The 2024 US presidential election’s potential impact on the energy transition

Much debate and analysis has focused on what the result of the 2024 US presidential election could mean for key markets, particularly in sectors considered to be favored by one candidate or the other. Within that, the energy transition remains a key area of focus. The Democrats are generally expected to continue their support for decarbonization through measures such as the Inflation Reduction Act (IRA), limits on new oil and gas expansions, and incentives for consumers to switch to electric vehicles (EVs). Meanwhile, Donald Trump, the Republican party’s nominee, has suggested that he would strive to reverse these efforts and support oil and gas at the expense of cleaner sources of generation. As always, the details are not as clear cut as the headlines would suggest. We take a look at some of the key areas of debate and what a change in policy may bring.

It almost goes without saying that we think a Democratic victory in the 2024 election would be seen as a positive for clean technology. Given the pressure on the space throughout 2024, we would attribute this at least partially to markets pricing in some probability of regulatory changes from a Republican victory.

Conversely, a second Trump administration, especially one backed by a Republican-controlled Congress, could lead to legislative changes that might significantly hinder clean energy initiatives. Much of this is centered on the implications for the IRA.

Sections of the IRA possibly at risk

The IRA was designed to accelerate the energy transition, while remaining overall “revenue neutral”—thanks to funding from reducing government drug spend. The IRA not only seeks to achieve decarbonization but also incentivize US manufacturing. Indeed, one could argue that in many cases it has served to subsidize the production of EVs, solar and wind in the United States, while the government has created protectionist barriers around these industries from cheaper imports. By way of example, in markets such as solar or EVs, US pricing remains well above the levels seen globally.

At the overall level, unwinding the entire IRA would be a difficult task, involving legal challenges that could stretch on for several years. We think that if Trump’s Republicans take control of all three levels of government, some areas of the Act would be more at risk than others, as amending the Act would be easier than canceling it. Some of its provisions are relatively low-cost and have a high impact on job creation, particularly in Republican states. Meanwhile, other areas carry uncompetitive costs, rely heavily on subsidies and have more limited job creation. We view these areas to be most at risk of being cut or repealed.

Our thoughts on a few of the sectors at risk of disruption are below:

The existing solar subsidy (the Investment Tax Credit or ITC) first became law under President George W. Bush in 2005 and Congress has repeatedly extended it since then. We believe it survived Trump’s first presidency because of the largely positive impact it had on job creation in Republican states—at a relatively low cost to the government. While the cost of credit has risen with market growth, the current job impact is more pronounced than ever with the announcements of multi-billion-dollar investments in states such as Ohio, Alabama, Tennessee and North Carolina.

We think solar companies may be vulnerable in the short term given the political uncertainty ahead, as some stocks in the industry collect substantial direct subsidies under the IRA. This setback would come on top of near-term headwinds from interest rates and grid connection delays. Offsetting potential IRA changes would be steeper restrictions on Chinese imports that Trump has suggested would come with his presidency. This cuts to the heart of the issue—the IRA is largely designed to create US manufacturing jobs in Republican states to replace Chinese imports. Thus, subsidizing domestic manufacturing jobs may be seen as the more attractive of the two options, even by the Republican party.

We think political risks to the solar industry are modest, given it remains the cheapest abundant source of power in the country and has significant growth potential—whether the government provides subsidies or not. We believe exposure in this space, makes sense, particularly to companies that have domestic US production and we believe could benefit from a tougher environment for Chinese imports.

We see similar risks for the wind sector as for solar. However, the onshore wind market is more mature, making the range of outcomes narrower. Importantly for offshore wind, in which investors expect significant growth, pricing is determined at the state level and largely free from federal involvement. The main risk to this subsector is therefore more likely to come from a potential executive order creating a moratorium on new offshore wind approvals. A moratorium is the same “tool” President Biden used upon taking office to stop new oil and gas licenses from being approved. Trump has specifically called out offshore wind as something he is opposed to. While we think this may largely be rhetoric at this stage, offshore wind exposure will continue to focus on areas where we are most confident around growth, such as in the United Kingdom.

For EVs, we do think there is a meaningful risk of a removal of subsidies in the United States. The existing credit of US$7,500 at purchase seems firmly at risk under a Republican presidency and we expect most companies are already operating under the expectation that it has a chance of being removed in the near term.

As global investors, we take confidence in the fact that the global EV market is mostly concentrated outside of the United States, with approximately 60% in China and 25% in Europe.¹ The United States has already fallen behind, and while it is a potential marginal source of demand, it does not currently drive the EV market.

Moreover, the EV transition is proceeding because of company commitments to produce the vehicles, which remain largely intact. We expect the United States will probably begin to accelerate the transition to EVs through 2025 and 2026, as pricing becomes more competitive compared to traditional combustion engine vehicles. State-level mandates (of which there are 31, with varying levels of commitment and timelines) also support further growth in US EVs going forward. The key risk here is that adoption could slow rather than that trends could reverse.

Aside from the above three areas, we see aspects of the legislation at greater risk, particularly those that incentivize what we consider more speculative areas, such as hydrogen or carbon capture. We expect energy companies to keep pushing for less aggressive subsidies in this area, and we view this as a low-jobs, high-subsidy part of the IRA that remains at risk. From an investment standpoint, we do not see this industry as likely to achieve profitable growth. Thus, we expect to continue to avoid investing in hydrogen companies until we see more evidence of sustainable profitability.

Conclusion

On balance, a Republican victory in the US election would not be supportive for global action on climate change but may have less direct impact on key areas that are already cost-competitive, such as solar or wind. We expect renewable energy and EVs would continue to grow under a Trump presidency, but at a slower rate than under a Democratic president. In many cases, state-level mandates, corporate commitments and economics are the primary driving factors behind the energy transition, rather than solely federal policy.

It is also worth highlighting that while the outcome of the November election could have a significant effect on the world’s largest economy, it will likely have less impact on the prospects of businesses primarily exposed to Europe. Europe is where we still see what we consider attractively valued and impactful companies within the theme of climate change.

The US election has many different possible outcomes, and as a portfolio management team, we continue to debate and discuss portfolio impacts regularly. It should be noted that US politics is only one of many topics creating volatility around climate-change investing. Other topics include interest-rate expectations, European politics, raw material price volatility and protectionist policies. While recent history has been volatile, we continue to see the space as potentially offering what we consider significant medium-term value. We remain excited about the prospects of investing in businesses providing the products and services that are needed to decarbonize the global economy.