INSIGHTS: THE PARIS AGREEMENT – DETAILS AND INSIGHT
By Guest Columnist Joseph Baran:
Principal at Bertison-George
The recent Paris Agreement under the United Nations Framework Convention on Climate Change (Paris Agreement) has been heralded as an historic overhaul of global energy policies. This legally binding agreement will “send a powerful economic signal that fossil fuels will be saddled with financial and legal premiums to remain part of the energy mix, and clean energy will enjoy subsidies.” Per Paul Bledsoe, a climate aide during President Bill Clinton’s administration. “The strength of the agreement is that it allows a thousand policy flowers to bloom.” However, if you’re looking for a country specific detailed set of standards, you’re not going to find one.
There are no specific goals or actions for each country. Each country will have its own climate action targets which are referred to in the Agreement as ‘Nationally Determined Contributions’ (NDCs). In signing the Agreement, each country is required to provide its’ NDCs every five years, with the expectation that every five year plan will be more aggressive.
The Agreement does provide for transparency, somewhat of. On the surface, this a significant topic as many developed countries stated that without such reporting, climate action targets are meaningless. There are loopholes of course. Article 13.2 states that “The transparency framework shall provide flexibility in the implementation of the provisions of this Article to those developing country parties that need it in the light of their capacities. The modalities, procedures and guidelines referred to in paragraph 13 of this Article shall reflect such flexibility.” Flexibility, of course, is not defined.
In the Agreement, developed countries are obligated to fund $100 billion annually. This is categorized as a floor since non-developed countries have the ability to provide funding voluntarily. So far, the Obama administration has requested in its’ annual budget, $1.29 billion for Global Climate Change Initiative. Canada has requested $2.65 billion between now and 2020. That comes to $0.53 billion per year. Assuming these two countries would sign the Agreement, their commitments would total $1.82 billion leaving $98.18 billion remaining to be funded.
Then there are the options available in the Agreement when a country cannot meet their goals. The Agreement allows for the “cooperative approaches” to trade emissions obligations, in a decentralized, bilateral way. Article 6.4 also establishes a “sustainable development mechanism”. These clauses create the ability for countries to trade emission obligations or for one country to pay another to cut its emissions and have those cuts count towards their own targets. What happens if a country does not meet their goals? The Agreement merely states that countries won’t, because basically it will make them look bad. It is always possible to get out of the Agreement. After 3 years, countries can provide a one year notice that it is no longer part of the Agreement.
Will this really impact the US? Below is a chart form a United State Environmental Protection Agency (EPA) showing the sources of CO2:
What’s getting lost in the Paris Agreement discussion is the impact natural gas has had on emissions. According to a Wall Street Journal editorial (1/4/15), overall [methane] missions fell 4.7% between 1990 and 2008 and 6.3% between 2008 and 2012. These are the same years when the U.S. became the world’s natural-gas leader, with production increasing by nearly fourfold since 2008. According to the Energy Information Administration (EIA), since 2005, natural gas has prevented more than one billion metric tons of carbon dioxide from being emitted from power plants in the United States. During the same time, renewable energy has prevented only 600 million metric tons of carbon dioxide. EIA also noted that as natural gas fired electricity generation increased, power plant greenhouse gas emissions hit a 27-year low in April 2015.
The oil and gas industry has done its part to clean up its own act. From the chart above, natural gas systems is the fourth largest emitters of CO2. EPA data released in April 2015 shows that new oil and natural gas wells increased 7.5% from 2005-2012, while methane emissions from oil and gas systems decreased 11% during that same period. (EPA, 4/14/15) In addition, a 2015 study found relatively low emissions of methane from major US gas fields. Specifically for the Marcellus, the study found the lowest methane release – 0.18% — 0.41% — of the Haynesville and Fayetteville formations. (Journal of Geophysical Research, 2/18/15).
The benefits of natural gas have already been experienced in the US. Other countries such as China have taken great efforts in attempting to develop their unconventional resources as they look to US technology and experience. Time will tell what will happen with the Paris Agreement. What is known is that natural gas has helped spur economic development and reduced greenhouse gasses.
ON THE ECONOMY: 2016 JDA PREDICTIONS
By John Dunham:
Managing Partner, John Dunham & Associates
Greetings, my friends. We are all interested in the future, for that is where you and I are going to spend the rest of our lives. So began one of the great cult movie classics of all time, Ed Wood’s Plan 9 From Outer Space. The narrator of the film was a former radio announcer known as the Amazing Criswell. Criswell was famous for his bizarre predictions including a claim that the earth would be struck by a ray from space that would cause all metal to adopt the qualities of rubber, leading to horrific accidents at amusement parks. He also suggested that the end of the planet would happen on August 18, 1999. While Criswell never claimed to be a real psychic, and his bizarre prognostications were for entertainment only, many of those who make forecasts are not always so humble.
In our final Monthly Manifesto of the year we like to examine the predictions that were made through 2015. As usual, the year was full of incorrect predictions. Let’s start with the Presidential election – specifically the Republican race, where Stuart Stevens, Republican strategist and the chief advisor for the 2012 Romney presidential campaign, George Will, Columnist for the National Review, and Robert Schlesinger, managing editor for opinion, US News & World Report among many others have all predicted that Donald Trump’s campaign would be a flash in the pan. Currently, the billionaire developer is sitting at about 40 percent in the national polls. Like political predictions, forecasts about the stock market are also a fool’s game. Currently, the S&P 500 is sitting at about 2000, down slightly from the beginning of the year. Forecasters for Morgan Stanley, Oppenheimer, and RBC all predicted at least a 10 percent increase in the S&P.
At the beginning of the year, the IMF projected US economic growth would be 3.5 percent in 2015. Looking at the last 4 quarters GDP is up just 2.2 percent (meaning that the IMF prediction is off by nearly two-thirds. After seeing oil prices crash in 2014, the Bloomberg survey of professional forecasters that expected crude prices to rise by 35 percent in 2015, and Goldman Sachs predicted prices of $85 a barrel. Currently NYMEX crude oil prices are below $35 a barrel.
On other fronts, psychic Thomas John suggested that in 2015, evidence would emerge that the US government was involved in the disappearance of Malaysia Airlines Flight MH370 while psychic Betsy Lewis claimed that top secret information will come to light that Lee Harvey Oswald was indeed “a patsy” as he claimed and did not kill President John F. Kennedy. And the biggest prediction about 2015, made in 1989 in in the film Back to the Future 2, that the Chicago Cubs would win the 2015 world series – well I just got back from Kansas City and can verify for certain that this did not happen.
All of this suggests that we should all be wary of predictions, and particularly of the computer models that all of us rely on to make them. The fact is, as economist John Kenneth Galbraith has been quoted as saying, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” With this in mind, how did JDA do in its predictions for 2015?
Our general prediction was that the US economy would start to pull out of the doldrums, while China and the other BRIC countries will continue to soften. We also suggested that Europe will continue to strengthen albeit slowly, and that geopolitical pressures and continued weak demand will keep energy costs in check, which will continue to put downward pressure on both prices and interest rates in the United States. So in a general sense we were pretty much right on. But general predictions are easy to make. The real question is how well did we do with our specific predictions.
We suggested that the US would experience overall GDP growth of 2.85 percent, so while we are doing better than the IMF we are still likely to be over forecasting by about 50 basis points. Our figures for consumer spending are also pretty close to actuals. We do continue to be totally off on our inflation forecasts suggesting that inflation would average 2.24 percent in 2015 versus the actual of – well virtually nothing as measured by the CPI. We also suggested that unemployment would be starting to rise by now and be at about 5.4 percent as more people began to reenter the labor force. The last figures show the rate holding stable at 5.0 percent. However, our average forecast of 5.35 percent is almost dead on. Our prediction for the average treasury yield was also pretty darn close, and we were correct that it would rise over the year, though we predicted a much steadier increase than has actually happened as interest rates are slacking off as the year ends. We are also pretty close on the 2-year with our average at right about the current rate. Again, we expected a faster increase – up to 1.25 percent today, while the current yield is 0.95 and increasing. This is all due to the fact that we thought that the Federal Funds rate would finally begin rising in the second quarter.
So the bottom line is that we were pretty close on our predictions of both economic growth and unemployment, while we expected inflation to pop when it did not – a pop which would have led to faster increases in interest rates. None the less, I would give us a solid B on the interest rate forecasts and a B+ on the forecasts as a whole.
So what do we foresee for 2016?
Well, as we have been saying for some time, it appears as if the US economy is slowly but surely heading into the next recession. This is in spite of the recent 25 basis point increase in the Federal Funds rate which should be a predictor of an increase in the demand for money. The current recovery has actually tracked in much the same was as every other post war recovery except that it has been less robust. While the recovery following the double dip recession at the beginning of the 1980s might be considered a giant, this one was more a hobbit. A slow recovery does not suggest a lengthy one, and there is simply nothing on the horizon that would suggest that we are not following a normal business cycle.
Our forecast for a recession comes in concert with continued slow growth in much of the world economy. Political crisis in Europe, along with continued problems with debt in most of the rest of the world will preclude any major countries or regions experiencing any significant growth in 2016. This means that there is little to suggest that exports will drive growth in the US economy.
That said, there is some strengthening in the US labor force, which should buoy consumer spending. But the business press is incorrect to suggest that spending leads to growth in America. Unless there is a big change in the direction of labor force participation, higher wages and spending will not do much for the overall economy. Unfortunately, there is also nothing on the horizon to suggest that the changes in the American regulatory and welfare structure will lead more people to work. This is particularly true on the lower rungs of the income ladder where most job creation has been. In fact, if more states enact job killing minimum wage increases we will see more low wage jobs replaced through automation – just what fast food restaurants in New York State are currently doing.
We expect to see the Federal Reserve continue to slowly raise the Federal Funds Rate, but demand for money,particularly for new investment activity will continue to be soft, as businesses and investors await the results of the 2016 Presidential race, so the rate increases will likely have little effect on the economy (see the blog post included in this Monthly Manifesto).
Based on these general findings, most recent forecasts for 2016 are presented in the following chart.
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