Trump on Climate Change… And What It Could Mean for Investors

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Alternative Energy

In the past couple years, the world has made big moves to control climate change…

In August 2015, the U.S. Environmental Protection Agency announced the Clean Power Plan (CPP). The goal is simple: Move the U.S. toward cleaner and lower-polluting energy.

In December 2015, representatives from 195 countries adopted the historic Paris Agreement. The agreement set limits for all countries to help reduce greenhouse gas (GHG) emissions. It was signed and ratified on April 22 and went into effect on November 4.

But with Trump’s inauguration later this week, it could all come tumbling down…

And that could have big implications for energy investors.

Admittedly, controlling climate change is no small feat. The goal of the Paris Agreement was to keep the rise in global temperatures below 2 degrees Celsius.

That means the U.S. has to cut carbon emissions 26% by 2025.

As the U.S. is one of the world’s biggest carbon emitters, a 26% cut is an ambitious goal.

But it’s not impossible…

Unless – of course – the next president of the United States believes climate change is a “hoax.”

In campaign speeches, Trump vowed he would kill the CPP and pull out of the Paris Agreement.

Instead, Trump said, “We’re going to save that coal industry, believe me, we’re going to save it.”

Given that most U.S. GHG emissions come from coal plants, if Trump’s proclamations become action, he could severely undermine, if not defeat, global climate change efforts.

But the cracks are beginning to show…

Last week, Trump’s nominee for secretary of state, Rex Tillerson, broke with his views during his testimony before a Senate confirmation committee.

Tillerson is the former CEO of Exxon Mobil (NYSE: XOM). Although Tillerson used to feel the same way as Trump on the issue, he now believes that GHGs are having an impact on the global climate.

He told the senators that the U.S. should “maintain its seat at the table,” referring to the Paris Agreement. That’s a distinct deviation from Trump’s campaign rhetoric.

Tillerson’s confirmation hearing was touch and go. However, it looks as though the Senate will eventually confirm him as secretary of state.

That’s good news. It means Tillerson will likely convince Trump to remain in the Paris Agreement. However, there is a reasonably good chance that the new administration and Congress will attempt to water down or eliminate the CPP.

What effect will that have on the U.S. being able to reduce its GHG emissions by 26% over the next eight years? The answer is, surprisingly, not much.

Regardless of the future of the CPP, U.S. utilities are rapidly moving away from coal.

The reason is simple… Coal-fired power plants cost more to build than natural gas-fired ones.

That’s because coal plants have 60% higher GHG emissions than natural gas-fired ones. All that additional pollution control equipment costs money and takes time to build and install.

Many of the oldest and most decrepit coal-fired plants have already been retired. The EPA’s Mercury and Air Toxics Standards rule has been in place for several years.

Most of the plant closures to date have been because they failed to meet its standards.

Since this is a “final rule” (part of U.S. law), reversing it would take the EPA some time. The EPA would have to propose new revisions, accept public comment, review and respond to those comments, and adopt new final language. It’s not something Trump can easily change.

That’s why utilities are continuing to close coal-fired plants. Over the next 12 years, they will close no fewer than 46 plants of at least 100 megawatts each. Those are just the ones that have received the EPA’s and regulators’ approval to close.

That means at least 15.6 gigawatts of new power will have to come from natural gas-fired plants or renewables.

Utilities have tentatively announced plans to close even more plants. However, these have not yet received regulatory approval to close.

My message to energy investors is this: While Trump may end up gutting the CPP, the economic move away from coal is irreversible. Natural gas is the “new coal,” and investors should position their energy portfolios accordingly.

Good investing,

Dave