One hundred ninety-five nations and the EU have approved the Paris Agreement, an unprecedented climate change accord that provides a broad framework for reducing global warming through international cooperation, adapting to environmental changes already expected, and addressing expected losses by vulnerable nations and people.

Produced by the Twenty-First Conference of Parties (COP21) to the UN Framework Convention on Climate Change, the Paris Agreement is being hailed as a historic achievement in tackling climate change. In this note, we summarize key provisions of the Agreement, share our experience from its negotiations, and address its impact in the energy sector.

Lawyers from DLA Piper played an active role supporting some states, including those with significant commercial interests in conventional energy projects, in the negotiations up to and during the COP.

FUNDAMENTAL AIMS (ARTICLE 2)

The Paris Agreement’s three fundamental aims are to:

  • hold the increase in global average temperature to well below 2°C above preindustrial levels, and pursue efforts to limit this to 1.5°C
  • increase the ability to adapt to climate change impacts, and foster climate resilience and low greenhouse-gas emissions development, without threatening food production; and to
  • establish means of finance to achieve these goals.

The Agreement divides the signatory parties into “developed country Parties” (generally those countries listed in Annex I of the Convention) and “developing country Parties” (all other parties, including China, India, and Brazil).

The Agreement differentiates between these party categories as to the stringency and speed of implementation obligations, and their funding obligations or entitlements. Developed country parties bear greater responsibilities to finance emission-reduction projects, support vulnerable countries in adapting to climate change, mitigate climate change by reducing their own emissions, and increase the ambition of their emissions-reduction goals over time. Developed country parties are expected to lead the way in implementing measures, with developing country parties following.

The Agreement recognizes that developing country parties are often unable to fulfil obligations as easily or robustly as developed country parties. Certain provisions do encourage other parties “in a position to do so” to contribute voluntarily to the Agreement’s goals.

Importantly, parties to the Agreement can be either individual states or regional economic integration organizations (REIOs) already party to the Convention.

KEY MECHANISMS

The Paris Agreement creates both voluntary and compulsory mechanisms and reporting obligations to achieve its three goals. Four cross-cutting issues were subject to heavy negotiation during the COP: (i) the two-category system, as discussed above; (ii) the parties’ ambitions as reflected by the commitments in their nationally determined contributions (NDCs); (iii) financing; and (iv) transparency.

  1. National determined contributions (NDCs) (Article 4): The Agreement requires parties to prepare, maintain, and submit NDCs. An NDC is a performance benchmark, articulating a party’s current status, intended contributions, and measures it intends to use to fulfil its contributions. Parties may revise NDCs to reflect more ambitious contributions. NDCs must be submitted every five years to the COP so the COP can track progress.
  2. Sinks and reservoirs of greenhouse gases (Article 5): Recognizing the necessity of greenhouse gas absorption from the atmosphere, the Agreement encourages parties to conserve and enhance sinks and reservoirs of greenhouse gases, such as forests.
  3. Mitigation of greenhouse gas emissions (Article 6): The Agreement establishes a voluntary cooperation mechanism so parties may internationally transfer mitigation outcomes toward NDCs, to promote sustainable development, prevent double-counting, and ensure transparency. The COP will guide this process and designate a body to supervise. Article 6 has four aims:
  • To promote the mitigation of greenhouse gas emissions
  • To encourage and facilitate authorized public and private entities to do so
  • To help reduce emissions levels in host parties and
  • To mitigate overall global emissions.

The Agreement also provides a framework of nonmarket approaches for implementing NDCs.

  1. Enhancing adaptive capacity (Article 7): The Agreement sets a goal of enhancing adaptive capacity for countries affected by climate change, strengthening resilience, and reducing vulnerability. Parties are encouraged to cooperate, with support from UN organizations and agencies, by (i) sharing information, (ii) strengthening institutional arrangements, (iii) strengthening scientific knowledge on climate change, (iv) helping developing country parties identify adaptation needs and effective practices, and (v) improving the effectiveness and durability of adaptation actions.

Each party will engage in adaptation planning processes and implementation actions, such as developing plans, policies, and contributions. Parties must submit and periodically update adaptation communications for publication in a public registry.

  1. Minimizing and addressing loss and damage due to climate change (Article 8): To address loss and damage associated with the adverse effects of climate change, the Agreement provides for areas of enhanced understanding, action, and support on a cooperative and facilitative basis. Such areas include early warning systems, emergency preparedness, and risk insurance facilities.
  2. Provision of financial resources (Article 9): Developed country parties (and volunteering parties) are to help finance mitigation and adaptation in developing country parties. The Agreement balances funding between mitigation and adaption measures, depending on specific country-driven strategies and the priorities and needs of the recipient parties.

Under the Agreement, developed country parties must take the lead in mobilizing climate finance from various sources, progressing to higher levels of ambition over time. To track their progress, developed country parties must communicate biennially on both actual and projected finance provision, which will be taken into account in the global stocktake (described below).

Finally, the Agreement also directs the Convention’s financial mechanism to provide transparent financial assistance to developing country parties on a concessional basis. All institutions serving the Agreement are responsible for ensuring distribution of financial resources, particularly through simplified approval procedures and enhanced readiness support for developing country parties.

  1. Technology framework (Article 10): Recognizing the importance of technology development and transfer for an effective, long term global response to climate change, the Agreement establishes a technology framework to improve resilience to climate change and to reduce greenhouse gas emissions.

The technology framework is intended to encourage and accelerate technological innovation with support from the Convention’s technology and finance mechanisms. Article 10 also promotes collaborative approaches to research and development and encourages parties to facilitate access to technology, especially for the benefit of developing country parties.

  1. Enhancing capacity of developing parties to take action (Article 11): The Agreement encourages all parties to cooperate to enhance the capacity of developing country parties both to implement the Agreement and to take effective climate change action, taking into account each party’s needs and circumstances; allowing regional, bilateral and multilateral approaches; and communicating these measures regularly.
  2. Transparency framework (Article 13): To build mutual trust and confidence between the parties and to promote implementation of the Agreement and achievement of NDCs, the parties agreed to an enhanced transparency framework for action and support. In relation to all communications and reports, parties must regularly provide specific information, which will be subject to a technical expert review. Provision is made to support developing country parties in implementing this mechanism.

The transparency framework builds on the transparency arrangements of the Convention to be facilitative, non-intrusive, and non-punitive.

ENFORCEMENT

One enduring issue for the Paris Agreement is enforceability. The Agreement provides that an expert-based committee will promote implementation and compliance in a facilitative and transparent manner. This committee will be non-adversarial and non-punitive, with no power to sanction for noncompliance. The committee will report annually to the COP.

The COP will serve as the meeting of the parties to the Agreement and regularly review parties’ implementation efforts, based primarily on their NDCs as updated from time to time and any other party reports and communications. The Agreement authorizes the COP to act to promote the Agreement’s effective implementation.

The Agreement also calls for a “global stocktake,” whereby all reports and communications from the parties will be analyzed to track collective progress toward achieving the Agreement’s fundamental aims. The first scheduled global stocktake will be done in 2023, and then every five years thereafter. Enforcement of the Agreement’s implementation depends fundamentally on peer review by the parties.

CONTEXT OF THE AGREEMENT

The Paris Agreement must be seen in the context of prior climate-change agreements. The Convention was launched in 1992 and introduced several voluntary commitments with the aim of tackling global warming. More important, the Convention created a framework for future agreements.

Entering into force in 2005, the Kyoto Protocol was the first milestone in imposing legally binding commitments to limit emissions. The Doha Amendment extended the Kyoto Protocol’s expiration to 31 December 2020. But the United States did not ratify the protocol. Thus, the need for a universally applicable post-2020 agreement was the primary driver for the new Agreement.

Two further agreements have addressed the issue of climate change: the Copenhagen Accord from COP15, whereby 140 countries agreed to limit the future increase in global average temperature to 2°C; and a non-binding agreement produced in Cancun from COP16, which recognizes that parties must take urgent action to limit global average temperature to 2°C above pre-industrial levels, additionally considering the need to limit this to 1.5°C.

WHAT COMES NEXT: EFFECT OF THE AGREEMENT - 10 KEY POINTS

The Agreement will be open for signature by parties to the Convention from 22 April 2016 to 21 April 2017, and enter into force on the 30th day after the date on which it has been ratified by at least 55 parties to the Convention, representing over 55 percent of total global greenhouse gas emissions. If these criteria are met, the Agreement will take effect before the Kyoto Protocol expires.

The Agreement is a political landmark. Its mechanisms are prescribed at a high level (with much detail yet to be worked out) and with limited enforceability. Nevertheless, the Agreement has symbolic significance. Notably, 196 parties have agreed to its language, and in doing so have acknowledged that controlling climate change requires a global mitigation plan. This will shape the demand and the relative support for various energy operations.

The Agreement will likely have significant effects on the global energy industry.

  1. Entry into force and early application: Achieving the necessary number of ratifications should not take as long as ratification of the Kyoto Protocol, particularly because the new Agreement has only self-imposed targets instead of legally binding carbon targets − a significant advantage over the Kyoto Protocol. During COP21, the parties extensively discussed early implementation of the Agreement, as well as securing finance, data, technology, and partnerships. Further, the Agreement will not simply replace the Kyoto Protocol at the end of 2020: the parties have been encouraged to sign the Agreement at a ceremony proposed for 22 April 2016.
  2. Direct effect: The Agreement creates no direct restrictions on the extraction, release, or use of fossil fuels. Even in countries where the Agreement would automatically constitute a source of national law, the provisions are not drafted to create direct obligations on energy companies or to impose liability for fossil-fuel-based energy operation. Conversely, the Agreement allows legislators to decide how to achieve its fundamental aims. The approaches parties may take are therefore unpredictable, and the energy industry would need to observe policy changes closely to prepare for new legislative regimes.
  3. Stranded assets: Over the last year, the notion of stranded fossil fuel assets, or the “carbon bubble,” whereby carbon reserves may become less valuable and therefore are written off as financial losses, has been discussed. The underlying argument suggests that all currently proven reserves, if burned at the current rate, would lead to an increase in temperature above the limit of 2°C above preindustrial levels. If the Agreement is implemented in such a way that fossil fuel use is curbed, and no effective technology to absorb CO2 is developed, a proportion of carbon assets could become stranded.
  4. Carbon pricing: The inclusion of carbon pricing in the financial analyses of projects and businesses, notably in the context of lending and investments, is on the rise. In June 2015, six major oil and gas companies called upon governments to introduce carbon pricing systems to lower CO2 emissions.
  5. Understanding NDCs: Energy companies should include a risk and business development assessment of NDCs in the countries where they are active, because these will influence a state’s approach to fossil fuel extraction and consumption.
  6. Competing financial commitments: The financial commitments under the Agreement are sizeable and rely on substantial private-sector investment. Project financing and corporate refinancing in the market for conventional energy may therefore face competition with investors focusing on the low-carbon sector as well as research and development.
  7. Financial mechanisms: Through the implementation of the Agreement, new funding mechanisms and opportunities will be introduced to the global energy market, including support via public and private sector funding. Ultimately, this Agreement will create a large range of opportunities worldwide for development and diversification in the energy industry.
  8. Business opportunities: There is little doubt that the Agreement will create new areas of business, notably for renewable energy generation, energy efficiency, storage and sinks.
  9. Sinks and offsetting: The Agreement recognizes the importance of carbon sinks. Technology will dominate this field, providing commercial opportunities for research and development. Additionally, we expect that public sector willingness to fund sinks will increase if countries fall behind on their emission reduction NDC targets. 
  10. Emissions trading and linking: The entry into force of the Kyoto Protocol led to the rapid development of greenhouse gas reduction projects and emissions trading schemes around the world. In the view of many, the Paris Agreement will only partially reinvigorate this market in the near term.