A new day?
President Biden sets out to change the course of US climate policy
President Biden pursues an ambitious climate Agenda
Substantial investment in the transformation of the US economy
Positive effect for the ESG investment market
Some US companies will benefit, while others will lose out
Political paradigm shift in the US
What links Kelly Loeffler and David Perdue to climate change? At first glance, not much. During their terms of office as Republican senators for the state of Georgia, climate and environmental policies did not rank high on their agendas. In fact, Perdue had a reputation for being a coal industry supporter and a climate change denier.1 In the run-up to the presidential election, both senators presented themselves as loyal supporters of Donald Trump, who had been ignoring and, in some cases, even sabotaging efforts to mitigate climate change.
But now, Loeffler and Perdue may – entirely inadvertently – have played a crucial part in changing the course of US climate policy, because the balance of power in the US Senate has tipped as a result of their defeat in the run-off election in Georgia. The Democrats now have a narrow majority in both chambers of Congress (the Senate and the House of Representatives), which perform important functions relating to the federal budget, legislation, and the scrutiny of government.
This means that the tide might be about to turn in the fight against climate change. On the campaign trail, Joe Biden proclaimed that there is “no greater challenge facing our country and our world” than global warming. For the next two years, at least, the 46th President of the United States will be able to pursue his policy agenda with the backing of a Democrat-controlled US Congress.2
The recently adopted economic stimulus package that had been debated by Democrats and Republicans for months includes schemes to promote green technologies such as solar and wind power. But based on his election manifesto, Joe Biden wants to do more than make minor adjustments here and there. He wants to completely overhaul US climate policy in order to put it back on its feet.
US government – from hindrance to driver of climate change mitigation
The contrast could hardly be starker: Donald Trump repeatedly questioned the existence of man-made climate change and described it as a “concept [...] created by and for the Chinese” with the aim of weakening the US economy. During his term in office, Trump withdrew the US from the Paris Climate Agreement and took steps to relax or abolish federal regulation on environmental and climate protection. The Climate Deregulation Tracker published by the Sabin Center for Climate Change Law of the Columbia Law School lists 172 measures taken by the Trump administration over the past four years.3
These include giving approval for drilling for oil and gas, clearing vegetation and constructing roads in nature conservation areas, and reducing emissions standards for conventional power plants. During Trump’s presidency, climate protection in the US was promoted primarily by cities, counties and federal states, such as California, which formed climate action initiatives in 2017.4 The new US government under President Biden will no longer hold back initiatives combating climate change but will provide its own input and return to a leadership role in this field.
Ambitious climate plans
In concrete terms, what climate policy action can we expect from President Biden? The former senator for Delaware announced ambitious plans as part of his election campaign. The ‘Biden Plan’ would see the US become climate-neutral by 2050. The country’s power generation would be completely carbon-free by 2035. Achieving these goals requires the large-scale and complex transformation of the US economy. Biden intends to invest US$ 2 trillion in this transformation in order to effect tangible change in the US economy and in society. The Democrat majorities in both chambers of Congress provide Biden with the political backing he needs to implement substantial parts of his policy agenda.
But this course of action will be successful only if he is able to unite the Democratic Party behind this goal. In reality, the party is made up of many diverse factions and not all of them regard climate protection as the top priority. This is all the more relevant given that the Democratic majority in the Senate is extremely slim, meaning that Biden will also need to win over Democratic senators from more conservative states where coal still plays an important role. The extent to which the political achievements of the Biden administration will live up to the ambitious goals in the election manifesto thus remains to be seen. However, at the end of December, Biden reiterated his determination to establish climate policy as the most important pillar of his government’s activities.
What impact are these transformation steps going to have on key sectors of the US economy? There is a huge need for change in US power generation if the sector is to become carbon-neutral by 2035. In 2018, the generation of electricity accounted for 27 per cent of total greenhouse gas emissions (see figure 1).
Figure 1: Proportion of greenhouse gas emissions in the US by sector in 2018
As part of Biden’s plan of ‘Building Back Better’, investment in clean energy, clean technology and research programmes will be increased substantially. There will be more support for small- and large-scale (onshore and offshore) solar and wind farms, and the production capacity of offshore wind farms in US waters will be doubled by 2030. New technologies such as green hydrogen will also receive significant funding over the next four years.
In addition, Biden wants to conduct further research into nuclear power, which is a controversial but low-carbon energy source. Conventional energy sources, on the other hand, will be regulated more tightly. The methane emission caps for new oil and gas fields could be lowered substantially. Oil and gas extraction on public land and in national parks (including in the Arctic) could effectively become unprofitable due to stricter requirements and no further authorisations for projects of this nature will be granted.
The transport sector is another major contributor to US carbon emissions. According to the Biden Plan, electric-powered transport is key to reducing this sector’s carbon footprint. To promote this technology, Biden intends to fund 500,000 charging stations for electric vehicles and to reintroduce tax incentives for all-electric mid-size cars. The public sector will also place greater emphasis on good climate credentials when procuring new vehicles. In addition, emissions regulations suspended by Donald Trump will be reinstated and further tightened. Biden wants all newly manufactured buses in the US to use zero-emission technology from 2030. Further plans include a substantial expansion of public rail networks, both at long-distance level and at local transport level in cities with upward of 100,000 residents. In aviation and shipping, a greater focus will be placed on biofuels that could be made from agricultural commodities produced in the US. Established industries (e.g. the automotive sector) will be supported on their green transformation journey.
The Biden Plan’s objective for the US real estate sector is to reduce emissions by 50 per cent by 2035. This will be achieved by modernising existing properties in order to improve energy efficiency and introducing tougher regulation. For example, the Democrats want to make it a requirement that new-built commercial properties are carbon-neutral from 2030. Stricter regulations for air-conditioning and heating systems and for lighting also form part of the strategy.
The Biden Plan also identifies huge potential for reducing carbon emissions in industrial production through carbon capture, utilisation and storage (CCUS). Biden wants to boost research in this area, double the current level of investment in CCUS and introduce tax incentives. This is a topic that many Republican senators also regard as a priority.
President Biden intends to return to a more rigorous approach to monitoring and enforcing existing environmental legislation and standards. This will involve reissuing the Environmental Protection Agency (EPA) with all powers required to systematically sanction environmental non-compliance, in contrast to past practice. The calculation of the ‘social costs of carbon’ could also change under President Biden. In the US, the application of many laws is based on a cost-benefit analysis regarding greenhouse gas emissions. In March 2017, Donald Trump introduced a change to the calculation method, which diminished the incentive effect of this instrument. A stricter approach to including the cost of climate change in the calculation would reduce the chances of success of lawsuits that challenge tougher emissions standards. In addition, Biden is planning new legislation that would increase the extent to which managers can be held personally accountable for environmental offences.
Against the backdrop of these ambitious goals, Biden presented a team of experienced professionals at the end of December who will coordinate domestic political action in the field of environmental protection and climate change mitigation. Arguably the most important figure in this team will be Brian Deese, who has been appointed Director of the White House’s National Economic Council. The former Global Head of Sustainable Investing at BlackRock will be responsible for ensuring that the topic of climate change is firmly embedded in all areas of the overall strategy. Biden’s pick for the post of National Climate Advisor is Gina McCarthy, who headed up the EPA from 2013 to 2017 and played a key role in shaping regulation in the field of environmental policy in the Obama administration. The new Chair of the Council on Environmental Quality will be Brenda Mallory. Her job is to coordinate action by federal states and authorities in the fight against climate change. Mallory previously worked for the Southern Environmental Law Center, an independent non-profit environmental public interest law firm. The newly empowered EPA will be headed up by Michael Regan, who most recently served as Secretary of the North Carolina Department of Environmental Quality. He had previously worked for the EPA from 1998 to 2008. A range of other personnel choices further support the impression that Biden is taking climate policy seriously. The designated Energy Secretary Jennifer Granholm strongly supported the promotion of renewable energy technologies during her tenure as Governor of Michigan and incoming Secretary of the Interior Debra Haaland is expected to take a stricter approach to protecting public land such as national parks and wildlife reserves.
US aspires to become a global leader in climate policy
President Biden’s agenda for climate action is, however, not focused purely on domestic policy. The election manifesto states that Biden will use every available instrument of US foreign policy in order to encourage the rest of the world to raise their climate protection targets in line with the US. Unlike Donald Trump, Biden will focus on cooperation with allied countries and a more conciliatory rhetoric and his foreign policy will therefore diverge clearly from the Trump administration’s approach. Biden announced on the campaign trail that, under his leadership, the US would rejoin the Paris Climate Agreement as quickly as possible, on day one of his presidency. To ratify the agreement, the US would have to set itself a climate protection goal. As a first step, Biden could reinstate the goal that the US initially adopted in 2016 – a reduction of greenhouse gas emissions of 26–28 per cent by 2025 compared with 2005. But the agreements specified that all signatory countries will have to put forward new, more ambitious targets at the next summit in Glasgow at the end of 2021.
In addition, the US will convene a climate summit with representatives of the world’s biggest economies within the first 100 days of Joe Biden’s presidency. It is already becoming clear that the country wants to become a global leader in the fight against climate change.
Another personnel choice that has already been announced by the incoming US president underpins this impression. The appointment of John Kerry as Special Presidential Envoy for Climate marks the return of a foreign policy heavyweight to the political stage. This newly created post is designed to help coordinate US foreign policy on the subject of climate change. Kerry served as Secretary of State under Barack Obama from 2013 to 2017 and played a leading role in the negotiation of the Paris Climate Agreement. In his new role, Kerry will have the status of a minister and will also be a member of the National Security Council. This appointment by Joe Biden emphasises that his administration regards climate change as a serious national security concern. At the end of November, Kerry commented on his objectives saying that he was “returning to government to get America back on track to address the biggest challenge of this generation and those that will follow”.5 He also asserted that the Biden administration would treat the climate crisis “as the urgent national security threat it is”.
The change of direction in US foreign policy could also have an impact on relations with China. The transition to a new president does not automatically resolve existing trade disputes and geopolitical tensions. At most, the change in approach is likely to manifest itself in a more conciliatory tone. China remains a rival of the US, but the fight against climate change could present a possible platform for collaboration between the two nations. After all, the Chinese government has announced plans to reduce its country’s carbon emissions to net zero by 2060. Collaboration would be advantageous for both China and the US, because combating climate change is a fight for the public good and bringing about a successful transformation will require international cooperation. The US could also exert its influence to try to redirect Chinese investment away from coal and infrastructure projects under the New Silk Road plan and towards more sustainable technologies.
Other countries could also find themselves under increased pressure. For example, Biden could use US trade policy to encourage export-oriented countries with a lacklustre track record on environmental protection, such as Brazil and Australia, to meet environmental protection goals.
The US as a partner and rival to the EU
What does Joe Biden’s climate policy mean for the European Union? First and foremost, the US could become a driver of global climate action rather than a hindrance. This improves the chances of significant global climate goals being agreed and actually achieved. The EU would also benefit from stronger US backing on climate matters in the international arena. On the other hand, a transformation of the US approach to climate policy could put pressure on the EU to step up its own investment and push ahead with even tougher environmental regulation. The EU presented its own plan, the Green Deal, in December 2019. But the US is getting back on the front foot now. The Biden Plan can be regarded as an attempt to promote transformation primarily through investment. This US model could prove superior in terms of its capacity for innovation.
From the point of view of Germany and the rest of the EU, there is a risk that billions of dollars of investment in research and development will allow the US to gain a leading position or strengthen its leadership in innovative technologies such as hydrogen technology and electric-powered transport. More competition and innovation in these areas would be desirable from a global perspective, but from a European industrial policy standpoint, it is – at best – a mixed blessing.
President Biden is likely to interact much more warmly with the EU than his predecessor. Both sides are also aligned on many aspects of climate policy. But a number of Biden’s climate policy positions are certainly controversial and will meet with little approval in the EU. For example, Biden does not intend to implement a wholesale ban on fracking. He is also more open to nuclear energy than some EU member states, including Germany. His election manifesto clearly states that he wants to promote research and development relating to nuclear reactors.
Potential implications for the capital markets
The new US climate policy strategy also affects the financial sector. Primarily, it will boost the market for sustainable investments. President Trump made it difficult for pension funds to take account of sustainability (ESG) criteria in their investment process. Many US funds are therefore still heavily invested in oil and gas companies, energy utilities and arms manufacturers. Trump also implemented a policy that prohibits public-sector pension funds from investing in ESG funds from 2021 and reduced the disclosure requirements for listed companies regarding sustainability key figures.
As a consequence, US investors are currently lagging behind noticeably with regard to ESG investing. According to figures published by Morningstar, around US$ 1,400 billion worldwide was invested in funds classified as sustainable as at the end of 2020 (see figure 2). European investors account for 85 per cent of this volume, US investors for merely 15 per cent. This is all the more surprising given that the US capital markets are significantly bigger overall. Currently, Asia and the rest of the world barely feature in the sustainable investment picture. The EU/US split regarding new investments in sustainable funds looks very similar and, if anything, the gap is currently widening.
Figure 2: ESG assets by region (US$ billion): Europe clearly dominant
But the political shift in the US will change the market for sustainable investments fundamentally. The Biden administration is expected to reverse the restrictions implemented by Donald Trump and increase the disclosure requirements for listed companies regarding sustainability metrics such as carbon emissions. This could increase the pressure on companies that have not yet formulated a sustainability strategy. Companies with a focus on sustainability and those with a credible transformation plan could benefit both from Biden’s government investment programmes and from private capital from ESG investors.
But differences exist not only between more and less sustainability-oriented individual companies. The climate policy U-turn in US politics will also have varying effects on entire industries. Some are likely to benefit, while others are facing challenges and will have to undergo a difficult transformation process (see the examples in figure 3).
Figure 3: Impact of new US climate policy on the capital markets –
potential of selected industries and companies
Stricter regulation will increase the pressure on companies with a large carbon footprint such as those in the oil and gas sector. Companies that have invested in drilling for oil and extracting shale gas in national parks, nature reserves and nature conservation areas that were approved for exploration by Donald Trump in recent years will feel the impact particularly keenly because the Biden administration is highly likely to fully reinstate the protected status of these areas in the near term.
Fossil fuel extraction on private land could also become more costly as a result of stricter environmental requirements under the Biden administration. Within the industry, bigger companies that have already developed strategies and business activities in the field of sustainable power generation and decided against investing in the new areas approved by Trump will cope better with the coming changes. In fact, the industry seems well aware that a policy shift is coming. An auction of oil exploration rights in an Alaskan national park in early January attracted very little interest and there was a notable absence of bids from any of the major oil companies. Pipeline manufacturers are also likely to be among the companies that will face challenges. This is primarily because new projects will be subject to tougher environmental regulation, which will make it more difficult to generate future growth.
Parts of the chemical sector will also be adversely affected by the change of government. Stricter environmental requirements relating to fracking could diminish the commodity cost advantage and thus reduce export opportunities for products such as ethylene, a basic product used in the petrochemical industry that is made from ethane. The industry has significantly expanded its capacity in this segment in recent years, which could now become a burden.
Tighter environmental standards are also likely to have an adverse impact on the business outlook of these companies. Tougher regulation of certain chemical products (per- and polyfluoroalkyl substances, PFAS6), which are used in areas such as single-use packaging and the textile industry but have proven potentially harmful to humans and the environment, will pose challenges for the industry and drive up costs associated with higher environmental standards.
Companies in the wind and solar power industries, on the other hand, could benefit from the coming changes. They stand to gain from the plans for a wholesale reorganisation of the energy sector and power generation, supported by tax breaks and extensive investment, which are set out in the Biden Plan. Among these beneficiaries are companies such as specialised rotor blade manufacturers, wind turbine manufacturers and producers of energy storage systems.
Biden’s plans for the transformation of the transport sector are favourable for companies in the field of electric-powered transport. Expanding the national charging point infrastructure is a project that the incoming president is likely to set in motion early on. The possible implementation of tougher exhaust emissions standards and fuel consumption requirements for cars could give manufacturers of electric vehicles a competitive edge over traditional car makers. Manufacturers of pick-up trucks and SUVs, which are very popular in the US, would probably be hit particularly hard by these measures.
Biden also wants to invest in the US rail network. Rail sector companies specialising in the production of train carriages and locomotives or in rail infrastructure could benefit from this in the medium term. Freight operators, on the other hand, will probably face rising costs due to the high proportion of oil and coal companies in their customer base and the diesel fuel consumption of their locomotives. However, the proportion of freight transported by rail is likely to increase in the medium term because rail haulage has a smaller carbon footprint. In addition, companies are experimenting with alternative drive systems for freight trains, such as hydrogen technology.
Engineering companies in the field of environmental protection technology and manufacturers of insulation materials, LED lighting and building control systems could also be among the winners of the change in US politics. And plans to modernise four million buildings and refurbish two million homes to make them more climate-friendly should benefit the construction sector.
As the next President of the United States, Joe Biden has the opportunity to change US climate policy fundamentally with the political backing of Congress. The climate policy goals and domestic measures that Biden announced on the campaign trail are ambitious and suggest that he is going to make significant efforts to drive forward the green transformation of the US economy and US society.
If these plans are put into practice, the market for sustainable investment could change significantly, both in the US and – ultimately – worldwide. The US will become a much more attractive market for ESG investors. For European investors too, it may therefore be worthwhile looking at ESG investments through a more international lens, especially with regard to the US. The public spending plans of the Biden administration could generate significant economic momentum and sustainability-oriented companies will be in a particularly good position to benefit. This is likely to create additional incentives for companies to hone their sustainability strategy.
Outside the realm of sustainable investing, investors will need to step up their risk management with regard to US companies in sectors that are problematic from a climate policy perspective. Like their European counterparts, many US companies will have to undergo a complex transformation process that will temporarily affect their revenue and profit performance. Some companies will also be forced to write down ‘stranded assets’ on their balance sheets.
In the foreign policy arena, the US seems set to resume a global leadership role in climate matters. The return of the US to the Paris Climate Agreement, which Joe Biden has announced for day one of his presidency, will be only the opening gambit.
These developments are good news for the global fight against climate change. The US is the second biggest global producer of carbon emissions after China and accounts for around 15 per cent of global carbon emissions.7If Biden successfully brings about a green transformation in the US, this alone could have a tangible effect on the global climate. According to calculations by Climate Action Tracker, a consortium of environmental organisations, Donald Trump’s election defeat and the turnaround in US climate policy under President Biden could reduce global warming by 0.1°C by the year 2100.8 But even more significant than the US contribution to curbing global warming will be international collaboration on climate matters. If the US aspires to a global leadership role in the field of climate policy, the Biden government will use its weight on the political world stage to promote greater international cooperation on climate issues and encourage less committed countries to pursue more ambitious climate goals.
This means that the election of Joe Biden may have improved the chances of the international community succeeding in meeting the goals of the Paris Climate Conference, i.e. limiting global warming to below 1.5°C if possible.
- 1 https://cleanenergy.org/blog/wtcs-perdue/
- 2 https://joebiden.com/climate-plan/
- 3 https://climate.law.columbia.edu/climate-deregulation-tracker, as at 12 January 2021
- 4 Siehe auch: https://www.wearestillin.com/signatories
- 5 John Kerry on 23 November 2020 on Twitter: “I’m returning to government to get America back on track to address the biggest challenge of this generation and those that will follow. The climate crisis demands nothing less than all hands on deck.”
- 6 See also: AnGEDACHT ‘Asbestos, glyphosate…PFAS?’, published in September 2020, available from https://institutional.union-investment.de/startseite-de/Kompetenzen/Nachhaltige-Investments/Themen/PFAS.html
- 7 Information correct as at 2018, https://de.statista.com/statistik/daten/studie/179260/umfrage/die-zehn-groessten-c02-emittenten-weltweit/
- 8 https://climateactiontracker.org/documents/829/CAT_2020-12-01_Briefing_GlobalUpdate_Paris5Years_Dec2020.pdf