Since the momentous Paris Agreement was officially adopted on the evening of 12 December, there has been much commentary on the significance of this historic agreement. This article outlines the key mechanisms of the Paris Agreement which deal with mitigation of greenhouse gas emissions, provides a high level overview of how these mechanisms work together and includes information on how the Paris Agreement may directly affect the international business community.

Key pieces of the Paris Agreement

There is already a common misperception that the adoption of the Paris Agreement means that we have "solved" climate change. In fact, quite the opposite is true.

What the Paris Agreement does is first, provide a unified global signal for the transition to a low-carbon economy and secondly, set up a process under which we can begin to address and accelerate a global response to climate change over the long-term.

There are a few key mechanisms which are critical to the architecture and integrity of the Paris Agreement. These include:

  • The long-term goals
  • Intended Nationally Determined Contributions (INDCs) / Nationally Determined Contributions (NDCs)
  • The five year review/"ratchet" mechanism
  • A global stocktake mechanism
  • Differentiation throughout the text between developed and developing countries
  • Provision of Finance

We note that the Paris Agreement also covers a range of issues not addressed in this article (including adaptation, loss and damage and capacity building). For further details on these broader topics, please refer to our earlier publication.

How the key pieces fit together

A few things need to be kept in mind when considering the Paris Agreement. The main mechanisms under the agreement do not take effect until 2020 and many rules around some of these mechanisms will require further development under the United Nations Framework Convention on Climate Change (UNFCCC) over the next few years.

Although there are overarching concepts such as transparency which apply, the Paris Agreement is not designed to operate from the "top-down". Therefore, it is unlike its predecessor the Kyoto Protocol, which features legally binding emissions reductions for annexed countries. The Paris Agreement is instead, designed to "ratchet up" nationally proposed contributions from 2020, in pursuit of a set of long-term goals over time.

The long-term goals under the Paris Agreement were hard fought for in the negotiation room and are significant. They include both qualitative and quantitative goals which reframe the international understanding on addressing climate change. These long-term goals explicitly include:

  1. A global temperature goal to hold increases in average global temperature to "well below 2°C" and to "pursue efforts" towards a 1.5°C rise above pre-industrial levels.
  2. A focus on adaptation, recognising that there needs to be an increase in adaptive ability and resilience to the effects of climate change.
  3. Redirecting financial flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development.

To achieve these long-term goals, the agreement also sets out a qualitative goal for countries to decarbonise before the end of the century. This is achieved through the inclusion of an overall trajectory for parties to "aim to reach global peaking of greenhouse gas emissions as soon as possible" and then to "undertake rapid reductions thereafter" towards "a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in the second half of this century". What is described here is a process of reaching global net zero emissions over the long term, whereby greenhouse gas emissions released need to be "balanced" by capture and storage of emissions.

All countries which sign the Paris Agreement will have an obligation to "prepare, communicate and maintain successive" NDCs which are the dominant means through which the long-term goals will be achieved. NDCs are a country-driven "bottom up" contribution towards the long-term goals. The contents of the NDCs are entirely determined by the submitting country, will be made public on a UNFCCC registry and will include information on mitigation and adaptation.

Countries are also bound to the process of communicating a revised NDC in five year cycles. The first cycle commences in 2020 with new NDCs to be resubmitted in 2025 and so forth every five years.

To bring parties closer to reaching the long-term goal, the Paris Agreement incorporates a "ratchet" mechanism, whereby successive NDCs will progress the ambition from the previous NDCs, reflecting "highest possible ambition…in light of national circumstances".

Although countries are not bound to achieve the contents of the NDCs themselves, the NDCs will be examined under a global stocktake mechanism, whereby global aggregate progression towards the long-term goals are considered in the years between resubmission of NDCs.

As part of the lead up to COP21, countries were asked to submit INDCs which will likely form the first round of NDCs (unless voluntarily amended before 2020). Over 180 parties have already submitted INDCs, some of which we analysed prior to COP21. The Paris Agreement is also significant compared to the Kyoto Protocol as the INDCs already cover almost 100% of global emissions. It is estimated that the previous Kyoto Protocol would have covered less than half of global emissions.

Although all countries are required to submit NDCs, the Paris Agreement differentiates obligations and responsibilities between developed and developing countries. One of the key areas where differentiation is pivotal is in the area of finance. The agreement specifies that developed countries have an obligation to provide financial resources to assist developing countries to mitigate and adapt to climate change. A floor of US$100 billion per year was set under the decision text for financial flows from developed to developing countries to meet this purpose. Additionally, the Paris Agreement encourages financing beyond this number towards the long-term goals.

Although the main mechanisms described above do not take effect until 2020, a pre-2020 workstream was also developed to fill the ambition gap between now and 2020.

How the Paris Agreement can involve business

As an instrument of international law, the Paris Agreement can only "legally bind" countries which sign and implement domestic laws in line with the agreement. Therefore, there are no direct compliance requirements on businesses under the Paris Agreement. However, another one of the key features of the Paris Agreement which distinguishes it from its predecessors is that it takes a more holistic approach, covering not only a broader range of issues, but also directly seeking to include actors beyond governments alone.

Non-party stakeholders which include civil society, the private sector, financial institutions, cities and other subnational authorities are explicitly invited to scale-up efforts, particularly through the UNFCCC Non-State Actor Zone for Climate Action (NAZCA) or the Lima-Paris Action Agenda (LPAA). Over 2000 global businesses and 400 investors have already registered commitments through the NAZCA platform or contributed directly to implement UNFCCC initiatives through the LPAA. Businesses can therefore be directly involved to support the long-term goals of the Paris Agreement through these avenues.

The Paris Agreement also includes various paragraphs throughout the text which are aimed at steering future research and investments in a direction consistent with the long-term goals. Several paragraphs were negotiated with the intention of creating or encouraging business certainty and clarity in support of this. Additionally, the private sector is also included and referenced as a partner within the provisions on market based mechanisms and financing.

We anticipate future opportunities and development of market based and non-market based mechanisms, including possible opportunities for business under a new sustainable development mechanism. The Paris Agreement specifically provides that one of the aims of this new mechanism is to incentivise and facilitate the mitigation of greenhouse gas emissions by public, as well as private entities. Under these provisions, we foresee growing discussions around emissions trading, but also the direct implementation of projects in renewable energy, energy efficiency, storage and sinks, in line with the timeframes outlined under the long-term goals.

The article on finance also makes clear that there is a "global effort" on the mobilisation of climate finance from a wide variety of sources, instruments and channels, in line with the overarching long-term goal of redirecting financial flows (to be led by developed countries).

The business community has clearly been invited and embraced under the Paris Agreement as an integral part of the solution to achieving the long-term goals. These goals, complimented by various provisions within the agreement also aim to guide changes in domestic policy to create pathways encouraging low-emission and climate resilient investments over the long-term. There is a clear call from Paris for businesses to not only observe these anticipated these changes or to seek out the opportunities, but also to play a greater role in the continued climate conversation.