Notes from the road: What the US election means for investors in decarbonisation

There are three policy areas that could go in very different directions depending on the US election result in November: fiscal, trade and tariffs, and climate. All of them may have consequences for the universe of companies driving the shift towards a lower-carbon global economy.

Victory for the incumbent

If the Presidential election results in a win for the Democratic candidate, we can expect a continuation of current policies. A priority for the administration would be implementation of the Inflation Reduction Act (IRA) of 2022 – which, despite its title, represents an unprecedented commitment by the US to tackling climate change. Key components of the IRA, which is driving structural growth for companies that provide solutions for decarbonisation, include:

• Renewable energy: A 10-year extension of tax credits for wind and solar, as well as a new 10-year tax credit for standalone energy storage.
• Electric vehicles (EVs): Incentives for EV charging.
• Hydrogen: Tax credits that make green hydrogen (made from renewable energy) more economical than grey hydrogen (from natural gas).
• Buildings: Incentives for heat pumps and other energy efficient technologies.
• Waste: A tax credit for biogas generation.

Major new climate legislation is unlikely – the consensus view is that it will become increasingly difficult for a Democratic administration to get any new laws through Congress. In any case, it is unnecessary. The focus will be on getting IRA dollars out of the door, and using executive action to drive the climate agenda.

Executive action

The US Securities and Exchange Commission is due to release new environmental, social and governance (ESG) reporting rules before the election, which will likely require Scope 1 and 2 carbon reporting – in turn, this would to some extent spur demand for renewables from the corporate sector. However, European Union CSRD¹ rules kick in for any company selling into the European market from 2028, so to some extent this will happen anyway. We can also expect more regulatory pressure behind the shift towards clean technologies via higher emissions standards on cars and power generation. From an international relations perspective, the policy experts I met believe a Democratic administration – while continuing to be very tough on trade and China broadly – would want to quietly cooperate with Beijing on climate, so we could see trade policies that may incrementally benefit Chinese leaders in decarbonisation solutions that export to the US.

Broadly positive

Overall, we see this election result as supportive of global decarbonisation. That said, it is important to put the upcoming vote into context. First, the US is only one component of the global decarbonisation opportunity set, which spans other developed markets as well as parts of the emerging world, especially China and increasingly India. Also, government policy is only one structural growth driver of companies providing solutions for decarbonisation – the other principal ones being technological progress, which has resulted in many clean-tech solutions being cheaper and better performing than the higher-carbon alternative, and changing consumption patterns. These supportive factors for the decarbonisation investment universe will remain regardless of the election result.

A Republican win

A Republican victory would most likely result in Donald Trump’s return to the White House. Investors in decarbonisation-exposed parts of the economy can expect alarmist headlines suggesting a very different environmental agenda. But it will be important to separate ‘signal’ from ‘noise’ – i.e., the real trends driving markets from chatter and bluster. During the previous Trump presidency, which featured vocal support for the coal sector, the US actually added more renewable energy than during the Obama administration (the red box in the chart highlights the Trump years). In other words, the ‘noise’ was strongly anti-climate; the ‘signal’ showed that the shift towards a lower-carbon US energy system accelerated.

Annual US electric-generating capacity additions (2000–2023)

Source: US Energy Information Administration, Preliminary Monthly Electric Generator Inventory, January 2023.

We will almost certainly get some noisy ‘anti-environment’ policy announcements early in a Trump presidency. An immediate withdrawal from the Paris Agreement – i.e., a reversal of President Biden’s reversal of President Trump’s withdrawal – is highly likely, as is the scrapping of the Securities and Exchange Commission’s expected ESG reporting requirements. But neither are material for the pace of US and global decarbonisation.

Trade and tariffs

The experts I spoke to think the most significant policy shift in a Republican administration is likely to be on trade and tariffs. Donald Trump has proposed an end to normal trade relations with China, the imposition of high tariffs on Chinese imports, and tariffs on imports from the rest of the world. The devil will be in the details – the Republican trade proposals should really be seen as opening positions for negotiation with scope for substantial exclusions, especially where there is conflict with existing trade agreements. Nevertheless, it is likely to become more difficult, or at least more expensive, for US companies to use Chinese-manufactured components. Given that China is a key supplier to the US for solar and batteries, this would be a headwind for companies in these supply chains, among others.

The other key point to note is that implementing tougher trade terms is achievable, because it does not generally require the approval of the legislature. The executive branch holds the levers of trade policy and has the experience and institutional knowledge to operate them.

IRA repeal unlikely

There is a clear consensus that a full repeal of the IRA is extremely unlikely. Even if the Republicans win the House, Senate and Presidency, most experts think the IRA will remain largely intact. There are several reasons for this. First, the IRA works via offering tax cuts to companies that invest in clean-tech such as renewable energy, electric vehicle infrastructure and energy efficient buildings, as well as other industrial activities – in this way, it should mobilise private investment in green sectors that is a multiple of government spending. Ideologically, Republicans favour lower taxes, and scrapping the IRA would be a de facto tax increase. Second, much of the green investment boom generated by the IRA – the building of windfarms, for example – and the associated job creation will take place in Republican states, disincentivising representatives of these areas from scrapping the legislation.

A green boom?

The third reason the IRA, and US green investment more broadly, may continue is that, as more than one expert put it, Donald Trump and his Republican colleagues “like workers in hard hats”. Whether the project in question will contribute to decarbonisation is somewhat beside the point. Windfarms might be unpopular in right-of-centre forums, but viewed as infrastructure projects that create construction jobs, they are likely to find favour with a future President Trump. It is also crucial to note how much the Republican party has changed since the Trump revolution. It is no longer a party of fiscal conservatism, and Donald Trump himself is absolutely not a fiscal conservative. That said, there is broad consensus across Republican groups that, if the IRA is to be rolled back, the US$7,500 electric vehicle tax credit is top of the list for repeal. Because EV manufacturers have managed to work around the local content rule (essentially, a requirement to use US-made components), the credit has proven to be more expensive than expected. In any case, electric vehicles are generally not popular with Republican politicians nor the Republican presidential candidate.

Another interesting idea floated by a climate lobbyist was that a Republication administration may want to reduce the 10-year runway for wind and solar credits to five years, to mechanically appear to be balancing the books. The shorter runway might pull in demand for renewable projects.

Finally, when in office, President Trump scrapped some environmental permitting and planning red-tape. If he takes the same approach on a return to the White House, there may be negative environmental consequences. But it will also become easier to get the go-ahead for renewable energy projects, for example. The US is already way ahead of some other regions in this regard: it takes about six weeks to obtain a permit for a windfarm in Texas, and about six years in Europe. Consequently, there are plausible scenarios in which a Trump presidency could accelerate green investment.

Continued support for decarbonisation

Overall, the consensus among the industry and policy experts I spoke to in the US is that there will continue to be significant policy support for US decarbonisation via the IRA in a Trump presidency. However, while financial markets appear to be overestimating the risk of IRA repeal, they may be underestimating the risk of trade policies and tariffs.

Looking ahead to November

In summary, I would highlight the following takeaways from my US research trip:

Focus on signal over noise

Investors can expect a lot of anti-climate ‘noise’ if the Republicans win. But it will be crucial for investors to separate the noise from the ‘signal’ – i.e., the real trends driving markets. There are plausible scenarios in which green investment accelerates under a Trump presidency.

Tariffs are the biggest risk to climate investments

Under a Republican-win scenario, the market may be underestimating the risk of trade policies and tariffs that make it harder for companies, especially those in China, to sell components into the US. This will be a headwind for select Chinese companies, as well as potentially for US businesses that rely on lower-cost (and often high-quality) Chinese cleantech solutions.

IRA is safer than the Street thinks

Whichever way the Presidential election goes, the IRA is likely to remain in place, spurring public and private investment in climate solutions. It will continue to drive structural growth for companies in the decarbonisation investment universe.

Download PDF

¹ The Corporate Sustainability Reporting Directive sets higher standards for environmental, social and governance reporting.