By Ethan Zindler
Head of Americas
Bloomberg New Energy Finance
Hello.
As Bloomberg New Energy Finance’s Americas chief and one of our de facto Washington “experts,” it has fallen to me to explain the meaning of the November 8 election results and the implications for the energy sector and the climate.
Just one problem: more than a week after Donald J Trump’s win, I’m still having trouble coming to terms with it. Right up until the moment it became official, it seemed inconceivable to so many of us, both “inside the Beltway” and beyond. Think Brexit-like shock and awe, perhaps times 10.
I’ll get to what Trump’s election might mean for energy and climate in a moment. But before doing so, a word on the campaign itself, which was one of the darker, most divisive and ultimately dispiriting in US history. Trump’s attacks on Latinos, Muslims, women, and the handicapped set new lows for modern-day US campaigning.
Does this mean that everyone who voted for Trump is a bigot? Absolutely not. Clearly, millions of Americans feel alienated from what has been tepid economic recovery from the Great Recession. Others are justifiably frustrated by the ways of Washington. Their voices are valid and they deserve to be heard.
However, my job is not to concentrate on the election itself but to analyze where the new president might take the U.S. What does a careful reading of the tea leaves tell us?
First, it’s worth noting that Trump is not much of a Republican. His views on trade, for instance, draw as much from the left as from the right. And he has been rejected by many mainstream Republicans, including the party’s last nominee for president, Mitt Romney, and former President George W Bush. Second, he has never held any public office. He has no legislation with his name on it, no bills he’s vetoed, no programs he’s championed, no actual track record of any sort on energy or climate.
For clues on how he might govern, we are left to fish from a relatively shallow pool of comments the president-elect made on the campaign trail or over Twitter. Even this is unsatisfactory as Trump has with some frequency made remarks that directly contradict each other.
Ironically, this apparent willingness to shift his positions with regularity may offer greatest hope to those fearful about changes to climate and clean energy. At his core, Trump may be not be an ideologue at all. The question then is, is he enough of a pragmatist to make wise decisions about energy and climate policy?
High Energy
Unlike other countries, the US has no clearly stated national clean energy strategy. There are no legally enshrined goals for boosting domestic oil or gas production, for building clean energy capacity, for becoming more energy-efficient, for bringing down energy prices, or for cutting CO2 emissions.
And yet, over the past decade we have made extraordinary progress toward all of these. Oil production has surged from 1.9 billion barrels in 2006 to 3.4 billion in 2015, while natural gas extraction has risen 40 percent over that period. Oil imports are back at mid-1990s levels, and natural gas terminals originally built to facilitate imports are being re-tooled for exports. Cross-border gas exports to Mexico are at an all-time high, having more than tripled in the last decade. We appear to have more gas than we know what to do with.
Over that same 10 years, non-large hydro renewable power-generating capacity grew by 96 gigawatts and generation grew to 7 percent of the total, or 306 terawatt-hours. At the same time, household spending on energy is at the lowest ever recorded, thanks to cheaper gasoline, but also lower electricity prices. And as for CO2 emissions from the power sector, they’ll likely finish 2016 at their lowest level since sometime in the early 1990s.
With results like these, who needs a national strategy!
Policy still matters, however. The U.S. is home to a hodgepodge of federal standards, tax credits, and state mandates that have helped fuel this transition. The much-derided federal economic stimulus package of 2009 alone may have been the most important piece of clean energy legislation in U.S. history.
Still, it is technology that has propelled U.S. energy to newfound heights, both in fossil fuel extraction (“fracking”) and renewables (cheaper PV modules, more efficient wind turbines). The U.S. has had such success that Hillary Clinton asserted during the campaign that energy independence has been achieved – and few quibbled with her.
There is little to suggest that further progress will be impeded in coming years. Yes, hundreds of natural gas and oil wells have been idled in the past year, but they stand ready to re-start should fossil fuel prices rise. As for renewables, they are becoming more cost-competitive by the day and, with battery prices dropping like a rock, could be ready to address the “intermittency issue” into the next decade.
Black stuff
Two fuels have been left out of the party, however: coal and nuclear. As recently as 2008, coal accounted for 48 percent of all US power generation. The year isn’t over yet, but it’s possible that coal will have met as little as 30 percent of America’s power needs in 2016.
That sudden and precipitous demand drop has been devastating for communities in Virginia, Ohio, Kentucky and West Virginia, where coal has been mined for generations. To voters in these states Trump made some of his boldest and, unfortunately, most unrealistic promises. Repeatedly, he charged that the U.S. Environmental Protection Agency’s “war on coal” was to blame for coal’s decline.
Trump’s pledges appear to have had their intended impact. In the easternmost counties in the critical battleground state of Ohio, Trump beat Clinton by three to one, or more. Those margins, coupled with others elsewhere in rural Ohio, were more than enough to offset Clinton’s big wins in urban counties. (Obama also lost Ohio’s coal counties in 2012, but by much narrower margins; he won the state.)
In a November 12 Page 1 article, the Washington Post interviewed barber Claude Rasnake of Coeburn, Virginia in the southwest corner of the state. Of Trump, Rasnake said, “The first thing I’d like him to do is fire that lady that runs the EPA,” in reference to the agency administrator Gina McCarthy.
Trump’s attacks on the federal government in coal country were hardly novel. During his 2010 campaign for Senate, Democrat Joe Manchin of West Virginia memorably hung a copy of federal legislation to limit CO2 emissions on a tree, lifted his rifle, and used it for target practice in one of his TV ads.
Whether done by Republicans or Democrats, blaming government for coal’s demise is disingenuous and even downright cruel. It raises hopes among those in the poorest corners of the U.S. that a magic policy wand can be waved and coal can be revived.
It cannot. Coal’s decline in the U.S. has been caused by market forces in the name of low-priced natural gas. And with each day that gas remains cheap (less than approximately $4 per million British thermal units), coal will largely be out of the money. There is little to suggest that this situation will change anytime soon.
This is so glaringly obvious that it took all of three days after the election for one of coal country’s biggest champions to acknowledge as much. In a speech in his home state of Kentucky on November 11, Republican Senate Majority Leader Mitch McConnell sought to lower expectations. “We are going to be presenting to the new president a variety of options that could end this [EPA] assault,” said McConnell. “Whether that immediately brings business back is hard to tell because it’s a private sector activity.” For years, McConnell has heaped blame on the EPA for killing jobs in his home state.
By the way, it’s worth remembering that the EPA regulations that have impacted coal most concern SOx and NOx, not CO2.
Compounding the potential challenges for coal is Trump’s outspoken support for expanded oil and natural gas drilling rights on public lands. This is again an area where policy action might largely prove irrelevant (the U.S. has plenty of wells ready to pump more should prices rise). But “success” would mean even more production, which would depress natural gas prices and, you guessed it, hurt coal.
So one of the very first questions President-elect Trump will need to address is how he can both be highly supportive of the natural gas industry and bring jobs back to eastern Ohio.
That then brings us to the future for renewable power under Trump. Again, reading the tea leaves is difficult here. On the campaign trail, Trump complained that solar is too expensive.
“I know a lot about solar,” he professed at one point. “I love solar. But the payback is what, 18 years? Oh great, let me do it,” he added sarcastically.
On wind, Trump fought an offshore project being built near his golf course in Scotland, though that may have driven more by classic NIMBYism than any principled stance. More recently, Trump complained about the environmental impacts of wind. “The wind kills all your birds,” he said. “All your birds, killed. You know, the environmentalists never talk about that.”
The Trump campaign website said little about renewables. But a newly established site representing the Trump presidential transition effort makes a point of referring explicitly to “renewable energy resources” in its second sentence.
Standards and credits
Trump has repeatedly stated his intention to rescind the Obama administration’s Clean Power Plan regulation of existing power generation, a promise his new website reiterates. This has caused significant angst among environmentalists and others. However, in both the short run (the next 3-4 years) and the longer term (through 2030), elimination of the CPP would have little to no effect on U.S. renewables development, in our view – for several reasons.
In the short run, the CPP at present has been blocked by a U.S. federal court. Its very future is already in doubt and yet clean energy development continues apace today. In the longer run, it is our view that the U.S. power sector will achieve the CPP’s de-carbonization goals anyway based on market forces, under the following conservative assumptions: natural gas remains cheap, renewable technology and power storage technology costs keep dropping, and U.S. electricity demand growth remains weak. To a large extent, the CPP is an insurance policy against higher natural gas prices, which would drag coal back into competitiveness.
There is one further assumption baked into the above – that the current tax credits supporting wind and solar stay on the books as scheduled over the next four years. For those keeping score, Congress in December 2015 extended the Investment Tax Credit and the Production Tax Credit for solar and wind, respectively, for five years. The extension included “phase-outs” of each, providing declining levels of benefit in the later years.
In their wildest dreams, clean energy advocates hoped that these phase-outs would be revisited by the 2017 Congress with Democrats holding a Senate majority. They had also hoped that credits as they applied to lesser-deployed technologies, including wave, tidal, and fuel cells, would get extended in the new Congress as these has been “orphaned” in 2015.
Fat chance. The question now is whether the ITC and PTC in their current form will survive the next two years of Congress. (As for the orphans, well, they’re likely to remain orphaned unless the current “lame duck” Congress acts). This, by far, is the most important question of whether U.S. clean energy continues on its pace of approximately 20 gigawatts per year or suddenly busts.
With the usual caveats, we think the tax credits in their current form are unlikely to be targeted specifically with any success by the next Republican-controlled Congress. Generally, Congress avoids proactively withdrawing tax benefits after delivering them to an industry, but prefers to let such benefits sunset. These credits are popular not just with Democrats but with key Republicans as well. For instance, among the wind industry’s biggest champions is the venerable, 83-year old Charles Grassley of Iowa, who remains a force on the Senate Finance Committee that oversees tax policy.
All of which augurs well for the PTC/ITC. But as is so often the case in Washington, there is yet another level of complexity to be considered. Specifically, Trump has pledged to slay the massive U.S. tax code. Inside the Beltway, true tax reform is like a unicorn – it gets discussed but it’s never been seen. Everyone agrees the code is a hot mess. But each and every one of the thousands of deductions, credits, accelerated depreciation and other benefits buried in it has a corresponding constituency, Washington trade group, and member of Congress ready to defend it to the death.
Nevertheless, with Republicans now enjoying majorities in both houses of Congress and with Speaker Paul Ryan’s help, Trump appears poised to give real tax reform a whirl with the ultimate goal of producing an incredibly simple, flat 15 percent tax rate for corporations. And should all of that come to pass, the clean energy tax credits could be history. But don’t hold your breath.
Trump has pledged to make infrastructure investment a priority during his first days in office, specifically with $550 billion in new investment. The aim is to prime the U.S. economy. Could energy infrastructure such as transmission be part of the outlays? Possibly. The Trump transition web page on the topic is silent on energy while mentioning roads, bridges, airports, and subways. For clean energy, the most useful thing that could emerge from an infrastructure binge might be funding to modernize and expand U.S. transmission.
All of these permutations aside, it is worth reiterating that the massive changes we have seen in the U.S. power sector have been driven primarily by technological advancements that show no sign of abating. While federal policy can influence the rate at which new gas or renewables get built or coal gets retired, it cannot reverse the basic direction of travel or revive moribund technologies. That’s cold comfort for folks in eastern Ohio or West Virginia, we know, but it’s the reality.
There are other areas where the new Team Trump will be able to have a more meaningful and immediate impact, however. Most notably, the U.S. automotive sector has since 2012 been forced to comply with more stringent corporate average fuel-efficiency (CAFE) standards. In 2016, automakers are expected to hit a fleet-wide goal of 35.5 miles per gallon.
Since the standards were put in place, automakers have upped the efficiency of their vehicles – and enjoyed a few exceptional sales years. But to some large degree, the industry has already done the work of making engines more efficient, using lighter-weight materials, and selling hybrid-electric and battery electric vehicles. Given how inefficient the U.S. auto fleet once was, this has not been all that challenging.
The much heavier lift is to come as CAFE rises to 54.5 miles per gallon by 2025. Prior to this month’s election, the automakers were crowing that the new goals are unrealistic and would inflate prices for new cars out of consumers’ reach. Obama’s EPA, and presumably Clinton’s EPA, looked unlikely to give ground on the issue. Team Trump may be much more receptive to reconsidering CAFE, but even if the standard does get relaxed, progress on, and sales of, electric vehicles will continue to grow, according to our Advanced Transport team.
Warming
This then, finally, brings us to the question of climate change and US CO2 emissions. On these issues, Trump himself has to date been ambiguous in one regard but very clear in another.
First, the ambiguity. On the question of climate change, Trump was rather definitive when in November 2012 he tweeted: “The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive.” However, when Clinton cited the tweet verbatim during the presidential debate to attack Trump, he vehemently denied having ever made the comment.
Did Trump have a change of heart or simply feel the need to deny something he perceived as costing him votes? Reporters were given few chances to press him further on the matter thereafter. However, even if his denial was purely politically motivated, it suggests that he realized that being a complete climate-denier is not the place to be.
What Trump has been entirely clear on is his plan to have the U.S. exit the climate accord agreed in Paris in December 2015. Trump’s surprise win cast a dark pall over climate talks in Marrakesh this month, according to my colleague Richard Chatterton, who arrived there just as the election results became apparent.
Removing the U.S. from the Paris deal will not be entirely straightforward. The new president could invoke what is known as Article 28 of the agreement, which would in essence allow the U.S. to exit in no less than four years. To get there sooner, however, the U.S. could simply exit the entire UNFCCC, which organizes the climate talks.
In the U.S.-centric view of the talks espoused by some in Washington, if Trump pulls out of Paris, the Chinese will also walk away from the deal. But our China team tells me there is basically zero chance of China abandoning ship. The country has, after all, already enshrined its Paris commitment into its latest domestic Five-Year Plan. The country needs to clean up its air anyway as conditions in Beijing and other major cities have become downright intolerable. With the U.S. out of the picture, China would also have an unprecedented opportunity to seize the moral high ground on this topic. One last motivation for China: Paris offers the chance to forge tighter bonds with emerging markets in Africa and southeast Asia to which China can export its wind and solar equipment (the timing is particularly useful as Chinese demand for PV has slowed sharply after a rush to build in late 2015 and early 2016). It is this very opportunity that the U.S. would miss out on, should it bail on Paris.
As if to underline all of this, on November 16, China Vice Foreign Minister Liu Zhenmin said the country did not invent climate change and noted that that it was Republicans who began the climate talks during the 1980s. Liu added that China planned to continue addressing climate change “whatever the circumstances.”
Whether China or the U.S. stays or goes, the dark mood in Marrakesh seems justified. It was always going to be a stretch for the U.S. to meet the 26-28 percent CO2 emission cuts by 2025 it had pledged (from a 2005 baseline). The power sector, as discussed above, would not be the problem as it is de-carbonizing rapidly anyway. But if, as seems quite possible, CAFE standards get watered down, the U.S. will go hopelessly off target. Under one possible scenario, the U.S. doesn’t bother to exit the Paris deal, but simply neglects the commitments it has made by freezing CAFE domestically.
Finally, there are the larger implications of not having the U.S. as an active leader in the climate talks. Collectively, the individual pledges agreed in Paris were never going to be sufficient to keep the planet from heating less than 2-degrees Celsius. The plan called for “ratcheting” in coming years, with countries making increasingly ambitious pledges to rein in emissions.
With the U.S. either officially or unofficially on the sidelines of the climate talks, other nations will be justified in asking “what’s my motivation” to do more?
Unbeholden
Whatever his shortcomings, Trump will arrive in Washington as that rarest of bird – an American politician who owes next to nothing to anyone inside the Beltway. He made few friends during a bruising Republican primary season. He raised comparatively little money from Washington’s entrenched interests, instead getting by on small-dollar donations from supporters and by tapping his own piggybank.
Trump has legions of devoted followers who seem less obsessed with his specific stands on issues than with the man himself. Trump is also a businessman who, we hope, would like to make rational decisions in the national interest.
To those in the depths of despair about Trump’s election, all of this should offer some glimmer of hope as today there are certain energy and climate realities that are simply undeniable: It is virtually impossible to expand U.S. natural gas production without hurting U.S. coal; clean energy is a $300 billion-plus per year global industry representing one of the greatest economic opportunities of the 21st century; and if the U.S. walks away from Paris, the Chinese and others will gladly take this clean energy opportunity straight to the bank.
The question then is: will Trump exploit the unprecedented freedom this election has afforded him to reinvent his views on energy and climate? A great place to start would be with an accurate and complete set of facts.
During the sprint to Inauguration Day, Trump’s days will be jammed with job interviews as he seeks to make no fewer than 4,000 political appointments. We hope he finds time as well to learn more about the current and future state of U.S. energy and climate change.
In that regard, we at Bloomberg New Energy Finance and many others in the industry stand ready to help. Give us a ring, Mr. President-elect.