Trumping climate: Fossil fuels, market forces, and the green transition
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Insights
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Responsible Investing
Published
November 21, 2024
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5 mins
Author
Julius Huttunen
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The United States is entering a critical period of climate policy transformation, marked by significant shifts in federal direction, accelerating market forces and evolving international dynamics. Recent changes in federal leadership signal a substantive pivot in climate policy priorities, with implications that could ripple through energy markets, manufacturing sectors and international relationships. The article suggests that while federal policies under Donald Trump may create obstacles, the fundamental transition towards clean energy is likely to persist due to economic and market dynamics. This market-driven momentum, combined with declining technology costs, indicates that the US will continue to see growth in renewable energy, albeit potentially at a slower pace.

 

Policy Direction and Economic Impact

President Trump won the 2024 US election with what some tout as a surprise comeback, while others describe it as Democrats losing touch with their voters. The Republicans did not only win the White House but also won the majorities in both chambers of Congress, enabling the party to act on Trump’s agenda swiftly.

 

The new administration is expected to have different views on climate policy and its implications for the US energy industry. Trump's campaign rhetoric was characterized by a focus on promoting fossil fuels (“Drill Baby Drill”) and rolling back environmental regulations. This approach, while significant at the federal level, will be tempered by a complex backdrop where market forces and state-level initiatives continue to drive clean energy adoption. Trump has also clearly signalled his intent to disregard international agreements and reduce climate finance, which is expected to reduce the amount of financial assistance to vulnerable or developing nations.

 

Earlier in the year, CarbonBrief outlined that a Trump victory could add an additional 4bn tonnes of US emissions by 2030 compared to Biden, which is equivalent to the combined emissions of the EU and Japan1. In their analysis, emissions would fall 28% under Trump by 2030 from the 2005 baseline, compared to 43% with Biden, however, both scenarios exclude the impact of climate finance and the global policy environment. Under each president, emissions are expected to fall from 2005 peak, but the difference is significant when every incremental reduction matters for reaching the 1.5C-degree scenario. The recent commentary on methane emission regulation rollbacks puts these numbers into further question.  

 

To highlight the key focus areas Trump has stated as priorities:   

  • Trump has pledged to withdraw from the Paris Agreement, a move that could significantly weaken US climate policy on the global stage. This withdrawal creates a potential political vacuum likely to be filled by China in the global policy environment. However, economic fundamentals and market momentum are poised to continue to support clean energy development. The cost trajectories of renewable technologies – with solar costs down 90% and wind 70% since 2010 – demonstrate the market’s direction regardless of policy shifts.

  • Increasing the production of oil, gas and coal, considering these key drivers for economic growth. During Trump’s previous term, despite promises to revive the coal industry, yearly production declined 3% and coal jobs decreased yearly by 5% annually between 2016-202, as the fracking boom resulted in significant price competition. This trend has continued, with renewable energy becoming increasingly cost competitive across most markets.

  • Rolling back EPA regulations setup by the Biden administration – the most significant being EPA’s final rule on methane emissions3 and other harmful air pollutants for the oil and gas industry. Trump has already selected Lee Zeldin to lead the EPA, who is expected to pause Biden’s moratorium on constructing new natural gas export terminals. The new administration is likely to deny requests for California to adopt its own emission regulations, which are stricter than the rest of the country.  Trump attempted to roll back more than 125 environmental protections during his previous term, though many of these were overturned or halted in courts. It is reasonable to expect that the administration will not push for any new federal climate policies. 

  • Changes to permitting could potentially help resolve the backlog for renewables, but are more likely to expedite LNG permits, promoting it as a dominant energy source in the US and focusing on LNG exports to assert US energy ‘dominance’. 

  • Changes to the Inflation Reduction Act – including rollbacks of EV credits and rescinding unspent IRA funds, but many expect manufacturing provisions to remain in place as they support the America First doctrine.

    A closer examination of the IRA reveals that many red states in the 2024 Presidential elections have been major beneficiaries of the Act. The largest investments have been made in California ($94bn), Texas ($69bn), Florida ($29bn), Georgia ($22bn) and Arizona ($18bn) 4. Representatives from these states may be hesitant to roll back the IRA in its current form.

    Manufacturing investment by state provides another important indicator, particularly as it aligns with job creation and the America First doctrine. The largest % share of GDP investment have been largely made in the ‘red states’ while this sector has created 330,000 jobs federally5. 

 

 

Annual manufacturing investment by state
Q3 2022-Q2 2024, share of state GDP

Source: Rhodium Group/MIT-CEEPR Clean Investment Monitor

 

Technology Evolution

These policies reflect the fundamental preference of traditional energy sources over renewable energy initiatives and undermines the urgency for climate change. In our view, these policies should increase the short-term noise and volatility; however, the fundamental economics remain the same supporting structural growth for ‘green transition’:   

  • The levelized cost of electricity (LCOE is often used to measure the cost of energy from difference sources) globally has dropped dramatically with decreases of 90% ($/kWh) and 70% for solar and onshore wind respectively since 2010. Even as global fossil fuel prices declined from their 2022 peak, solar and wind continue to provide attractive economic alternatives to fossil fuel-fired options6. 

 

Change in global weighted average LCOE for solar and wind compared to fossil fuels, 2010-2023

Note: RE = renewable energy

  • Battery technology has never been cheaper and is more energy dense than before. Prices have dropped from $1400 per kWh in 2010 to below $140 kWh in 20237.

  • Globally, electric vehicle adoption has surged, reaching 18% of all new car sales in 2023 (almost 1 in 5), up from almost 0% in 2010 and only 2% in 20188. In the US sales outlook of EVs is in question especially if tax incentives under the IRA are removed, but IRAs federal tax credits are only applied to vehicles with final assembly in the US and supports the affordability of EVs to the consumer.

  • Renewables and energy storage maintain a crucial competitive advantage over fossil fuel-powered alternatives through their price stability compared to commodities.  

 

Conclusion

While these elections will not fundamentally change the direction of green transition globally, they will create short-term uncertainty and delay action in the US. The resulting vacuum in global climate leadership will most likely be filled by China and perhaps the European Union, both of which have demonstrated significant commitment to climate action. China as the largest producer and investor of climate solutions will likely strengthen its leadership position and extend its competitive advantage in renewables over the US as federal policy shifts away from supporting the sector.  We expect the largest companies in the US will continue to invest in renewables and carbon free technologies such as nuclear power to support energy-intensive industries like data and AI. Consequently, climate leadership in the US will likely emerge from market forces rather than federal government policy. This market-driven momentum, combined with state-level initiatives and declining technology costs, suggests that while federal policy may create headwinds, the fundamental transition toward clean energy will continue, albeit potentially at a slower pace than under alternative scenarios.

 

 

Sources

1Batteries and Secure Energy Transitions Analysis - IEA
2Global EV Outlook 2024 (IEA)
3Renewable_power_generation_costs_in_2023 (IRENA)
4 Annual Coap Report (IEA) 
5Biden-harris-administration-finalizes-standards-slash-methane-pollution-combat-climate change, Protect health and Bolster American Innovation (US EPA)
6 Clean Investment Monitor
7The White House, Briefing Room, statements and releases
8Analysis: trump election win could add 4bn tonnes to US emissions by 2030 (CarbonBrief)

Disclosures

Author

Julius Huttunen
Head of ESG – Fixed Income Public Markets
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