Market

How Congress can save Biden’s climate agenda

Three things to start:

Welcome back to another Energy Source. These last two stories hit a common theme: the need for energy is adjusting politics. In China’s case, the state company Sinopec’s three new deals (one signed by its affiliate Unipec) were struck before the energy crisis in the country really started to bite. But it’s clear that China realises the strategic imperative in signing up long-term fuel supply where it can.

Venture Global LNG, the US exporter selling the cargoes to China, already has agreements to ship some natural gas to Europe. But coming on top of Cheniere Energy’s recent deal to supply China’s ENN with natural gas, it seems increasingly plausible that the next wave of American LNG construction will be financed by Chinese buyers. That’s quite a turn of events given the escalating political tensions between Washington and Beijing.

As for the European Commission’s green taxonomy, natural gas’s inclusion would dismay environmentalists. (Nuclear’s inclusion would delight some and disappoint others.) But in the grip of deepening energy security anxieties and an unprecedented supply crunch, politicians across Europe — a continent whose leaders like to tout their green energy credentials — are keenly aware of political blowback.

In fact, while one section of the EU Commission is talking about whether to reward or penalise natural gas, the energy commissioner Kadri Simson, has urged countries to cut consumption taxes and talked about the possibility of jointly buying natural gas to guarantee its availability.

In today’s Energy Source, we ask what can be salvaged from President Joe Biden’s climate and energy plans, which took a West Virginia-sized hit last week.

And which energy equities have done best so far under Biden? Data Drill reveals.

This article is an on-site version of our Energy Source newsletter. Sign up here to get the newsletter sent straight to your inbox every Tuesday and Thursday

Salvaging the Biden climate plan

There is a scramble under way on Capitol Hill to keep the Biden administration’s emissions goals on track after West Virginia senator Joe Manchin torpedoed the climate centrepiece of the president’s multitrillion dollar spending package.

The moderate Democrat became the focus of environmentalists’ ire after confirming he would not back proposals for a so-called “Clean Energy Performance Program”. Manchin argued that the policy — a carrot-and-stick approach to weaning utilities off fossil fuels (see here for more details) — was “using taxpayer dollars to pay private companies to do things they’re already doing”.

That leaves the president and his party in a bind. The Democrats’ razor-thin majority in the Senate means every vote counts. And without Manchin’s support, the spending bill cannot pass.

The CEPP — alongside a sweeping programme of clean energy tax credits — was at the heart of Biden’s plan to achieve an 80 per cent carbon-free power sector and slash economy-wide emissions to half of 2005 levels, by the end of the decade.

On its current trajectory, US emissions will only fall by 17 to 25 per cent by 2030, according to a report by the Rhodium Group.

If the president’s emissions goals are to be achieved, alternatives will be necessary. And Biden is anxious for a substantial domestic win on climate before he travels to COP26 in Glasgow in two weeks’ time.

So where to from here? There are a number of options on the table:

1. CEPP 2.0

Manchin has always been sceptical of the CEPP. He maintains that utilities are transitioning anyway, so paying them to do so would be a waste of money. (That argument doesn’t take into account the pace of the transition — which would be much quicker under the CEPP).

His decision not to put forward any alternative versions of the programme disappointed environmentalists. Yet there is still some hope that a reworked (and diluted) CEPP might emerge from the ashes.

“That’s the simplest solution,” said Paul Bledsoe, a former climate adviser to the Clinton White House now with the Progressive Policy Institute. “Just to change the energy payment program in ways that are amenable to [Manchin] and the concerns of electric utilities.”

Those tweaks, argues Bledsoe, could include cutting the annual growth rate required from utilities, cutting the subsidies provided, removing the penalty for those that do not hit targets, or changing the carbon intensity requirements to make it more accessible to natural gas and coal plants coupled with carbon capture technology.

2. Carbon price

Failing the emergence of a CEPP phoenix, some have offered renewed hopes of a carbon price as an alternative.

But that mechanism has become politically toxic in the US, even though it has already been adopted in various guises in Europe, Canada and China. It has come under fire both from the US right — where it is seen as just another tax — and the left, where climate justice advocates argue it risks disproportionate harm to poorer communities. Biden has done his best to steer clear of the subject.

Whatever its merits, it is probably even less politically palatable than a CEPP at the moment. Even those who do favour a carbon price as an alternative will be reluctant to push one through while fuel prices are soaring.

“I think it’s political suicide for the Democrats to implement,” said Lindsey Walter, deputy director of the Climate and Energy Program at think-tank Third Way.

Objections have already emerged. Manchin has said a carbon price is “not on the board”. Jon Tester, the Democratic senator from Montana, has also said he is “not a fan”.

“It’s a hopeful pivot, but I think you don’t have the votes for it. And even if you did, the backlash would be, I think, really devastating for Democrats,” said Walter, who worked with Minnesota Senator Tina Smith’s office to craft the CEPP proposal.

3. Something else

Lawmakers are looking at a host of alternative, less far-reaching solutions to the problem.

Activists say they would like to see the $150bn earmarked for the CEPP redirected towards other programmes that could help make up some of the ground lost on emissions cuts.

“No single new investment programme would be sufficient to solve the emissions gap left by the CEPP,” Ben Beachy, director of the Living Economy programme at the Sierra Club, told ES. “Instead, a bundle of new and bold investments would need to be included.”

One of the ideas under discussion is a state grant scheme tied to federally-set emissions reduction benchmarks. Another proposal is to pump more funds into clean energy tax credits — and further expand their availability. More money could be directed towards community solar or building electrification. Or a greater emphasis could be placed on innovations to clean up heavy industry.

4. Nothing else

If none of the above can be agreed, the spending bill could be pushed through without a CEPP replacement, relying on the extensive tax credits to drive a green energy buildout.

Even without the CEPP, or a replacement policy, said Bledsoe, the bill would still be “very much worth doing and represent by far the most aggressive and largest climate and clean energy investment in US history”.

But whatever the merits of the tax incentives, this would leave the end-of-decade emissions cuts promised by the administration out of reach and for many activists, would represent an unforgivable capitulation.

“If Biden doesn’t deliver for us now, especially in the lead up to COP26, history will remember him as the president who didn’t do enough to save us when he had the chance, and he will be an embarrassment on the world stage,” said Lauren Maunus, advocacy director of Sunrise Movement, a youth-led climate campaign group.

With just 10 days remaining until COP26 kicks off, the clock is ticking.

“I think there’s hope that we will indeed lock in a deal,” said Beachy. “We want to make sure that when President Biden walks into Glasgow, he’s carrying historic climate investments in his briefcase.”

(Myles McCormick)

Data Drill

Biden has been a champion of clean energy, but it’s fossil fuels that have been having a stock market resurgence since the president’s swearing in.

XOP, an exchange-traded fund of oil and gas producers, has seen its share prices increase 80 per cent since the start of the year. Fuelled by soaring demand for the fuel, coal shares have also skyrocketed. The VanEck Vectors coal ETF closed in December, but a look at individual companies like Arch Resources show that prices are more than double their cost in January.

Renewables’ performance is less impressive. WilderHill Clean Energy ETF peaked in February before plummeting nearly 50 per cent by May. While prices have risen slightly, they remain 22 per cent below January levels. Other renewable funds show a similar trend. Invesco’s solar energy ETF and First Trust’s global wind energy ETF both remain around 10 per cent below their prices at the start of 2021.

One explanation for the diverging fortunes of fossil fuel and renewable equities: stocks linked to an energy source that is essentially free — such as the sun or wind — are falling out of favour because of issues in their supply chain and higher input prices, according to Jamie Webster, a senior director at Boston Consulting Group’s Energy Impact Center.

“The fuels that we want to move away from are actually accruing a massive amount of value because they are commodities, and the fuels that we want to move towards are languishing, relatively speaking, because they aren’t commodities,” Webster said.

The US Energy Information Administration expects a colder winter to further drive up demand and prices for natural gas, which are already high due to falling inventories. The EIA this week also announced that coal-powered electricity generation would increase for the first time in seven years. (Amanda Chu)

Power Points

  • UK households will probably face new taxes to meet the costs of getting to net zero.

  • More than half of the world’s most investable companies are not aligned with any agreed temperature target.

  • China’s coal prices plunge following threats of state intervention.

  • Foreign investors want to create one of Europe’s largest lithium mines in Spain. Locals are fighting back.

  • Inside one of the worst methane emitters and its dictatorship. (Bloomberg)

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.

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