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The White House versus the Senate – Where next for US climate policy?

This article was written by Impax Asset Management, a specialist asset manager, investing in the opportunities arising from the transition to a more sustainable global economy

A new dawn for US climate policy? How the Biden administration could proceed with a new climate agenda.

Despite the Trump campaign’s much-anticipated filing of lawsuits challenging the election results, a Biden victory seems all-but inevitable. Yet his win did not prevent the withdrawal of the US from the Paris Agreement, over three years after Donald Trump signed an irrevocable timetable for an ‘America First’ departure. Biden has vowed to re-join Paris after taking the presidential oath on 20 January, but with a likelihood of a Republican-controlled Senate, how far would his administration be able to reverse Trump’s climate change rollbacks?

The failure of the Democrats to wrest decisive control of the Senate from the Republican party poses significant challenges for the new administration to pursue its climate and energy policy with legislation. The Democrats have an outside chance of eking out effective Senate control come January via run-offs for Georgia’s two seats, but they face an uphill battle.

However, the White House wields significant executive power and can accomplish at least some of the Biden agenda without cooperation from the Senate.

Route 1 to net zero?

The Biden election platform included a climate plan to invest USD 2 trillion over four years in clean energy, low-carbon transport, building energy efficiency and infrastructure. It targeted zero-emissions power generation by 2035 and a net-zero economy by 2050. It is heavily orientated towards job creation.

For example, it seeks to create 12 million jobs by upgrading four million buildings and weatherising two million homes. Its goals of building 500 000 new electric vehicle charging stations, invest in transport, water, electricity and broadband infrastructure, and clean up brownfield sites and exhausted fossil fuel wells and mines would also create millions of jobs.

If the Republican Senate leadership reverts to its strategy during the Obama years – of an outright refusal to work across the aisle on any legislative proposals – an overwhelming majority of this agenda is likely to be compromised. The main constraint on Biden’s agenda, with the Senate staying red, would be through appropriations.

However, given that the US is facing significant economic disruption caused by the pandemic, there is a serious prospect of parts of the Biden plan passing the Senate in the form of elements embedded in an early COVID relief/recovery effort.

A recovery bill under Biden is likely to look different to recent stimulus proposals and will almost certainly include environmental elements linked to job creation, in line with the approach in the Biden climate plan.

Infrastructure spending in particular would create employment, including in Republican-leaning areas where senators will come under political pressure to support additional fiscal stimulus. While legislation is unlikely to be passed until after the inauguration, work on the shape of the package will start over coming weeks.

We’ll always have Paris

Moreover, the White House retains significant executive powers that a Biden presidency will exercise in pursuit of its climate and energy objectives.

Biden has confirmed that his administration would re-join the Paris Agreement. That agreement was carefully designed not to require Congressional approval.

Such a move would be positive for the international climate effort. While other leading countries and regions have doubled-down on commitments to tackle climate change – note the net-zero pledges by the EU, China, Japan and South Korea – a lack of leadership from the US has slowed progress. For countries such as Brazil, it has provided cover for reversals in climate action.

On the domestic front, the measures spelt out in 2015 by the Obama administration to meet its Paris goal – a 26-28% reduction in greenhouse gas emissions by 2025 compared with 2005 levels – were designed to be achievable through executive action alone.

The Biden White House would likely restore some version of Obama’s Clean Power Plan that attempted to reduce power sector emissions and promote renewables. It could also take additional emissions-reducing executive actions such as improved vehicle energy efficiency standards and reductions in methane emissions from the oil & gas sector.

The White House could advance its climate agenda through the federal government’s enormous procurement spend. This could extend to the US military – which has increasingly expressed concerns about the security implications of climate change.

And the president can wield significant influence through personnel appointments. Across the federal government, Trump appointees have undertaken an extensive rollback of environmental regulations and a gutting of the ability of federal agencies to pursue their mandated roles. The Biden administration’s appointees will move aggressively to reverse this process.

It is worth bearing in mind that the clean energy sector has managed to thrive despite four years of indifference at best, and opposition at worse, from the Trump administration. Technology cost reductions, supportive state-level policy and strong demand from businesses responding to customer pressure have all helped renewables grow significantly with extremely limited federal support.

While ambitious legislative support would provide a significant accelerant, its absence will merely slow, rather than reverse, the sector’s growth.

Beyond climate

More broadly, the sustainable investment community hopes that a Biden presidency will reverse the current administration’s hostility towards ESG integration and disclosure. For example, new leadership at the Department of Labor would likely scrap its proposed rule requiring plan fiduciaries to prioritise the financial considerations of beneficiaries over social and public policy objectives – a move seen by many plan providers as preventing consideration of ESG factors.

Similarly, new commissioners at the Securities and Exchange Commission would likely be supportive of mandating ESG disclosures by companies, although it is uncertain whether this will include the disclosure of climate-related risks under TCFD.

They would also be likely to undo the Trump administration’s attempts to make proxy voting more onerous and expensive and to make it more difficult for shareholders to file shareholder proposals.

There is an opportunity for a Biden administration to go further than the Obama White House in actively promoting the sustainable finance sector. The US Social Investment Forum has proposed, among other things, a White House Office of Sustainable Finance and Business to act as ‘a focal point in the administration’ to promote “the continued growth of sustainable investment and accelerate the shift from a shareholder-centric company model to a multi-stakeholder model”.

It should be noted as well that Ceres is currently drafting a similar transition document with proposals more narrowly focused on climate and environmental issues.

There is much that a Biden administration can do to address the profound sustainability challenges facing the US and the world – challenges that a re-elected President Trump would most likely have continued to ignore.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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