"We're pausing investments till after the election" — On subsidy risk and what happens if Trump wins
Climate tech should celebrate, not fear, our alignment to government money — and get even better at locking it in
At a recent climate venture capital event, one LP raised his hand and asked, “What if Trump wins?”
I’ve previously discussed how the Inflation Reduction Act and Bipartisan Infrastructure Law could fare under a second Trump administration. These are the Biden administration’s landmark climate laws that together represent half a trillion dollars in climate transition spending, which is an enormous and market-moving amount of money.
But if Trump does win and also successfully guts the IRA and BIL, what happens to all the subsidies?
This is the question in the back of every asset allocator’s mind, as they consider whether now is a good time to continue investing in climate, or whether we’ve crested the Climate Tech 2.0 wave and are headed for a wipeout.
Many people who invest in climate have responded defensively, because the question puts you on the defensive: “The best companies and projects don’t need subsidies, and we only invest in the best companies and projects, so we are safe.”
This is a fair response in an environment of risk and scarcity, where investors are looking to align with the strongest companies who need the least help from anyone, least of all from a changeable government.
What allocators are really asking is, “When is it safe for us to come off the sidelines and really start investing in climate tech?”
I think we’re asking the wrong questions. Let’s reframe with some numbers.
Subsidies as a competitive strategy
In Michael Porter’s classic book, Competitive Strategy, the author presents different ways companies gain a competitive advantage. These competitive strategies are as broad as cost leadership to undercut competitors to lawsuits to protect IP and delay market entry by rivals. All of Porter’s classic competitive strategies are about out-maneuvering competitors and establishing a position within a defined market.
But what if you could define the market?
The ability to engage in regulatory capture, where companies shape and reshape the regulatory environment to favor their industry or position, is akin to writing the rules of the game.
It’s not entirely contained within the confines of market-based competition, but it’s actually the ultimate competitive strategy — and the one that’s most relevant to companies building societal infrastructure (ie, our food, energy, transportation and information systems).
It’s so important that every successful incumbent in these areas has had to become a master of regulatory capture. Some of that regulatory capture has been expressed in market entry or participation requirements, but a lot more has come to life as trillions of dollars in subsidies. These subsidies offset production costs (thereby enabling them to undercut competitors, including new entrants) and enable new capital projects and even technologies that ultimately delay market entry by rivals.
Subsidies by the numbers
Despite the alluring myth of the free market, most major players that climate companies are looking to replace have relied on government intervention to get to where they are. We’ve heard before how the oil and gas industry wouldn’t be where it is today without decades of public sector aide in the form of tax breaks, infrastructure support, and even things military protection for oil routes.
Many of us know this intuitively but don’t know the real numbers, and the numbers matter. So I spent an afternoon on Subsidy Tracker and here’s what I found.
Tyson Foods has received over $338M in government subsidies and another $4.7M in loans and bailout assistance. Many of the subsidies have consisted of tax rebates, but some have even included grants for facilities expansion or employee training, and all have been geared at helping Tyson lower its capital expenditures and ongoing operating costs.
Cargill has received $164M in subsidies and $5.3B in loans and bailouts, across thousands of awards for its industrial meat business. One of the big ones was a $43M single tax credit in Iowa for a major facilities expansion in the state. This enabled Cargill to cut its overall costs, and contributed to scale advantages that reinforced barriers to entry.
Chevron has gotten $629M in subsidies and $5M in loans and bailouts, including their $352M property tax abatement deal for building a chemicals production facility near small town schools. The deal allowed Chevron to pay a significantly smaller amount towards the district in lieu of its huge property tax bill, and is one of the most common and lucrative tools Chevron has leveraged to lower its overall cost of doing business.
Duke Energy has received $1.5B in subsidies, including a $204M tax credit deal at the state and federal levels to offset 10% of the capital costs to build a new coal plant in Indiana. Notably, Duke has also received over half a billion in federal grants to implement grid modernization technologies and build wind farms.
Shell has gotten $2.2B in subsidies and $5M in loans and bailouts, including one of the biggest deals on our list, a $1.65B tax credit from the state of Pennsylvania for building a natural gas processing plant there. This and other subsidies are often paid out or realized over many years, making them reliable and even bankable sources of cost reduction for decades to come.
Exxon Mobil has received over $1.9B in federal and state level subsidies and another $5.4B in federal loans and bailouts. The $5.4B in loans was across just 13 discrete awards, meaning their average award size was $408M. That’s on par with the historic DOE loan package that famously saved Tesla from bankruptcy in 2010 — except 13 separate times. Some of their largest subsidy awards at the state level went towards offsetting the capital costs of building new petrochemical plants.
Ford has received $7.7B in federal and state subsidies and $33B in loans and bailouts, including a $2.3B mega tax credit deal from the state of Michigan to retain jobs in the state by offsetting the cost of facilities expansions. Ford has also received hundreds of millions in federal grants to pay for its R&D costs.
General Motors has received $7.5B in subsidies and $50.3B in loans and bailouts across just 22 awards, for an average of award size of $2.3B. Their biggest deal, a $2.3B tax credit from the state of Michigan, was granted for a capital investment on GM’s side of just $800M — great dollar for dollar leverage for the company.
Tesla, including SolarCity, has netted $2.8B in subsidies, mostly at the state and local level with $1.28B in Nevada alone, and $466M in loans and bailouts. For its relatively young age, Tesla has played the subsidies game masterfully, receiving large federal grants for R&D alongside big tax abatement deals for factory buildouts.
First Solar has received $108M in total subsidies and $857M in loans and bailouts, including $54M as a federal cash grant for building a solar power plant in Nevada. The $54M grant offset 30% of capital expenditures for the project, enabling First Solar to deliver a better investment rate of return to its investors as project revenue was able to exceed the lower total investment amount sooner.
Redwood Materials, a battery company that’s still privately held and therefore the most ‘startup’ stage on this list, has received $616M in total subsidies, including a $510M mega deal from the state of South Carolina for its new facility there. As part of the mostly tax credit deal, Redwood Materials is also getting access to state-owned land for the buildout — a great example of subsidies supporting not just cost reductions but also helping to establish others barriers to entry, like getting a special parcel of land for a battery factory.
The numbers above represent disclosed subsidies only. Undisclosed subsidies — including hidden tax advantages, favorable regulatory treatment, unreported loans, and government-backed guarantees — are another thing entirely. Both types of subsidies create enormous advantages for the companies or industries that can leverage them.
Unpopular opinion: let’s celebrate subsidies
I’m not here to trash talk subsidies or make a statement about government-industrial complexes.
Instead, I want to understand subsidies so we can shift them to the industries and companies where they can do their best work. When we think about subsidies within climate tech, it can be helpful to remember that they’ve always been a tool for building dominant industries. So, the ability to consistently amass subsidies is a competitive strategy — and one that we should exploit at least as well as incumbents, not suppress.
Subsidies were created to de-risk innovation. This is what they’ve done in the nascent stages of every single industry that has benefitted from them.
We often talk about the higher upfront costs and longer time horizons of climate tech, but this actually describes every single major industrial category in its early stages. The fact that subsidies often continue long after the startup stage for some industries, like many of the ones I listed earlier, is an artifact of those companies’ ability to activate regulatory capture as a long term competitive strategy.
You may not like it, and I may not like it, but we can agree it works for the corporate entities that benefit from them. Now we just need to make sure that the companies building our future — not our past — are the new beneficiaries.
What about the election though? Even if we agree that subsidies are fair and necessary for critical industries, it doesn’t change their de facto role as a political tool. What happens to early believers and all our capital if a Republican sweep further shifts the subsidy map from climate tech to fossil fuels?
Upside comes with uncertainty
I’m here to posit a different take: that waiting for political certainty leads to missed opportunities.
Long-term investors, including VCs and their LP backers, understand that revolutionary change happens slowly and then all at once. Gaining a position early on, with risk priced in, is how you get the most upside.
Every single climate tech company, even the software-only ones who don’t seem to need any government involvement, ultimately either directly benefits from subsidies or relies on a company that benefits from subsidies.
Instead of retreating to companies whom we think don’t need to play the game (and where upside may ultimately be more limited), we should be gathering our collective weight behind the companies who embrace the game and are committed to the work of changing its rules.
Instead of asking, “What if Trump wins?” we should be figuring out how to make sure it doesn’t matter. By conservative estimates, there’s $8T in liquid, investible capital in the United States, not including household savings. That’s cash. It’s a war chest spread across corporate cash reserves, private equity dry powder, and pension and endowment fund cash holdings.
A lot of this capital is waiting for attractive investment opportunities and, I believe, a meaningful call to action. By combining capital and commitment, the US can build a decarbonized economy that stands strong regardless of who wins this November, much as oil, gas, automotive and industrial poultry have remained steady growth industries regardless of whether it’s a Clinton, Bush, Biden or Trump in the White House.
The incumbents have done it for decades—now it’s our turn.
PS — Interested in what else is happening at the frontier of climate intervention? Check out Climate on the Edge, my podcast focused on exploring cutting edge approaches in climate change mitigation and adaptation alongside the researchers and experts who are pioneering the work.