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European Energy Insights - May 2021

China, EU push ahead as US pulls back on climate change

Now that President Donald Trump has announced that the U.S. will withdraw from the Paris Agreement on climate change, the markets are left to assess whether eschewing a leadership role on the issue will help or harm the country's economic growth and which industries will be affected most. The answer may well be that companies, particularly energy providers and automakers, are already responding to forces that the White House cannot control.

The Paris agreement, which every country except Syria and Nicaragua signed in 2016, is an attempt to get carbon emissions under control and hold the rise of global temperatures to 1.5 degrees Celsius above pre-industrial levels. At 2 degrees Celsius and above, the majority of climate scientists agree that there are likely to be irreversible environmental changes.

SNL Image

At the same time as Trump was telegraphing his intention to pull the U.S. out of the agreement, China and the European Union were cementing an alliance to move toward lower-carbon economies, according to the Financial Times. That collaboration is expected to be announced at a China-EU summit June 2, the FT said.

That move suggests just how strongly the international community has committed to solving what they see as an environmental crisis.

For the first time in 2015, renewable energy sources, such as solar and wind, surpassed coal as the fastest-growing source of global electricity capacity, according to the International Energy Agency. China was responsible for 37% of that growth, with the U.S. at 13% and the E.U. at 12%. India came in fourth at 9%, the IEA said.

When it comes to wind power development, China is expected to lead, according to the Global Wind Energy Council, an industry association. India, however, is coming up fast, with a record number of installations in 2016, the association said.

And though investment in clean energy fell 18% to $287.5 billion in 2016 from a record $348.5 billion the year before, the number of worldwide clean energy projects increased, according to Bloomberg New Energy Finance. In addition, M&A in the sector has been on the rise, as it has been in all sectors, with renewable energy project acquisitions globally totaling $72.7 billion in 2016.

Those investments are likely to continue, said Leslie Samuelrich, president of mutual fund Green Century Capital Management, which has about $437 million in assets under management.

"Companies have a longer time horizon, whether it’s four or eight years [sourcing cleaner energy]," she said. "Even if there wasn’t an accord, they would be doing this."

Manhattan Institute senior fellow Oren Cass, however, cast doubt on whether the Paris agreement, because of its voluntary nature, would result in much change to emissions, or industries' responses. The New York-based Manhattan Institute analyzes policy from a free-market viewpoint.

Cass agreed, however, that clean energy was progressing, citing a recent solar auction in India that set a new low for tariff rates that would-be developers would charge. Still, he noted, production in oil and gas "is expanding as quickly as people can find low-cost sources."

Technology follows energy’s lead

Elon Musk, the founder of electric carmaker Tesla Inc., had already said he will stop advising Trump should the U.S. pull out of the Paris agreement. Musk has staked his company’s future on his vision of non-gas-fueled cars and, even more important, on the technology needed to make more efficient and longer-lasting electric batteries.

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A Green Mountain Power customer next to a Tesla Powerwall battery and inverter connected to a solar panel array in her yard in Middletown Springs, Vt.

Source: Associated Press

And traditional car makers aren’t holding back in the new electric car era. While the Trump administration has already signaled that it expects to water down the Environmental Protection Agency’s more stringent fuel-efficiency rules put in place under President Barack Obama, Morgan Stanley said in a research note that it would not stop traditional automakers "from making a significant and permanent shift in engineering emphasis away from internal combustion and toward pure [electric vehicles]."

Other huge technology companies have joined the call for the U.S. to stick with the Paris agreement, including Apple Inc. and Amazon. And Google, which claims it will support its global operations 100% through renewable energy in 2017, also said it has invested $3.5 billion in renewable local infrastructure projects.

Industry moves on

While Washington was debating the merits of the Paris accord, industry, even the fossil fuel producers, had already moved on to newer, more cost-efficient methods of producing energy.

Exxon Mobil Corp. said the U.S. should stick to the Paris accord, a position it may have struck to be on good terms with its shareholders. On May 31, 62% of the energy giant’s shareholders voted in favor of the company making more climate change disclosures, as compared to 38% the year before. That followed a vote earlier this month at Occidental Petroleum Corp. where shareholders voted 67% in favor of a similar resolution.

Anne Sheehan, director of corporate governance at California State Teachers’ Retirement System, with $206.5 billion in assets under management, and which spearheaded the climate change reporting resolutions, said companies understand "the environmental risks on the horizon in the next 10 to 25 years must be considered—no matter what stance the government takes on the Paris climate agreement—because they have a potential material impact on their bottom line and by association investors’ return on investment."

Though Trump said the U.S. would immediately "cease all implementation of the non-binding Paris accord," he also said his administration was willing to renegotiate "on terms fair to the U.S."

The President pledged to work with Democrats "on something that's much better than the Paris accord," he said. "I will work to ensure that the U.S. remains the world leader on environmental issues."

After Trump spoke, the governments of France, Germany and Italy issued a joint statement noting that the agreement cannot be renegotiated, according to the Associated Press. In response, the White House pointed to "ambiguity" in the agreement and the "international climate agenda in general."

Annalee Armstrong contributed to this report.