon tariffs to U.S. exports to level the playing field and send a message about the consequences of withdrawal.

It's also important to consider the impact of climate change itself. Without the U.S. participating in efforts to reduce carbon emissions, it's believed that the effects of climate change will increase at a much faster rate. If such estimates prove correct, the impact on global economic output over the next century could be profound.

The Political Implications

While we may not see the economic impact of withdrawal for some time, the political implications may be felt much sooner.

Although Trump's withdrawal fulfills a campaign promise and was framed as part of his “America First" policy to defend U.S. jobs and interests, the controversial decision could create further political challenges. It provides China with the opportunity to step up as the global leader in the development of clean energy. It also potentially sends a message to our European allies that we cannot be relied on to cooperate on big issues, which could make them less willing to do so on matters of security, trade and economics in the future. And given that the timing of the withdrawal coincides with the next U.S. presidential election, climate change is likely to be a much more prominent issue during the next campaign than it was during the 2016 election. However, the Trump administration could accelerate the withdrawal by exiting the broader United Nations Framework Convention on Climate Change entirely. Such a move would allow the U.S. to withdraw from the Paris agreement with only one year's notice.

Conclusion

At present, we see no reason to adjust our general view on the market or how we have positioned investors' portfolios, given the limited short-term effects related to withdrawal. It's likely that the other 194 signatories to the Paris agreement will continue with their efforts to reduce carbon emissions, though the road ahead is steeper without U.S. participation. Within the U.S., the trend away from fossil fuels is likely to continue, albeit more slowly. The future of U.S. policy with regard to climate change is sure to be the subject of major debate in the years to come. While investors should be mindful of the long-term implications, they would be wise to not overreact to what they hear in the news, and instead remain confident in their long-term, objective driven strategy.

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