Investment
22 January 2021

US re-enters global fight against climate change

By Conrad Tan

Investment Strategist

US re-joins Paris Agreement to tackle climate crisis

Hours after being sworn in as US President on 20 January 2021, Joe Biden signed an executive order to re-join the Paris Agreement.

This marks the start of much broader efforts that Biden has promised during his election campaign to tackle the existential threat to climate change.

Biden has also pledged to review the Trump administration’s rollback of over 100 environmental rules and regulations, potentially reversing them to re-introduce stricter vehicle fuel efficiency standards and tougher rules on oil and gas companies and power plants.

In our view, Biden is likely to take a whole-of-government approach to fighting climate change – extending far beyond the Environmental Protection Agency and the Departments of the Interior and Energy that traditionally regulate environmental pollution, to include other parts of the federal government such as the US Treasury, and the Departments of Agriculture and Transportation, and even into areas such as national security and foreign policy.

We expect Biden to weave climate policy and decarbonisation targets into key government initiatives to advance his climate agenda, instead of relying on broad climate-focused legislation and spending proposals that could face defeat in Congress, given the Democratic Party’s very slim control in the Senate.

Biden has already made it clear that climate policy will be at the heart of the government’s plans to rebuild the US economy as it recovers from the Covid-19 pandemic.

“We can put millions of Americans to work modernising water, transportation, and energy infrastructure to withstand the impacts of extreme weather,” he said on 19 December 2020.

“We see farmers making American agriculture first in the world to achieve net-zero emissions and gaining new sources of income in the process.”

The push to align federal government policy with climate targets is likely to receive broad support among the US public, based on recent surveys. Sixty percent of US adults now believe that global climate change is a major threat to the country’s well-being, compared to 44% in 2009, according to Pew Research Center survey results published in April 2020.

Much of this increase has come from Democrats and those who lean toward the Democratic Party.

A separate Pew report published in June 2020 showed that about two-thirds (65%) of Americans believe that the federal government is doing too little to reduce the effects of climate change.

A large majority of the US public also believe that the priority for the country’s energy supply should be developing alternative sources of energy such as wind and solar, rather than expanding the production of oil, coal and natural gas.

A majority (58%) say government regulations are needed to encourage reliance on renewable energy.

Biden’s key picks to support his climate agenda so far include:

- Former Environmental Protection Agency chief Gina McCarthy as the first ever National Climate Advisor to coordinate the Biden administration’s domestic climate agenda and interagency policy and lead the newly formed White House Office of Domestic Climate Policy.

- Former senator and Secretary of State John Kerry as Special Presidential Envoy for Climate, a new position on the National Security Council that reports directly to Biden, to address the climate crisis in US international diplomacy and national security affairs. Biden has pledged to work with other world leaders to fight climate change.

- Former Federal Reserve chair Janet Yellen asTreasury Secretary. Yellen is a strong advocate for a carbon tax to discourage the use of fossil fuels and spur the development of clean energy alternatives, calling it a“textbook solution” to climate change.

- Brian Deese, global head of sustainable investing at BlackRock and former climate advisor to President Obama, as director of the National Economic Council, Biden’s top economic adviser.

- Michael Regan, head of North Carolina’s environmental agency, as Environmental Protection Agency chief.

Expect new targets and milestones, and perhaps even a carbon tax

To support his pledge to deliver a carbon neutral US economy with net zero carbon emissions by 2050, Biden’s climate plan includes a promise to demand that Congress approve legislation to

- establish an enforcement mechanism for the US to achieve its 2050 net zero carbon goal that includes milestone targets by 2025

- make USD400 billion of investments in clean energy and climate research and innovation over the next four years; and

- incentivise the rapid deployment of clean energy innovations across the economy.

Although the plan does not explicitly mention a carbon tax, it states that the enforcement mechanism would be based on the principles that “polluters must bear the full cost of the carbon pollution they are emitting and that our economy must achieve ambitious reductions in emissions economy-wide instead of having just a few sectors carry the burden of change.”

Incoming Treasury Secretary Yellen is a co-founder of the bipartisan Climate Leadership Council comprising business leaders and influential economists that proposed the introduction of a carbon tax in the Bipartisan Climate Roadmap published in October 2020.

Limits on Biden’s green ambitions

While the Democrats’ winning control of the Senate in January’s run-off elections in Georgia is unambiguously positive for the Biden administration’s overall climate ambitions, we highlight three key factors that are likely to restrict the government’s ability to achieve its climate goals quickly:

- The ongoing spread of Covid-19 will draw attention and resources away from other priorities in the early days of Biden’s presidency.

- The Democrats’ slim control of the Senate(split 50-50, with Vice-President Kamala Harris as tie-breaker) means that sweeping legislation such as a carbon tax would struggle to pass in the face of opposition by Republicans or dissenting Democrats.

- Most bills need 60 votes to pass in the 100-seat chamber.

- The Supreme Court, with its 6-3 conservative majority, would likely limit the extent that Biden is able to use his executive powers as President to implement climate policy.

What can be done regardless?

Even if the more ambitious parts of Biden’s climate agenda – such as USD2 trillion in climate-focused spending that he proposed in his election campaign – are opposed by lawmakers, the government can use its vast procurement power as a policy lever to encourage the adoption of clean technologies.

“The federal government owns and maintains an enormous fleet of vehicles. And we’re going to harness the purchasing power of our federal government to make sure we are buying clean, electric vehicles that are made and sourced by union workers right here in America,” Biden said on 19 December 2020.

Moreover, state- and city-level authorities across the US have significant powers to determine policy and strategy for their local economies and are well positioned to continue promoting climate initiatives locally even in the absence of new nationwide legislation, especially with political support, leadership and a clear blueprint for climate action from the Biden administration.

As an example, California, the state with the largest economy in the US, had in 2018 already pledged to achieve carbon neutrality by 2045, including a target for 100% of the state’s electricity to be produced by renewable energy and zero-carbon resources by 2045.

Several other states, including New York, Michigan, Nevada and Hawaii have also announced plans to slash net carbon emissions to zero or near zero by 2050.

Many US cities such as New York City, San Francisco, Seattle and Washington, DC have also pledged to turn carbon neutral, together with international counterparts that are part of the Carbon Neutral Cities Alliance.

We expect these localised climate initiatives in various parts of the US – including the roll-out of low-carbon power, greener buildings and cleaner transport – to gather further momentum, adding greater impetus to the nationwide climate agenda.

Greater international cooperation on climate action likely

In the coming months, we expect the US to make a significant push to regain a leadership role in the global fight against climate change.

Other major economies including China and the European Union would welcome greater cooperation with the US on climate action to meet the Paris Agreement goals.

Traditional US allies in Europe are likely to be eager to forge new partnerships with the US to advance the global climate agenda, and we expect to see climate-related political momentum to gather new strength this year, ahead of the UN Climate Change Conference or COP26 meeting in November 2021.

“I warmly welcome President Biden’s steps to re-enter the Paris Agreement on Climate Change and join the growing coalition of governments, cities, states, businesses and people taking ambitious action to confront the climate crisis,” United Nations Secretary-General António Guterres said.

The re-entry of the US into the Paris Agreement means that more than two-thirds of the world economy – including China, the European Union, United Kingdom, Japan and South Korea – have now joined the fight against climate change with ambitious commitments to carbon neutrality by around mid-century.

Overall, we expect to see significant advances in global climate action and the broader environmental, social and governance agenda this year.

More intense competition in clean technologies to drive innovation and growth

At the same time, we expect to see more intense US-China competition to take the lead in clean technologies.

China’s bruising experience with the US during the Trump administration has accelerated its pursuit of self-reliance in key economic sectors, and we expect these efforts to continue even if bilateral relations improve significantly under Biden’s presidency.

China’s heavy investments to develop and expand the use of clean technologies is likely to pressure the US to step up its own investments. Indeed, Biden’s campaign platform makes explicit reference to this competition: “In 2017, China invested USD3 in renewable energy for every USD1 in America, giving China an edge on the technologies of tomorrow that will generate well-paying jobs.”

His campaign promised to “put the US back in the driver’s seat” in clean energy research, investment, commercialisation, manufacturing, and exports by 2030.

Overall, we expect China-US competition to be a key driver of innovation and growth in clean technologies for years to come.

Potential beneficiaries

Given the all-encompassing nature of decarbonisation efforts worldwide and the fast-evolving but uneven rollout of supporting legislation and regulations across the world, we continue to believe that a strategy of adding diversified exposure to a wide range of potential beneficiaries of the global transition to a carbon-neutral economy is appropriate.

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Version: July 2020