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Quarterly Outlook
Getting Green Done
Christopher Dembik
Head of Macroeconomic Research
For the first time in the US Presidential election, climate change is emerging as a major theme – along with the economy, racial tensions and police brutality. Public awareness has been raised by growing evidence of man-made climate change in the recent period. In the month of August alone, the United States recorded an average temperature higher than the 100-year average. In the past September, dramatic fires have devastated acres of forest and homes in the eastern United States. Climate change-related events are becoming more frequent and more violent.
There is no longer any question of denying climate change and even President Trump, who has been quite skeptical in the past, is keeping a low profile. Climate change is now a political issue that can generate substantial change on election day, which was not the case in previous presidential elections. According to political science professor Jon Krosnick from Stanford University , who has been working on election polls for over twenty years, 25% of Americans will vote for a candidate based on their climate change agenda: a record high for the issue. Only abortion is viewed with more importance, with 31% of voters basing their decision on it.
On the sole issue of climate change, the Democrats are better positioned than the Republicans. In mid July, Joe Biden presented his ambitious climate plan worth about $2 trillion, or 2.5% of GDP, over four years. Here, we discuss in a Q&A format the details of the plan – and its implications if Biden is elected.
Q. What are the main proposals of Biden’s $2 trillion climate plan?
A. For the Democrats, the $2-trillion climate plan is both a way to address the impact of climate change on daily life and to create new jobs to offset losses from the pandemic. Its core goal is to reach carbon neutrality no later than 2050, with better energy efficiency and increased electricity generation from nuclear and hydropower. It also plans to create millions of jobs by making infrastructure more resilient to natural disasters (i.e. coastal restoration, large-scale tree plantings, renovation of bridges and roads, etc.).
The plan does not include a carbon tax at the federal level to contribute to reducing greenhouse gas emissions, as that is still object of debate within the Democratic Party. But Biden does want to recommit to the 2015 Paris agreement, which aims to prevent the global temperature from rising more than 2°C above pre-industrial levels this century.
Q. After almost five decades of hesitation, the Democrats have finally embraced nuclear energy as a way to fight climate change. Why is this revolutionary?
A. Because this is a major change of heart. This is the first time since 1972 that the Democrat electoral platform refers positively to nuclear energy as a way to be less dependent on fossil fuels. The Democrats have finally adopted a pragmatic approach, recognising that current renewable energy technology is simply not up to the task and that the nuclear energy, which is carbon-neutral, is part of the answer to mitigate climate change.
Going green with nuclear energy often raises public concerns about global safety (in link with the Three Mile Island accident in 1979 and the more recent Fukushima Daiichi nuclear plant disaster) and some question whether it is green enough to be part of a green new deal. For Biden’s team, the answer to that question is yes.
Regarding safety, the Democrats are counting on new, more secure technologies – such as reactors using molten salts or liquid metals – to win public support. However, there is still a long road ahead to transform this support into new investments to extend the life of existing reactors and create new ones (two reactors are currently under construction).
Q. The Democratic green platform sets an objective of producing 100% of electricity without fossil fuels by 2035. Is it realistic?
A. As of today, two thirds of US electricity comes from fossil fuels, versus 20% from nuclear (which accounts for nearly 63% of carbon-free electricity generation) and 18% from renewable . Reaching the threshold of producing 100% electricity without fossil fuels on such a short timeframe is ambitious, and supposes constant electricity demand and a massive increase in capital expenditure – notably in the field of nuclear energy, where investment have severely declined since 2015.
Q. What are the implications for the Fed and the financial markets?
A. Addressing climate change implies setting up the base of a green financial system that will be able to directly finance the Democrats’ ambitious green platform. Today, most ESG-related policies and regulations remain voluntary (“comply or explain”) and are largely dependent on assets owners’ views on ESG investing. Under Biden, we see the emergence of new incentives to move towards stronger requirements, as is already the case in the EU (with the EU Action plan on sustainable growth and the EU taxonomy which specifically addresses the issue of green bonds and low-carbon benchmarks).
The Federal Reserve will have a very specific role to play in this new financial infrastructure and may integrate climate change across its mandates more explicitly – a process that has already started. It could take steps to favour green transition as part of its oversight of financial institutions, for instance via raising capital requirements for fossil energy project loans or lowering requirements for green ones.
Krosnick J. A. & MacInnis B. (Aug. 2020). Climate Insights 2020. Surveying American Public Opinion on Climate Change and the Environment. Resources for the Future. https://media.rff.org/documents/Climate_Insights_Overall_Trends_Final.pdf
Appendix:
There is no longer any question of denying climate change and even President Trump, who has been quite skeptical in the past, is keeping a low profile. Climate change is now a political issue that can generate substantial change on election day, which was not the case in previous presidential elections. According to political science professor Jon Krosnick from Stanford University , who has been working on election polls for over twenty years, 25% of Americans will vote for a candidate based on their climate change agenda: a record high for the issue. Only abortion is viewed with more importance, with 31% of voters basing their decision on it.
On the sole issue of climate change, the Democrats are better positioned than the Republicans. In mid July, Joe Biden presented his ambitious climate plan worth about $2 trillion, or 2.5% of GDP, over four years. Here, we discuss in a Q&A format the details of the plan – and its implications if Biden is elected.
Q. What are the main proposals of Biden’s $2 trillion climate plan?
A. For the Democrats, the $2-trillion climate plan is both a way to address the impact of climate change on daily life and to create new jobs to offset losses from the pandemic. Its core goal is to reach carbon neutrality no later than 2050, with better energy efficiency and increased electricity generation from nuclear and hydropower. It also plans to create millions of jobs by making infrastructure more resilient to natural disasters (i.e. coastal restoration, large-scale tree plantings, renovation of bridges and roads, etc.).
The plan does not include a carbon tax at the federal level to contribute to reducing greenhouse gas emissions, as that is still object of debate within the Democratic Party. But Biden does want to recommit to the 2015 Paris agreement, which aims to prevent the global temperature from rising more than 2°C above pre-industrial levels this century.
Q. After almost five decades of hesitation, the Democrats have finally embraced nuclear energy as a way to fight climate change. Why is this revolutionary?
A. Because this is a major change of heart. This is the first time since 1972 that the Democrat electoral platform refers positively to nuclear energy as a way to be less dependent on fossil fuels. The Democrats have finally adopted a pragmatic approach, recognising that current renewable energy technology is simply not up to the task and that the nuclear energy, which is carbon-neutral, is part of the answer to mitigate climate change.
Going green with nuclear energy often raises public concerns about global safety (in link with the Three Mile Island accident in 1979 and the more recent Fukushima Daiichi nuclear plant disaster) and some question whether it is green enough to be part of a green new deal. For Biden’s team, the answer to that question is yes.
Regarding safety, the Democrats are counting on new, more secure technologies – such as reactors using molten salts or liquid metals – to win public support. However, there is still a long road ahead to transform this support into new investments to extend the life of existing reactors and create new ones (two reactors are currently under construction).
Q. The Democratic green platform sets an objective of producing 100% of electricity without fossil fuels by 2035. Is it realistic?
A. As of today, two thirds of US electricity comes from fossil fuels, versus 20% from nuclear (which accounts for nearly 63% of carbon-free electricity generation) and 18% from renewable . Reaching the threshold of producing 100% electricity without fossil fuels on such a short timeframe is ambitious, and supposes constant electricity demand and a massive increase in capital expenditure – notably in the field of nuclear energy, where investment have severely declined since 2015.
Q. What are the implications for the Fed and the financial markets?
A. Addressing climate change implies setting up the base of a green financial system that will be able to directly finance the Democrats’ ambitious green platform. Today, most ESG-related policies and regulations remain voluntary (“comply or explain”) and are largely dependent on assets owners’ views on ESG investing. Under Biden, we see the emergence of new incentives to move towards stronger requirements, as is already the case in the EU (with the EU Action plan on sustainable growth and the EU taxonomy which specifically addresses the issue of green bonds and low-carbon benchmarks).
The Federal Reserve will have a very specific role to play in this new financial infrastructure and may integrate climate change across its mandates more explicitly – a process that has already started. It could take steps to favour green transition as part of its oversight of financial institutions, for instance via raising capital requirements for fossil energy project loans or lowering requirements for green ones.
Krosnick J. A. & MacInnis B. (Aug. 2020). Climate Insights 2020. Surveying American Public Opinion on Climate Change and the Environment. Resources for the Future. https://media.rff.org/documents/Climate_Insights_Overall_Trends_Final.pdf
Appendix: