Much ink has already been spilled on the US election result and the implications for renewables and climate action. Much of this is focused on the immediate impacts briefly summarised below:
1. Drill, baby drill – intention to increase oil production in US
2. Inflation Reduction Act – cancelling or redirecting funding from renewables to other activities
3. US pulling out of Paris Climate Accord
4. Environmental Protection laws being substantially weakened or abolished
Whether some, or all, of the above will or will not happen requires a deeper knowledge of the US political system (separation of powers, powers of the state versus the federal government etc) than I have. But what I think we can say is that we will be shifting back to more of a more multipolar world as it relates to addressing the worst effects of climate change. Like it or not, the US through its sheer market dominance drives global policy narratives. For those countries that have been holding out on substantive change, Trump’s election makes it easier.
However, to take a hopeful view, despite the shift in political narrative, the economic incentives of low emissions technology remain.
Renewables are cheaper
On a long-term levelised cost basis, solar, wind and batteries are simply cheaper than conventional fossil fuel alternatives. Trump can drill all he wants, but the economic incentives for business and households remains unchanged – for example, see analysis below from Lazard’s annual levelised cost of energy
Countries like China, with limited oil resources, have huge geopolitical and domestic incentives to reduce oil demand (and to more broadly reduce their importation of all fossil fuels – such as coal and gas)
The chart below shows the AEMC’s estimate of the impact of electrification on household transportation in Australia. Switching from an ICE to an EV delivers substantial fuel cost savings. While Trump can change the narrative re global efforts re climate change, each individual facing a choice to buy a new car, will need to form their own views about the long-term running costs (and re-sale value) of each. I suspect quite a few will choose to buy an EV – including even if subsidies to encourage EV adoption are reduced. Politicians can change incentives at the margin – but there are limits to the extent short-term changes in subsidies can change underlying cost differences. Trump risks being King Canute if he thinks he can stop the adoption of EVs.
Investment incentives
The Inflation Reduction Act (IRA) has a vast scheme of incentives supporting the manufacturing and deployment of low emission technologies. It would seem unlikely that these schemes will be unwound, especially because much of the allocation (78%/USD346b) has gone to Republican congressional districts. Many countries (including Australia) are following a similar policy strategy with the domestication of key industries. The amount of manufacturing capacity coming online globally in renewables is eyewatering – China for example has provide support to low emissions manufacturers for almost a decade.
All this production has to go somewhere. Solar, wind and batteries will just get cheaper as more manufacturing capacity comes online together with advancement in design, reinforcing the incentives that exist today. This creates a positive feedback loop as clearly articulated by the Rocky Mountain Institute:
Longer term and within a particular view (yes you might need to squint) I can actually see the Trump administration being a net positive on climate action because of the very thing President Trump says he loves: Tariffs!
Tariffs could be a potential force for good. Yes, the neoclassical economists will rally against this, but this has been a clear statement of intent throughout the election, and nothing has changed since. If implemented, other countries may respond in a beggar thy neighbor’ approach, in doing so, this would ‘normalise’ tariffs as part of the trade environment.
So why could tariffs be good for climate change?
One of the key challenges of getting a global CO2 trading in place is a lack of consistency in terms of the determination and application of carbon credits across jurisdictions. Put simply, it is challenging for one country to enforce carbon pricing on its domestic producers when competing against another economy that doesn’t.
Tariffs related to high-embedded emissions is a possible way to level the playing field. The imposition of tariffs would be avoided if the country of origin either had low embedded emissions or a carbon price for emissions, and hence there would be a greater incentive to have a global emissions trading system (ETS). Today an Australian Carbon Credit Unit (ACCU) cannot be used by a European steel producer to meet emissions targets.
I’m not suggesting we’ll have an ETS in place in the next four years, all I am saying is the advent of tariffs creates a trade environment that might more readily tackle emissions (recognising that it is a global problem) and this would be a net positive for zero emissions technologies (not to mention carbon capture). The EU Carbon Border Adjustment Mechanism is an example. It only started last year and applies to a few select sectors and it will be interesting to see how it plays out.
It's also important to keep in mind that events can shift political narrative exceptionally quickly (think Covid). We are presently at 421 parts per million of CO2 in the atmosphere, to have a 50% chance of limiting warming to two degrees the UN Framework Convention on Climate Change estimates we need to limit emissions to 450ppm. Put simply, this is a razor thin budget (excess CO2 emissions beyond what the Earth can naturally absorb is cumulative). 2023 was the hottest year on record, 2024 will likely beat it. We are seeing more and more events that align with the climate science. These events are having, and will continue to have, an economic impact. Sure, it doesn’t look like the plot of the Day After Tomorrow, it’s more insidious and the impacts are not evenly distributed. Trump is an excellent retail politician – if events demand that he shift, he will.
The election of Trump does not reverse climate change or make it less of a problem, it simply alters today’s narrative, but I would argue that it doesn’t change the investment opportunity over the medium to long-term.
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