The historic COP-21 Paris Agreement on climate change is the first major development in the climate area at the international level since adoption of the Kyoto Protocol in 1997.

Given the architecture of the COP-21 Paris Agreement — a bottom-up approach of nationally defined and voluntary contributions — the actual implications will vary dramatically across the globe. But the Agreement represents a significant development, establishing trends that will continue to define the direction of domestic climate policies globally. Latham & Watkins lawyers were in Paris during COP-21 and provide the following insight on how businesses can best position themselves for a low-carbon future.

On a global scale, why does COP-21 matter?

Jean-Philippe Brisson: COP-21 was the 21st meeting of the parties to the 1992 United Nations Framework Convention on Climate Change. These meetings are typically held annually and they produced, in 1997, the Kyoto Protocol. Since adoption of Kyoto Protocol, however, the COP process has failed to produce any meaningful agreement. This failure has become more acute since the end of 2012 when the Kyoto Protocol essentially sunset. But COP-21 was different on a number of levels, which allowed the negotiation of the Paris Agreement. First, a number of key developed and developing countries came to Paris with a common desire to negotiate a new agreement. These included the United States, Canada, China and India, all of which had remained on the sidelines of and even inhibited progress at prior COP meetings. Second, countries decided on a new bottom-up approach for the Paris Agreement that allows each individual country to set and communicate to the UN its own greenhouse gas commitment — called nationally determined contribution or “NDC.” This is a 180-degree turn from the approach pursued previously, which involved the very contentious and unsuccessful negotiation of individual country binding targets at the multilateral level — a top-down approach. Finally, there was a significant level of participation in Paris from the private sector, combined with a very effective diplomatic exercise from the French Presidency, which provided the key conditions for the negotiation of a new agreement.

What is the role of markets in the Paris Agreement?

Robert Wyman: Although the Paris Agreement does not explicitly mention “markets,” Article 6 refers to countries “engaging on a voluntary basis” in “cooperative approaches,” which are code words for markets. Article 6 creates a new tradeable instrument — internationally transferred mitigation outcomes or “ITMOs” — but additional work is needed from the parties to flesh out the details on how ITMOs will be created, sold and purchased. Article 6 also establishes a new “mechanism” — again, without specifics — that is expected to be the successor or replacement to the Clean Development Mechanism established under Article 12 of the Kyoto Protocol.

More broadly, the Agreement provides flexibility for countries in choosing how to reduce emissions domestically. Some countries may focus on command-and-control style policies, but the trend has been towards increasing use of market forces to achieve environmental goals, and we expect that to continue.

What will the impact of COP-21 be in Europe, which has historically been a leader in efforts to address climate change?

Paul Davies: Two common apprehensions are voiced within the EU. First will the EU’s ambitions on climate change — relative to other parts of the world — undermine the competitiveness of EU’s industries, an unintended consequence described as ‘carbon leakage.’ For example, the steel sector argues that proposals to vary the EU emissions trading system (ETS) compensation scheme would cost the industry €34 billion over 2021-2030. So how this global transition to a low-carbon economy will be funded is a major concern. But as the EU already has the world’s largest ETS, currently in Phase III, I expect this system will serve as a model for other systems around the world.

On a national level the UK has issued positive statements about the Paris Agreement, but domestically has pulled back on several climate change initiatives such as subsidies for solar and wind energy. Significantly, the government has shelved a carbon capture storage prototype.

Antonio Morales: The reaction in Spain has been muted. While the Paris Agreement does not require individual countries to make a legally binding emissions reduction commitment, Spain, like the UK has pulled back on renewable energy subsidies. The photovoltaics sector in Spain has been particularly hard-hit since support schemes have been suspended, reducing output by 30-40% on average.

As China is one of the most significant players in the global economy and a significant contributor of global emissions, what are the implications for the Chinese economy?

Andrew Westgate: China has already taken significant diplomatic steps, announcing major target reductions in coal usage, massive reforestation goals and an emissions trading system (ETS) to be established in 2017. Whether or how China’s ETS will link with other analogous systems around the globe remains unclear. While the size of the overall cap of the ETS and enforcement will be the key determinants of the system’s effectiveness, undoubtedly China will become the world’s largest carbon market. Government financing mechanisms will also become important, for example the Chinese government has announced a RMB20 billion (US$3 billion) “South-South Cooperation Fund” to finance emissions reductions in other developing countries.

How should investors or companies respond to the COP-21 Paris Agreement?

Stacey VanBelleghem: It may be too early to draw the correct conclusions from the meeting, as much of the Paris Agreement will still need to be interpreted through national laws. But clearly, investments in emissions-reducing technologies and clean energies will continue to grow in significance. From a regulatory perspective, individual companies should continue to work with regulators to help shape policy and regulation, and companies are likely to be more effective if they work together through coalitions or industry groups.