What you can expect from the Paris climate talks

In less than a month, negotiators from all over the world will convene in Paris to thrash out an agreement for limiting future emissions of greenhouse gases in a bid to counteract the effects of climate change. The meeting is billed as critical to avoiding what could be a devastating increase in global temperatures; hopes for a significant agreement are high. But realistically, what can we expect to come out of the Paris summit?

Environmentalists: Temper Your Expectations

We recently had the opportunity to sit in on a meeting convened in Washington, D.C., by a prominent environmentalist group that will be taking part in the Paris climate talks. Most of those in attendance were members, donors, environmental activists and the like, but we were permitted to observe, on the condition that we not quote anyone or name any names.

The purpose of the meeting was to brief attendees on what to expect (and not expect) from Paris. There was plenty of optimism, but the biggest takeaway was this: Do not look for the world to agree to cut emissions by enough to avoid the temperature rise of 2 degrees Celsius that climate scientists say must be prevented.

Coming from an organization that views fighting climate change as an urgent mission, that was a pretty sobering admission. But also an understandable one.

The last big United Nations climate confab, held in Copenhagen, Denmark, in 2009,ended without an agreement because countries such as China were not willing to commit to emissions cuts that would hamper their figure economic growth.

No doubt many climate activists hope that the Paris talks will prove to be more productive. But the realists, such as the presenters at the meeting we attended, understand that any deal reached in Paris will be a modest one, at best.

Broader reductions in emissions are not in the cards. Avoiding the 2-degree temperature rise that climate scientists fear would require a truly massive reduction in worldwide greenhouse gas emissions. The figure we heard was an 80% reduction from 1990-level emissions by the year 2050. Cutting emissions that much and that quickly is a daunting task, and a goal that very few countries will commit themselves to now.

So what will come out of Paris?

Some type of agreement calling for emissions cuts is likely. Odds seem good that the countries in attendance won’t leave empty-handed. In fact, dozens of countries that will be attending have already rolled out various promises to reduce emissions or at least slow the rate at which their emissions are growing. At the risk of oversimplifying, we figure that Paris will produce an agreement to lower worldwide emissions by an amount roughly equal to those combined pledges.

Furthermore, negotiators will probably make progress on some notoriously difficult technical hurdles, such as how to set up systems for measuring and financing the emissions cuts that each country promises to make. That likely means agreements on how to set up cap-and-trade systems, in which various countries jointly agree on an emissions reduction target and then issue emissions permits to industrial companies that reduce allowable emissions over time.

There’ll be a lot of talk about how to pay for reining in future emissions. But we suspect agreement on that front will prove harder. Any concerted global effort to lower greenhouse gas emissions is going to cost tens or hundreds of billions of dollars. Deciding who contributes what to that effort has already proved acrimonious, and promises to remain so. Many developing countries argue that wealthy developed countries (which are responsible for most greenhouse gas emissions to date) should foot the bill. That’s an argument that won’t be settled anytime soon.

The bottom line: Expect a pact that moves the world closer to curbing emissions but that falls far short of what climate activists want.

Meanwhile, Closer to Home…

While the world gears up for another push to reach a grand bargain on climate change, the U.S. is making rapid progress on cutting its own emissions. When he goes to Paris (and our sources indicate that he will attend), President Barack Obama will no doubt highlight the regulations that his administration has developed to curb carbon dioxide from U.S. power plants. Those regulations, known as the Clean Power Plan, call for a 30% reduction in those emissions compared with the 2005 level and give Obama some credibility when he tells other countries that the U.S. is serious about fighting climate change.

The fate of Obama’s climate regulations is uncertain, not least because quite a few states are suing to block them. But U.S. emissions are likely to be down sharply this year anyway. Why? In a word: Coal. More accurately, the continued decline of coal as a power source.

This year, we look for coal usage to drop to its lowest level in about three decades. Through the first seven months of 2015, consumption was off 13% from the same period of 2014. If that rate continues through year-end, annual coal usage for all of 2015 would come in at a shade under 800 million tons. That would be slightly less than the total for 1985 and a far cry from the 1.1 billion tons burned a decade ago.

Chalk it up to a combination of tougher air quality rules on power plants and bargain-basement prices for natural gas, which is now trading near $2.25 per million British thermal units. Power plant operators are under regulatory pressure to reduce emissions of toxic substances such as mercury. Switching to natural gas helps them do that, since gas burns much more cleanly than coal. The low price of gas makes the switch particularly attractive. And because natural gas releases about half the carbon dioxide of coal for a given unit of power generated, the displacement of coal by gas means U.S. emissions in 2015 should come in at their lowest level in many years.

We still look for natural gas prices to perk up. But any rebound is going to be slow to materialize. With long-term forecasts favoring a mild winter and stockpiles of gas nearing record levels, prices are going to stay depressed in coming months, says Stephen Schork, editor of energy investing newsletter the Schork Report. Rising demand from power plants burning more gas should eventually help lift gas prices closer to $3 per MMBtu, perhaps by winter’s end. But until then, gas remains a buyer’s market, and electric utilities are taking advantage.