With the 2024 election season in full swing, there are two likely outcomes: a Biden re-election with a clear guide for the energy transition or a Trump administration fraught with energy transition uncertainties. Donald Trump’s disparaging statements regarding energy transition-related technology coupled with conservative think tank reports create concern on the impact of the energy transition if Trump is re-elected. The central question is whether the energy transition related incentives of Inflation Reduction Act will be materially changed under Trump. Let’s walk away from the political kayfabe and separate the risk from the noise.
First and foremost, Trump has supported the importance of domestic manufacturing. To support domestic industries, the Inflation Reduction Act created tax incentives related to domestic manufacturing and to support clean energy and electric vehicle jobs in the United States. These tax credits have already attracted tens of billions of dollars of investment into the United States. There has been a large build-out of battery assembly plants. Solar assembly plants and corresponding parts suppliers are either expanding in the United States or building plants from scratch. A repeal of the incentives would cause both job losses (75% of investment has been in Republican districts) and effectively increase tax rates for many manufacturing companies. With both of those potentially hitting his base, tax credits related to manufacturing will likely stay in place.
Digging deeper into the Inflation Reduction Act allows an examination of clean energy production and hydrogen tax credits. While Trump has greatly attacked mandates and certain environmental laws, any major changes to the tax credits related to investment in the United States are unlikely. Most of those tax credits have incentives for domestic content (more domestic manufacturing jobs) and using union labor (major part of Trump focus is blue collar workers). The trend for increasing investment in both renewables & storage existed both during the Trump administration and pre-IRA as shown in the following charts. The chart on the left depicts types of energy and storage waiting for approval for grid connection in the US. The chart on the right depicts the unsubsidized cost of electricity during 2023, presuming zero tax credits. The macro forces of lower cost renewable and storage are the main drivers of the energy transition. The incentives in the IRA were gravy. Domestic manufacturing jobs and union labor combined with the major beneficiaries (large utility and energy companies) utilizing the tax credits, and lower tax bills from those credits, make major changes unlikely to occur.
EV tax credits are more of a mixed bag. Some variation of a domestic manufactured vehicle tax credit will likely continue to exist. Again, a major topic of discussion for Trump is manufacturing jobs in the United States. As one portion of the EV tax credit encourages final assembly of EVs in the United States, and Trump’s rhetoric pushes for American jobs, it is fair to assume some form of that tax credit will remain. Especially since many of the battery plants and EV assembly plants related to the Big 3 auto makers are now unionized. The portion of the EV tax credit most likely to be impacted deals with EVs failing to have final assemblage in the United States. Finally, Trump’s main attack against EVs has more to do with Chinese imports, which are currently non-existent. All in all, any change would most likely focus on foreign assembled cars and have only a marginal impact in the United States.
The energy transition is not just a US trend; it is a global megatrend. In fact, in 2023, the United States accounted for about 15% of the investment related to the energy transition globally. The energy transition is gaining momentum because renewables and energy storage have become the cheapest form of energy globally. A worst-case scenario under a future Trump administration that would repeal all incentives to pre -IRA levels could decrease energy transition investment in the US by about 25-30% (which will negatively impact union labor and US manufacturers). That works out to about 4% of total global energy transition investments. The impact on other countries would be minimal since it is a global competition for investment. Yet, it would be very detrimental to US manufacturing and employment while allowing other countries to continue gaining ground on the United States.
Looking toward the 2024 election, much will be made of Trump’s anti-climate change rhetoric. With so many companies, unions, and communities benefiting from the many domestically focused tax incentives, a major change to the incentives from the Inflation Reduction Act is unlikely. Any type of repeal would also require a majority of both Houses of Congress and, with so many jobs in Republican districts, convincing members of Congress to remove a district benefit raises the difficulty level. Talk is cheap; complaining about a law is easy compared to the difficulty in repealing. Ending investments with a repeal of incentives will also result in job losses and effectively raise taxes on companies, neither of which are beneficial to Trump’s legacy. Presidents inherit economies and macro forces that exist; their ability to massively change those forces is limited. In a twist of irony when looking back at the previous Trump administration, clean energy investments did well while oil and coal did poorly; while under Biden we saw a reversal of these trends. Macro forces are leading this transition and the headwind which hurt the energy transition returns (high interest rates and supply chain challenges) is lessening, while cost structure for clean energy continues to drop. It would not be surprising if clean energy again did well under a potential Trump administration and oil did poorly, but we will just have to wait and see. While certain regulations such as emission reductions (which we consider more aspirational) will be on the chopping block, the cost advantage of the energy transition and job creation will continue to be the driving forces.
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