Trump, Harris, and Project 2025: impacts on energy transition investors
While Kamala Harris represents a continuation of Biden’s climate policy, Donald Trump and Project 2025 take aim at the Inflation Reduction Act and Infrastructure Investment and Jobs Act
Alarmed by threats to U-turn on the Biden administration’s green industrial plan, energy transition investors are nervous about the prospect of a second Donald Trump administration.
Democrat presidential candidate Kamala Harris currently enjoys a narrow lead in the polls, but the race is still too tight to call.
While Trump, along with other key Republican politicians, have stated their intentions to protect the fossil fuel industry, withdraw from the Paris Agreement, and roll back clean energy policy, questions remain around what he would actually do and the implications for investors.
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In the two years since the implementation of the IRA – a key component of the green industrial plan – actual business and consumer investment in clean technologies totalled $493 billion, a 71% increase from the two-year period preceding the legislation, according to Rhodium Group report.
Chris Berkouwer, portfolio manager of Robeco’s Sustainable Global Stars Equities fund, said the IRA has generally been popular among investors, not least because its tax credits allow investors to receive extra funding early on in the business development process. However, the prospect of a second Donald Trump administration has dampened sentiment.
“Energy transition investors are currently in wait and see mode,” said Berkouwer. “They want to know the outcome of the November US presidential elections before committing to any major new investments, especially ones that take advantage of the IRA tax credits. Trying to figure out what Trump would do keeps us very busy. There are many different scenarios to consider.”
The uncertainty, has, to a large extent, been “priced in” to a clean energy market already rattled by two years of severe macroeconomic challenges characterised by high interest rates and inflation.
Robeco itself takes the position that Trump’s threat to the IRA is generally “overstated”. Berkouwer estimates that the chance of Trump actually following through with the threats to attempt to fully repeal the IRA is only 20%, mostly because of the bipartisan nature of the legislation and the benefits to swing states and Republican states.
“We are confident that common sense will largely prevail over anti-ESG ideology,” said Berkouwer. “Trump may change the wording and tweak the IRA, but we don’t expect a complete reversal.”
There is also the extra political challenge of pushing any rollbacks through Congress.
Even if Trump were able to repeal the IRA, Ashley Keet, portfolio manager at AXA IM, argued that many clean energy projects are competitive vis-a-vis fossil fuels, with or without subsidises. For example, the unsubsidised levelised cost of energy for utility scale solar is often cheaper than natural gas or coal in the US.
The asset manager tends to focus on "identifying companies with strong competitive positions and durable earnings growth prospects that are not overly dependent on subsidies or environmental regulation".
"Companies are also committed to reducing their emissions in response to customer/consumer demand, which is independent of policy," Keet added. For example, Microsoft has just signed the largest clean energy deal in history for Brookfield to provide renewable energy to Microsoft’s upcoming data centres.
Even so, the Republican proposals would have an impact on the net zero value chain, especially those parts that still depend on subsidies, such as renewable energy equipment or electric vehicles. As such, they are worth examining.
The Republican proposals
Project 2025 – the controversial federal reform program drafted by conservative thinktank Heritage Foundation, which includes many former Trump officials – clearly states intentions to reverse the progress made by the Biden’s Administration’s green industrial plan:
The next Administration should … push for legislation to fully repeal recently passed subsidies in the tax code, including the dozens of credits and tax breaks for green energy companies in Subtitle D of the Inflation Reduction Act.
Developers of clean energy projects can currently claim these IRA tax credits, with additional incentives for projects in low-income or energy communities. Rhodium Group estimates that, thanks to tax credits and other sources of federal funding, private investment is 5-6 times larger than public investment.
In addition to doing away with the IRA tax credits, Project 2025 also looks to weaken the U.S. Environmental Protection Agency’s (EPA) regulatory authority, lower or eliminate existing emissions standard, and ease environmental permitting restrictions for new fossil fuel projects.
Project 2025 would also eliminate the Office of Clean Energy Demonstrations (OCED).
Set up under the Biden-Harris administration, the OCED oversees the implementation of $6bn from the IRA and the Infrastructure Investment and Jobs Act (IIJA) for the DOE’s Industrial Demonstrations Program (IDP).
Funding is allocated to projects that advance industrial manufacturing processes and cut carbon emissions, avoiding 14 million metric tons each year and spurring private investment.
Additional funds for the research and development of clean energy technologies are available through the IIJA and the IRA to revitalise and strengthen core manufacturing.
In the past two years, solar manufacturing has seen more than 132 projects announced, and investments in US battery manufacturing have increased sevenfold, according to policy institute Centre for American Progress. These investments aim to limit dependence on foreign supply chains and enhance US competitiveness.
“The raw data for new solar and wind farms or battery factories and green job creation is a testament to the success of the IRA,” said Berkouwer. “Apart from a stop and go 'effect', caused by agencies having to digest so much complex regulation at the same time, the implementation has mostly been smooth and timely.”
The Centre for American Progress warns that Project 2025’s stated policies would lead to “increased GHG emissions, reversing years of progress and making it virtually impossible to limit warming to the 1.5 degrees Celsius goal that is necessary to avoid the worst impacts of climate change.”
While a Harris administration represents a continuation of current clean energy policy, a higher corporate tax rate might offset some of the benefits of the IRA tax credits.
"We will continue to assess the impact of the election vis-a vis the IRA partial repeal, environmental regulation, and international climate policy," said Keet.
Clean energy fundamentals
Whatever the outcome of the US elections, questions still linger around the fundamentals of clean energy business models, especially in the context of two years of challenging macroeconomic environment.
These fundamentals are arguably more important than whether a Republican or a Democrat occupies the White House, according to Berkouwer.
“The cleantech energy index has seen great volatility in the last two years,” he said. “However, the fundamentals have started to improve, even if the stocks themselves remain discounted due to the political risk of the upcoming elections.”
The uncertainties keep many investors on the “sidelines”, he continued. By putting a definitive end to the uncertainty, the election of Harris may act as “a spark on dry wood of clean tech valuations”.
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