Can the BP share price rally if the US follows through with this pivotal agreement?

With the world’s largest economy, the US recently rejoining the Paris climate agreement has big potential implications for the energy industry. Given that BP (LSE: BP) is a leader in energy, here’s more on the Paris climate agreement and how I think the US rejoining the agreement affects the BP share price.

Paris climate agreement

The Paris climate agreement is an agreement made by over 190 countries to combat climate change. The agreement has a goal of limiting average global warming to well below 2 degrees Celsius (with the hope that the end result is around 1.5 degrees Celsius) by reducing greenhouse gas emissions over time.

In terms of combating global climate change, I reckon the task is tougher than sending someone to the moon. No one country gets to decide the global level of carbon emissions by itself. The carbon capture technology needed for one country to economically offset the necessary fossil fuel emissions doesn’t exist yet. As a result, it takes a global effort to fight climate change. I think the US joining the fight increases the odds that the world successfully controls global warming.

As it relates to BP, I think the US rejoining the Paris climate agreement improves the growth prospects of BP’s potential green business.

Although many US businesses are planning to cut their carbon emissions regardless, I reckon the US rejoining the Paris climate agreement could accelerate the trend of cutting carbon emissions. For example, the US government could potentially legislate more accommodative policies and regulations towards green energy. As a result, various low carbon energy forms such as offshore wind could see more demand and BP’s green business could have an even larger potential target market.

As for BP’s other business lines, I don’t think the US rejoining the Paris climate agreement changes BP’s strategy much given that the company already has a goal of cutting carbon emissions substantially over time.

How I think the US rejoining the Paris climate accord affects the BP share price

In terms of its effect on the BP share price, I reckon the market has already priced in much of the effect of the US rejoining the Paris climate agreement. The market is a forward-looking mechanism, after all. President Joe Biden, who supports the fight against climate change, won in November of last year, as well. 

Although the market may have already priced in much of the effect, I nevertheless think BP shares can still rally given the right conditions. To me, BP shares don’t trade at an expensive valuation given the quality of the company’s assets and R&D potential. I also think BP management will succeed in their green transition. I’d buy and hold BP given the current BP share price as a result.

With this said, I reckon BP shares could also decline if oil prices fall or if management fails to deliver the results the market expects. If Covid-19 variants becomes more of a problem, BP could also face additional headwinds.