We look at President Trump’s decision to pull the U.S. out of the 2015 global climate agreement.

Victoria Barron

Paris Discord

What has happened and why?

  • The U.S. has pulled out of the Paris climate agreement, an accord signed by 195 of the 197 UN countries in December 2015. Agreement1 had been reached to:
    • limit global temperature increases to “well below” 2°C (3.6°F), and to endeavor to limit them to 1.5°C (2.7°F) between 2050 and 2100
    • review and strengthen each country’s emission-reduction plans every five years
    • enable poorer nations through ‘climate finance’ to adapt to climate change and switch to renewable energy.
  • President Trump cited unfairness to U.S. business as one of the key reasons for leaving the agreement.2 To our minds, this is slightly confusing, as the agreement is voluntary, and it is actually up to each country to decide how it makes emission reductions. The U.S. could have therefore changed its commitment to ensure business was supported.
  • The president also cited concern that other countries would take financial advantage of the U.S., and that the U.S. economy would lose $3 trillion in GDP.3 However, many other countries, including China, have actually pledged to support the global climate transition financially, and the figure of $3 trillion is derived merely from one conservative think tank report (The Heritage Foundation), which concluded the agreement would “result in over $2.5 trillion in lost GDP by 2035”.4
  • Finally, Mr. Trump left open the possibility of renegotiating the agreement or an “entirely new transaction”. The reality is, however, that there is no process for reopening the agreement, and it is unlikely other countries will want to rehash a plan that took six years to agree.

Does it matter that the U.S. Is pulling out?

  • Scientifically: We would argue ‘yes’. The U.S. is the world’s second largest CO2 emitter, accounting for almost one-sixth of global emissions. Its departure will place a heavier burden on other countries to stick within the ‘two-degree’ warming goal. Some studies have shown that a US withdrawal could even make the Paris agreement targets unreachable.5
  • Geopolitically: At a geopolitical level, we think it also matters. Multilateral agreements work better if everyone remains ‘in’, and this departure may give other countries an excuse to soften their emission-reduction plans. However, we believe China and Europe’s continued commitment should retain confidence.
  • Reputationally: The move has been branded ‘irresponsible’ by world leaders.6 It may also simultaneously have helped China step into the shoes of being the economic and military superpower, which shapes and leads global peace and trade deals.
  • Procedurally: The Paris agreement is designed so that no country can withdraw within three years of its coming into force, and the process of withdrawal takes a further year to complete. Therefore, the U.S. cannot withdraw before November 5, 2020, the day after the next presidential election, meaning that the president cannot withdraw from the agreement within this term. Should another president be elected, this move could once more be reversed.

What has been the global reaction?

Given that President Trump has long called climate change “a hoax”7 and promised to “cancel” the Paris deal during his election campaign, this move is not a surprise.8 China and the European Union have already restated their commitment to the Paris agreement and the “irreversible” move away from fossil fuels.9

Newton’s Conclusion

While not a surprise, we see the U.S. decision to pull out of the Paris climate agreement as a blow to the 2015 agreement, albeit that the other signatories seem likely to persevere. However, while we are supportive of strong, international policy moves to limit global warming to 2°C (3.6°F), so far it has not been these sorts of policies that have actually changed global emissions.

Instead, state and national-level subsidies, along with economics, have meant that solar, wind and lithium-ion battery cost curves have fallen, and that global coal usage has declined. We believe future progress on carbon emissions will be a by-product of these continuing trends, and of business’s vested interest in improving industrial efficiency.


Important information

This is a financial promotion. ‘Newton’ and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Investment Management (North America) Limited (NIMNA Ltd) and Newton Investment Management (North America) LLC (NIMNA LLC). NIMNA LLC personnel are supervised persons of NIMNA Ltd and NIMNA LLC does not provide investment advice, all of which is conducted by NIMNA Ltd. NIMNA LLC and NIMNA Ltd are the only Newton companies to offer services in the U.S. In the UK, NIMNA Ltd is authorized and regulated by the Financial Conduct Authority in the conduct of investment business and is a wholly owned subsidiary of The Bank of New York Mellon Corporation. Registered in England no. 2675952. NIMNA Ltd is registered as an investment adviser under the Investment Advisers Act of 1940. NIMNA Ltd investment business described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Certain information contained herein is based on outside sources believed to be reliable, but their accuracy is not guaranteed. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of The Bank of New York or any of its affiliates. The Bank of New York assumes no responsibility for the accuracy or completeness of the above data and disclaims all expressed or implied warranties in connection therewith. © 2006 The Bank of New York Company, Inc. All rights reserved. Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed. This document is for institutional investors only. Any reference to a specific country or sector should not be construed as a recommendation to buy or sell this country or sector. Compared to more established economies, the value of investments in emerging markets may be subject to greater volatility due to differences in generally accepted accounting principles or from economic, political instability or less developed market practices.

1 http://unfccc.int/paris_agreement/items/9485.php
2 http://www.independent.co.uk/news/world/americas/us-politics/trump-paris-agreement-speech-read-in-full-climate-change-deal-withdrawal-a7768291.html
3 https://www.bloomberg.com/politics/articles/2017-06-01/economic-damage-from-paris-withdrawal-may-emerge-in-trade-wars
4 http://www.heritage.org/environment/report/consequences-paris-protocol-devastating-economic-costs-essentially-zero
5 http://edition.cnn.com/2017/06/01/politics/us-paris-agreement-trump/index.html
6 https://www.washingtonpost.com/politics/trump-to-announce-us-will-exit-paris-climate-deal/2017/06/01/fbcb0196-46da-11e7-bcde-624ad94170ab_story.html?utm_term=.a187782e832a
7 https://www.vox.com/policy-and-politics/2017/6/1/15726472/trump-tweets-global-warming-paris-climate-agreement
8 http://www.bbc.co.uk/news/election-us-2016-36401174
9 https://www.ft.com/content/585f1946-45e2-11e7-8519-9f94ee97d996