When Donald Trump announced that America was leaving the Paris Accord, it caused tremors in the business community with one of America’s leading CEOs, Elon Musk, announcing that he would leave Donald Trump’s advisory council as a result of this decision. This article explores why the decision to leave the Paris Accord could have a detrimental and potentially destructive effect on the American economy.
Economic Importance Of Global Warming
Often the importance of global warming in our society is downplayed due to it being a longer-term and intergenerational issue, but that does not detract from its impact on the planet. Since the industrial revolution, the world has seen a marked increase in global temperatures and the trend has steadily continued over the last 60 years.
America has always been prone to hurricanes and there have been studies that link the strength and duration of hurricanes to an increase in global temperatures. Hurricane Sandy in 2012 caused losses in the region of $30bn to $50bn to the American economy with Hurricane Katrina causing more than $100bn to the American economy. Increases in the frequency of such devastating hurricanes will no doubt keep resulting in massive detrimental economic shocks to the American economy over the longer term.
The world relies on agricultural output for its survival and there have been numerous studies documenting the negative correlation between agricultural yields impacted by an increase in global temperatures, particularly in the developing and underdeveloped regions of the world which are currently witnessing drought and poor rainfall.
These are just a couple of examples of the scale of impact that global warming can have on economic progress and prosperity. The starkest fact would be one mentioned in a study published in Nature which states ‘temperature change due to unmitigated global warming will leave global GDP per capita 23% lower in 2100 than without warming’.
Slowdown Of Investment In Green Energy
Evidently, green energy is the future. Trump’s administration has sent a clear message that they are not as committed to green energy as various other governments including China and India. This will likely result in lower investment in green energy (it is important to note that green energy is still more expensive to produce than the non-renewable alternatives) by many corporations in America than would have been the case otherwise. After all, investment is critical to the growth of any potential new sector.
Government backing is often critical for companies to gain the confidence to invest in a particular market. This could likely result in the US being left behind by global competing economies on the green energy front.
Studies have shown that there is a clear link between the healthcare burden and the use of fossil-fueled power plants. It has been estimated that poor health costs the American economy $576bn a year, of which $227bn stems from ‘lost productivity’ from missed work days due to poor health. Continued reliance on fossil fuels and their resulting effects can continue to have a major negative impact on domestic production and in turn the economic prosperity of the country.
Not to mention that these health issues are likely to lead to ever increasing pressure and costs on the healthcare system, which will be made less affordable for the population through Trump’s repeal of the Patient Protection and Affordable Care Act, particularly for those of lower socioeconomic class.
Formation Of A Skills Gap
There are currently 6.4m Americans working in the traditional energy and energy efficiency sector. It is in no doubt that in the future, reliance on traditional energy sources, such as coal, is going to diminish and eventually be non-existent. As the rest of the whole world starts to accept renewable energy sources and move their economies onto the ‘greener side’, the labour force of these countries have and will start to gradually move from the non-renewable energy sector to the renewable energy sector. Trump’s decision to pull out of the Paris Accord means increased confidence within the non-renewable energy sector, which could result in even greater hiring. With most fossil fuels being expected to run out in the lifetime of the millennials, a significantly large skills gap has the potential to form. More than 6.4m Americans would lack the requisite skills to work in the renewable energy sector as such work involves significantly more engineering, geological and scientific know-how.
This skills gaps will likely result in wider economic costs for the government in dealing with the issue. Skills gaps have previously been blamed as a major cause of the ‘productivity gap’ that has plagued many Western economies, which leads to a large drag on GDP growth. The resulting unemployment levels that caused as a result of skills gaps also have a social and psychological impact on the population of the country.
Loss Of Goodwill With Major Trading Partners
After Trump announced that he was going to leave the Paris Accord, Italy, France and Germany expressed their deep disappointment and expelled any suggestions that there would be a renegotiation over the pact. The three countries combined make up a trade value of $24.4bn with America. This decision to pull out could be seen as an act of selfishness when up against an issue that all countries share in common which could lead to loss of goodwill, more crucially amongst the largest trading partners of the US. Nearly 30% of GDP growth over the last five years have been a result of export growth and exports continue to play a major role in the American economy. Trade relationships between America and many of its largest trading partners are already strained by the potential protectionist policies that Trump could impose down the line and a perceived act of short-sightedness and selfishness could put further pressures on those trade relationships. It is also worth noting that all countries in the list below are part of the Paris Accord (except Taiwan).
Big Business In Green Energy
It is undisputed that the future of energy is in renewable sources such as solar and wind energy, and as in many other sectors it is often the initial few companies to establish their presence within the market that thrive and currently green energy has opened up that opportunity.
One of the growth drivers in green energy is that the cost of production of renewable energy has fallen. The levelized cost of electricity (LCOE) of solar photovoltaic generation has fallen from $315 per MWh in 2009 to $100 per MWh in 2016 and with LCOE of onshore wind sources also falling, it has made the green sector much more competitive on a cost basis.
Economies around the world that notice this trend can capitalise by entering the market and supporting local players in developing scale economies to further reduce the production costs. With increasing consumer demand for green energy, economies that take a proactive approach in establishing their presence in the green energy market can reap massive benefits.
An Alternative Strategy
Trump pulled out of the Paris Accord for to two main reasons: he believes global warming is a ‘Chinese hoax’ and that the accord will result in a significant negative impact on American jobs.
Addressing the first point, global warming most certainly is not a ‘Chinese hoax’. Many studies have proven that global temperatures have been rising over the past few decades. Global warming is real and it represents a significant risk to the planet we inhabit.
If Trump’s real concern was about American jobs then he should have addressed the 19% of US solar jobs in the manufacturing industry being heavily reliant on low-cost imported panels that are mostly from China, Malaysia and Korea. This percentage is likely to increase due to the lower investment in the green energy sector within the US as noted above. A potential strategy to conserve American jobs and even increase the amount of employment in the renewable energy sector in the future would have been to provide local players in green energy with protection to help them develop economies of scale and build up a competitive advantage over their international rivals. This route could also minimise carbon dioxide emissions and slow down global warming in the process.
It is important to keep in mind that global warming is not an issue that is singular to one nation but an issue that impacts everyone that lives on this planet and it is critical that world leaders take the initiative to deal with this threat and give a habitable planet for the next generation.