What a second Trump presidency would mean for climate investing
Trump is no friend to climate action, but just how bad will it get for climate investing?
Amidst this week’s warranted excitement around Kamala Harris, it’s nonetheless time to talk about what a second Trump presidency would mean for climate investing.
Note: I’m deliberately leaving out broader implications for climate action, democracy, social equity, species survival etc to keep this constrained in relevance to the core job of climate investing and building.
Trump’s efforts on climate policy will likely attempt to cut down both the carrot and the stick: eroding funding and rolling back regulation.
Can Trump reverse the IRA?
The Inflation Reduction Act is the single biggest piece of energy and infrastructure legislation in US history, and it came on the heels of the also-important bipartisan infrastructure law. The IRA earmarks $369B for clean energy and climate-related initiatives over the next decade, and the infrastructure law allocates $80B to critical decarbonization infrastructure such as EV chargers, hydrogen and battery production, and the DAC hubs. Both represent an unprecedented federal commitment to accelerating the energy transition away from fossil fuels, and to capturing already-emitted carbon.
A new Trump administration would have four tools for dismantling the IRA, or any climate-related legislation.
1. Executive actions
Difficulty: easy | Permanence: low | Likelihood: high
Trump could – and almost certainly will – leverage executive actions to undercut the IRA. These executive actions will be oriented around delaying regulations or reallocating resources. As precedent, the Trump administration previously rolled back a number of Obama-era environmental regulations through executive orders, hurting policies like the Clean Power Plan, which was effectively dismantled by executive action.
Since it’s straight out of the Trump administration playbook, we can expect similar maneuvers targeting the IRA.
For example, they could:
Roll back or delay regulations around emissions, renewable energy incentives, and efficiency targets. If there are early signals of this, I expect many companies to hold off on climate transition actions until the dust settles, which could bake in emissions for years or decades in the products and assets they produce. These actions would kick off a lengthy process of rulemaking, public comment, and legal battles, which could blunt their impact, but which would also take up precious time in which corporate actors won’t likely be choosing the most stringent path to decarbonization.
Reallocate funding from climate and environment programs to a different priority, like border security. These funds can also be re-reallocated by a later administration.
Issue executive orders that reprioritize what federal agencies focus on, like telling the DOE to focus on fossil fuel production over renewables development.
The executive action path is fast, direct, and unilateral, even though its permanence and total impact is inherently limited due to the nature of executive authority under our constitution. It requires no consensus-building and it’s headline-grabbing, which suits Trump. This is a near-certain play we’ll see from Trump-Vance if in office.
2. Budgetary Influence
Difficulty: easy | Permanence: low | Likelihood: high
Another path to killing the IRA is through starvation. By cutting or simply slowing budget allocations, they could delay projects indefinitely and create an overall environment of uncertainty that would chill other investors’ willingness to get involved. Budget reconciliation only requires a simple majority in the Senate, so it’s an easy and practical tool for dismantling policy without the spectacle of a full-on legislative battle.
Trump’s previous budget proposals aimed to cut EPA funding by nearly a third, which would have seriously limited the agency’s ability to enforce its regulations had Congress fully approved the cuts, so we can expect a replay of this and more.
For example, they could:
Propose budget cuts to the critical agencies that implement IRA initiatives, the DOE and the EPA, limiting their muscle power to enforce regulations, fund projects, and provide incentives.
Reallocate IRA funds to other programs, like how they previously attempted to redirect money from environmental and science programs to border security, which changes both real action on the ground and the national conversation.
Use administrative tactics to delay fund disbursement, which would slow down project implementation.
Standing in the way of any administration’s ability, and/or willingness, to legislate via budgetary control are three key factors:
The federal budget is an annual process, so budgetary influence is inherently temporary.
The power of the purse lies with Congress, who have ultimate approval over any budget that the president’s office proposes. Every ballot and every office counts, and there’s bound to be a lot of horse-trading either way.
A lot of IRA and infrastructure funding is allocated to red states, including big swings like the DAC hubs in Louisiana and Texas, and the battery facilities in the new Battery Belt spanning Michigan, Indiana, Ohio, Kentucky, Tennessee, Georgia and the Carolinas.
There’s one more factor here that’s specific to the IRA: it was written with a future Trump administration in mind. The IRA has the following built-in provisions designed to protect its funding and ensure implementation:
Specific appropriations for some of its programs written into the law. For example, it mandates funding for hydrogen production tax credits, advanced manufacturing projects, and electric vehicle incentives.
Funding spread out over multiple years, which provides stability for builders and investors, and makes it harder for any single administration to completely defund these programs in any one move. For example, the IRA’s Advanced Industrials Program, its energy infrastructure financing, and its production tax credits for clean energy and manufacturing are all multi-year provisions where no single year’s budget is make-or-break.
Legislative language that specifically targets emissions reductions and infrastructure improvements, which ties the funding to these outcomes. For example, the language around the $27B Greenhouse Gas Reduction Fund specifically calls out GHG emissions reduction and earmarks $7B of its total towards direct emissions reducing activities, as opposed to administrative program management that’s also funded by the GGRF.
3. Judicial Challenges
Difficulty: medium | Permanence: medium | Likelihood: high
Legal challenges could bog down the IRA, creating delays and uncertainties. Trump’s administration was no stranger to court battles over environmental policies, such as the prolonged litigation over the Clean Water Act, intended to roll back protections covering 60% of the US’ waterways (just what we need in an age of ubiquitous PFAS and microplastics).
A barrage of lawsuits from industry groups, states, and conservative think tanks – each one chipping away at the foundations of the IRA – could be in our future. As they have with so many other issues, the courts become a battlefield, with each ruling potentially reshaping the landscape of US climate policy through regulatory changes or even permanent overrule.
Trump’s track record is all about leveraging the judiciary to create political power, so this is probably one of the first tools they’ll reach for. However, while court rulings can have a major impact on how the IRA gets implemented, factors like court hierarchy (lower vs higher courts) and using potential legislative amendments to the IRA to circumvent court rulings while still retaining the core legislation can help counteract some of this.
4. New legislation
Difficulty: hard | Permanence: moderate | Likelihood: low
Reversing the IRA through new legislation would require majorities in both the House and the Senate. Given the current political polarization, this could be a significant hurdle. Let’s take a look at a somewhat recent example: the Affordable Care Act.
Despite an onslaught of opposition, the ACA withstood numerous repeal efforts. It survived for the same reason it’s “so hard to get anything done in our country these days” – the sheer challenge of achieving consensus across both the House and the Senate in a fractious political landscape. Even with a Republican majority, the ACA repeal failed in the Senate in 2017 by a single vote.
The IRA’s benefits are diverse in terms of geographical and industry distribution. Many Republican states benefit, introducing intra-party dissent to a political mix that also likely includes slim majorities and divergent personal agendas.
This is probably the hardest path for doing damage.
Impact on the LPO and private funding markets
Appointing Jigar Shah head of the Loan Programs Office was a climate coup. Since taking that office, Jigar has expanded and accelerated the scope of the LPO to unprecedented levels.
Under Trump 1, the LPO was effectively dormant for four years. In fact, the administration initially proposed to eliminate all administrative funding for the LPO, which would have effectively shut it down until it was saved by Congress voting to continue funding the office even though it wasn’t approving new projects.
Today, the LPO manages over $40B in loan authority across hundreds of applications. Under Jigar Shah, it has expanded its scope to include not only energy and fuel transition for passenger vehicles, but also hard-to-decarbonize trucks, ships, planes and locomotives.
If Trump comes back, the White House will most likely appoint a figurehead to head the LPO, stalling, deprioritizing or even calling off large projects. As one example, Tesla’s Gigafactory received $465M in loans from the LPO to scale up battery production, which the private sector alone would be hard-pressed to replace.
Jigar’s replacement by someone unfriendly to the energy transition could and should increase uncertainty among investors and companies. During the previous Trump administration, inconsistent policies and abrupt changes created a volatile investment environment, which is bad for long-term funding commitments.
What about broader regulatory rollbacks?
The most investable climate companies do not rely on punitive regulation to make their business models work, but most of them nonetheless do benefit from regulatory action that starts to force industry actors to internalize the cost of polluting.
Regulatory whiplash would result in action delays we can’t afford
When the Trump administration previously tried to roll back air quality, water quality and particulate matter and mercury standards under the Clean Air and Clean Water Acts, they were met with legal challenges that limited their damage, and then eventual reversal once the White House changed hands. That said, this kind of whiplash causes big players to sit on the sidelines till everything plays out, wasting precious time in which an earlier stage company could die on the vine while waiting for regulation-motivated traction.
That said, regulation will still happen at the state and international levels
Big states like California, New York, Massachusetts and others are increasingly imposing their own regulatory standards that create market tailwinds for climate technologies. California is the US’ biggest market for most things, and every operator in every industry either sells there, produces there, runs track through there, or otherwise finds itself under the state’s regulatory regime. California has been especially effective and aggressive at leveraging clean air standards to generate decarbonization and clean energy tailwinds, and many industries are working on decarbonization pathways simply to comply with state-level rules. The same is true for global players operating in Europe.
What climate investors should focus on
I’ve noticed some investors citing election uncertainty as a reason to pull back, or at least delay, involvement in the climate tech ecosystem. I think this is a cover. In reality, many GPs and LPs are still recovering from 2021-2022 era over-deployment and are looking to rightsize their portfolios more broadly within the new market schema. For a few folks, it may be more convenient to point to the thing that everyone else is wringing their hands about rather than reveal uncomfortable details about past allocation.
Election year climate tech investors should lean on the same things great tech investors have always focused on: great companies that deliver lower cost and/or better features through technology and business model innovation. Instead of hanging back, this is the exact time when the private sector, including the largest asset allocators, needs to lean in.
Decarbonization for its own sake was never a thing
The companies we've invested in at Toba, as well as many of the best companies we haven't yet backed, are winning on merits outside of the sphere of decarbonization, even though that is a driving motivation for our investment strategy. These companies are either structurally set up to compete on cost at scale (Swift, Bedrock) or solving emergent problems in completely novel ways (Dryad, Euclid), with technology as the lever. This may benefit from policy, but it doesn't depend on politics as these companies build traction across state and country lines.
BP just released its very influential annual Energy Outlook report for 2024, in which it predicts peak oil demand in 2025, driven by long-term, baked-in, secular trends changing global use of liquid fuels. Even though it says natural gas will continue as a so-called transition-fuel, it's nonetheless predicting peak emissions by the middle of the decade.
Even as it attempts to frame itself as an energy transition company, providing the fuel for our society’s insatiable hunger for more energy, BP still recognizes these are long term transitions that emerge from a combination of markets, policy, and cultural and technological change. No single US president – no matter how bad, distasteful or destructive – is going to turn the tide.
But we still need to keep Trump out
None of this is to say that who's in the White House doesn't matter. It does, and it also matters who’s in Congress, who’s (already) on the Supreme Court, who’s the Governor of your state and the Mayor of your city — not to mention City Council, Lands Commissioner, Utilities Commissioner and many more.
Government is diffuse and complex, just like the climate crisis itself. No one savior or solution can flatten that complexity into a single point; instead, we have to do all the things and vote all the votes. Any point is a good place to start, and the best time to do something is right now.
Additional recommended reading on this topic:
The Stakes & why beating Trump is absolutely necessary – Bill McKibben
Goodbye to the first climate president – Canary Media
Trump could roll back Inflation Reduction Act tax credits in a second term – Utility Dive
What Trump 2.0 Could Mean for the Environment — The New York Times
Great post - quite comprehensive (let's discuss on the pod 😉)