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Posted on Aug 26th, 2022

The Quest for Renewables: Energy Transition in the United States

CONTRIBUTING AUTHORS

Jeremy Lin, CFA

Portfolio Manager

Sean Phelan

Content Marketing Specialist

Transitioning to clean energy is crucial in addressing the existential threat of climate change. But while most countries say they’re on the same page and vow to work together, petty geopolitical issues get in the way and hinder any progress in what seems to be one step forward and two steps back.

For the latest entry in our Quest for Renewables series, we’re taking a look at the United States. The US is in a unique situation as their role in the fight not only involves what happens within their own borders, but because they are one of a few that can affect change worldwide.

Key Takeaways:

  • The recently passed Inflation Reduction Act is the most significant piece of legislation tackling climate in the history of the United States.
  • The United States and China are the world’s largest carbon emitters, and their strained relationship affects any global climate initiative.
  • President Biden introduced the Build Back Better World (B3W) initiative last year to help developing countries build clean infrastructure this decade. Still, there have been very few announcements since, and many key areas have largely gone unaddressed.

The Inflation Reduction Act

Heralded as the most significant climate legislation in the history of the country, the recently passed Inflation Reduction Act will invest $369 billion in climate solutions that will move the US closer – but not all the way – to its Paris agreement target. Partially restoring the country’s credibility to lead climate action on the global stage, the bill will accelerate the transition to clean energy with initiatives like investing $60 billion in manufacturing solar panels and other clean energies in the US, increasing their energy security.

Under the current policies, the US is on track to cut its emissions between 24% and 35%, depending on the analysis. With the policies introduced in the new bill, they would be on track to cut emissions between 31% and 44%.1

US greenhouse gas emissions comparison
(Source: Rhodium Group)

While these projections are still not enough to meet President Biden’s pledge to cut emissions by 50% by 2030, it does bring the US back on track. As Jesse Jenkins, leader of the REPEAT modelling project at Princeton University, recently tweeted, “[This bill] keeps us in the climate fight and makes it possible that executive action, state and local government policies, and private-sector leadership can get us across the finish line.”2

While this bill does greenlight parts of the Gulf of Mexico and Alaska’s Cook Inlet for oil and gas drilling, think tank Energy Innovation estimates the bill’s positives greatly outweigh any negatives. Their modelling found that for every ton of emission increases generated by oil and gas provisions, at least 24 tons of emissions are avoided by other provisions.3 The bill’s electric vehicle (EV) tax credits are also very strict, imposing materials sourcing and pricing stipulations that some see as counterproductive. It disqualifies battery packs made with Chinese cells or packs with raw materials processed in China, who account for the lion’s share of the world’s raw materials that go into EV cells.4

US-China Relations

The strained relationship between the world’s largest carbon emitters showed some diplomatic momentum at last year’s COP 26, the UN’s Climate Change Conference. However, within days of the historic Inflation Reduction Act, China halted any climate talks with the US in retaliation for House Speaker Pelosi’s refusal to cancel a visit to Taiwan.5

A trade war between these two economic powerhouses has already been a mainstay in the global economy since 2018, causing continuous disruptions to the global supply chain.6 Higher solar panel production and distribution tariffs disincentivize any transition to renewable energy. Without the trade war, demand would be much greater – demand that would have eliminated an estimated 7 million tons of carbon emissions.7

Halting any climate discussion between these two countries is far from ideal in a year that has already seen skyrocketing gasoline prices and shaky energy supplies with Russia’s invasion of Ukraine. As Russia was a major exporter of oil and natural gas to much of Europe, this invasion has caused countries like Germany to return to coal as a stopgap to conserve natural gas reserves.8

While it may seem like the world is taking one step forward and two steps back when it comes to climate, all may not be lost. The two countries reached a last-minute agreement at last year’s COP 26 that called for a decade of bilateral climate work.9 Only time will tell if they will honour that agreement.

Build Back Better World

Last year, G7 partners announced several initiatives to help developing countries recover from the pandemic and build clean infrastructure to align with the Paris agreement’s climate goals. Along with the EU’s Global Gateway and the UK’s Clean, Green Initiative, the US pre-announced the Build Back Better World (B3W). Through B3W, the G7 will coordinate the global scope of the initiative to help low- and middle-income countries build the clean infrastructure the world needs.

While President Biden, President von der Leyen, and Prime Minister Johnson met and issued a set of principles to guide all three initiatives, there have been very few public announcements since. With this uncertainty, E3G notes three areas largely unaddressed: money (where will it come from and how much?), modalities (will these initiatives work together?), and pipeline (will funding be connected to projects, country platforms, or packages?).10

McKinsey & Company estimates that in order to halve the global emissions by 2030 and stabilize the climate, $3.7 trillion of investment in economic infrastructure is needed – every year from now on until 2035.11 With climate change accelerating even faster, this year’s COP 27 is proving to become a watershed moment for climate change. The G7 must provide insight into the unaddressed areas and quickly move to shift the trillions needed.

Infrastructure spending gap among geographies
(Source: McKinsey & Company)

Moving Forward

Achieving carbon neutrality is possible, but petty geopolitical issues must be set aside. The United States is in a position to make meaningful changes in the fight against climate. The Biden administration is making good strides by passing the Inflation Reduction Act and announcing the B3W initiative, but now is the time for more action and less lip service – especially regarding its relationship with China. Any positive steps forward they may take will only give diminishing returns if that strained relationship is not addressed. And quickly.

Climate is a threat that affects us all, and hitting net zero is impossible without the proper raw materials. But the transition to renewable energy, while vital to our survival, also presents considerable investment opportunities. The Purpose Climate Opportunities Fund looks at global natural resources, electricity generation, and the supply chains of geopolitically stable regions. Investing in both renewables and low-carbon fossil fuels serves today's energy needs while providing the sustainability needed for the future.

Because looking towards a greener future also requires looking at today’s reality.


Sources

  1. “A Congressional Climate Breakthrough,” Rhodium Group: https://rhg.com/research/inflation-reduction-act/
  2. Jenkins, J. (@JesseJenkins) [Twitter] July 27, 2022: https://twitter.com/JesseJenkins/status/1552441845485305858
  3. “Modeling the Inflation Reduction Act using the energy policy simulator,” Energy Innovation: https://energyinnovation.org/wp-content/uploads/2022/08/Modeling-the-Inflation-Reduction-Act-with-the-US-Energy-Policy-Simulator_August.pdf
  4. “Manchin rebuffs industry criticism of new EV tax credit,” Ars Technica: https://arstechnica.com/cars/2022/08/the-new-ev-tax-credit-is-unlikely-to-change-despite-industry-criticism/
  5. “China suspends climate talks with US,” Politico: https://www.politico.eu/article/china-suspends-climate-talks-with-us/
  6. “The US-China trade conflict and its impacts to energy security in Asia Pacific,” Konrad Adenauer Foundation: https://www.kas.de/documents/265079/265128/KAS+RECAP+Survey_The+US-China+Trade+Conflict+and+its+Impacts+to+Energy+Security+in+Asia-Pacific.pdf/8bfcb863-4c42-a6ec-070f-4ba9656d8118?version=1.0&t=1586227858013
  7. “Biden must end this ruinous solar power trade war with China, The Washington Post: https://www.washingtonpost.com/opinions/2022/02/01/biden-must-end-this-ruinous-solar-power-trade-war-with-china/
  8. “Europe’s turn back to coal a ‘temporary’ measure in response to Russian gas cuts,” CBC: https://www.cbc.ca/news/science/germany-coal-renewable-energy-climate-russia-1.6500354
  9. “U.S.-China deal boosts climate talks in final stretch,” Politico: https://subscriber.politicopro.com/article/eenews/2021/11/11/us-china-deal-boosts-climate-talks-in-final-stretch-283089
  10. “One vision, three plans: Build Back Better World & G7 Global Infrastructure initiatives,” E3G: https://www.e3g.org/publications/one-vision-three-plans-build-back-better-world-g7-global-infrastructure-initiatives/
  11. “Bridging infrastructure gaps: Has the world made progress?” McKinsey Global Institute: https://www.mckinsey.com/business-functions/operations/our-insights/bridging-infrastructure-gaps-has-the-world-made-progress

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