Increased investment in sustainable and eco-friendly infrastructure
Policymakers are gradually hammering out the details of climate-related infrastructure plans that could support and accelerate decarbonization (the plans are part of a revival in US infrastructure spending that I wrote about in a recent note). Within the $550 billion bipartisan infrastructure package making its way through Congress, there are a number of climate-related proposals, including:
- $15 billion for electric vehicle (EV) production, procurement, and infrastructure
- $73 billion for power grid improvements, including clean-energy technology
- $50 billion for water storage and resiliency (e.g., mitigating drought and floods)
- $39 billion for public transit (to reduce cars on the road and their environmental impact)
There are also many climate-related initiatives included in the broader 10-year budget package that the Democrats hope to push through on their own via the reconciliation process. While the full size and scope of the package is still to be determined, here are some of the key proposals:
- Tax credits for zero-emission electric power generation and grid improvements
- Grants to electric utilities to meet clean-energy targets through 2030
- Funding for rural electric cooperatives to accelerate decarbonization efforts
- A new EV tax credit ($7,500 per vehicle) with no manufacturer cap
- Fees on methane emissions associated with oil and gas production/transmission
- Funding for removing carbon via soil conservation and reforestation
Importantly, I think the increase in government spending could boost private-sector investment in climate-related infrastructure (private infrastructure investment has been relatively flat in the US for over a decade). In many areas, the government will be doing some of the foundational work (e.g., EV charging stations), but given the scale of the challenge, the private sector will have a large part to play.
A key role for regulation
We’ve already seen the Biden administration flex its regulatory muscle on the climate front, including revoking the permit for the Keystone XL pipeline and freezing new oil and gas leases on public lands. Most recently, it proposed that car makers increase their fuel efficiency by 8% per annum between 2024 and 2026, effectively raising fleetwide efficiency by about 12 mpg by 2026, relative to 2021 — a meaningful step up. Biden is also aiming for EVs to represent 50% of all new auto sales by 2030.
What’s next on the regulatory front? I think we could see a reduction in the number of fossil fuel subsidies, higher efficiency standards for buildings and appliances, and new emissions standards to ensure electrification of light- and heavy-duty vehicles. In addition, increased climate disclosures could act as a catalyst for companies to rethink their carbon footprint and to address concentration risk related to physical facilities in areas vulnerable to the impact of global warming. For financial institutions, climate-related stress tests could be on tap, as well.
It is also worth noting that Biden will likely make climate change part of his international agenda. This could include commitments in trade agreements and leadership on the global policy stage. One possible area of leadership is making good on the commitment to help poorer nations fund the cost of transitioning to a lower-carbon economy.
The implications of a more rapid clean-energy transition
Considering the full scale of Biden’s infrastructure proposals, including the climate-related initiatives, and bearing in mind that the final dollar amounts will likely be lower, I think the spending could provide a lift in economic growth of 50 bps – 75 bps over the next few years, led by investment spending and putting some upward pressure on interest rates. And as I wrote previously, these investments, if designed well, should also raise US productivity over time.
In terms of the impact of the climate-related proposals specifically, they will hasten the clean-energy transition, which, as Figure 2 shows, is at an inflection point that has been decades in the making. This will fundamentally affect multiple industries, including agriculture, utilities, building materials, and manufacturing, among others. Besides power generation, transportation could be facing the most significant transformation, as the largest source of US greenhouse gas emissions. And for the defense industry, the geopolitical instability fostered by climate-related disruptions is likely to be a long-term tailwind — a topic my colleague Thomas Mucha has written about here. In addition, demand for a wide range of commodities will rise, to support new technologies that will be needed to drive the clean-energy transition (Figure 3).