What does Trump’s victory mean for the US energy transition?
Trump trade aside, how are institutional investors grappling with the long-term impact of a Trump takeover on the US energy transition?
US stock markets surged following Trump’s re-election, but for long-term institutional investors worldwide, the longer-term impact on the country’s energy transition has become a crucial challenge to navigate.
With Trump having threatened to repeal the Inflation Reduction Act (IRA), research by Carbon Brief suggests that rescinding clean energy subsidies could result in a significant increase in US emissions. If climate subsidies were withdrawn, more than 4bn tonnes of CO₂e could be emitted. US emissions would still fall below 28% of 2005 levels, but this would be far short of the 50% target needed for alignment with the Paris Agreement. This could lead to additional climate damages amounting to around $900bn, Carbon Brief warns.
IRA- uncertain outlook
However, Nazmeera Moola, chief sustainability officer at Ninety One, argues that it remains far from certain that Trump will repeal IRA subsidies: “While a red sweep is net negative for climate considerations, we do not expect a blanket repeal of all elements of the Inflation Reduction Act. Large portions of the IRA are increasingly being defended by Republicans, whose districts benefit from the investment,” she emphasises.
Indeed, the IRA has attracted over $110bn in EV and battery sector investment, with red states disproportionately benefiting—more than 90% of this investment has gone to Republican-led states, according to Benchmark research. While Trump may be on track to win control over both houses, he could still face pushback from Republican states on reversing the IRA.
Still, Moola warns that some parts of the IRA may be reversed or amended. “If elements like the green hydrogen credits are retained, we are likely to see changes in how they are implemented, which could lead to questionable climate outcomes. A Republican victory also opens the door for EV tax credits to be rescinded,” she warns.
Oil: “drill, baby, drill”
Trump’s victory is widely seen as a boost to US oil and LNG production, which had already increased under the Biden administration. Further surges in production could add to an oversupplied market, amid warnings from the IEA that global LNG and oil prices may peak this decade.
A rising dollar could add further pressure on global commodity prices as investors anticipate heightened US inflation and a prolonged period of high interest rates. Given that the oil trade is dominated by the dollar, its appreciation makes oil relatively more expensive to hold.
Trade – The underestimated factor
Another major factor influencing the energy transition and the wider US economic outlook is the potential for tariffs. Solar panel prices in the US have halved over the past year, largely due to cheaper Chinese imports. The clean energy sector is now divided on the possible effects of a 60% tariff on Chinese goods.
The Washington-based Solar Energy Industries Association (SEIA) reported earlier this year that tariffs on imported solar cells, introduced by the Biden administration, had already led to a loss of more than $19bn in new private sector investment and significant job losses.
This view, however, is not universal. Moola of Ninety One notes that tariffs could offer some insulation for US EV producers against cost pressures from Chinese competitors. “The proposed tariffs would provide some insulation for US EV producers from cheaper Chinese rivals. Other considerations include the effect of prospective tariff hikes on the cost of new renewable projects in the US and the likely expansion of oil and gas exploration on federal lands as environmental regulations are rolled back,” she explains.
Ronald Temple, chief market strategist at Lazard Asset Management, argues that trade remains “the big underestimated part of policy.” Speaking at Room151’s Annual Investment Forum, he warned, “I don’t think we are pricing this correctly.”
“Most asset owners assume Trump’s talk of tariffs is merely negotiating bluster. But I think that is a fundamentally unwise assumption; you should at least consider a bear case where Trump actually does what he says,” Temple advises.
A bear scenario, according to Temple, should consider a 10% tariff on all imports and a 60% tariff on Chinese goods. “To give you a sense of the macro implications, it could raise US CPI by 200 basis points and lower GDP by 100 basis points. Analysis also suggests it would reduce Eurozone GDP by 100 basis points, and Chinese GDP would fall by 2.5%. This would be a massive shock to the global trading system. As an investor, I worry about its impact on corporate profit margins,” he warns.
