One of the things that always made me smile about the Republican’s attack line on the Democrats was that their opponents were really socialists masquerading as old Blue Dog Dems. But even worse, once in power, the socialists would unleash a blitz of state intervention. As a country that has in real life faced a real socialist as a leader – Corbyn – I think we can take those accusations with a pinch of salt. An awkward squad of four congresswomen doesn’t really make a revolution. But there’s also a more mundane reason why one should always have treated that claim with suspicion. Most US government’s struggle to enact much most any legislative programme beyond the first year. Trump promised lots of big programmes and failed to deliver on most of them, focusing on executive orders and such like. Biden, with a gridlocked Senate, will probably struggle to deliver even less. In fact, I wouldn’t be surprised if he focused on just one or two big initiatives in the first 18 months.

One of those will almost certainly be climate change. Here there is a faint chance that Biden could build bridges to the small number of Republicans and (larger number of) business leaders who realize that “something needs to be done”. That should provide a tailwind for US-focused renewables for instance. How much of a tailwind comes in a note out last week from analysts at DWS asset management. They observe that a 2019 report by America’s Pledge coalition worked out what extra clean energy capacity might be deployed in a “bottom-up2 scenario – in this situation the US could deliver a reduction in greenhouse gas emissions of 37% by 2030 which would be in line with a sub 2 degrees global increase in temperatures. If the federal government got involved, by contrast, the US could reduce

“GHG emissions by 49% below 2005 levels by 2030, which goes beyond the 45% widely assumed to be in line with the 1.5ºC of warming. …“For the power-generating sector, the scenario “federal government is all in” could mean average annual capacity additions rising from 29 gigawatt (GW) today to 75GW between now and 2030, as we see in our “Chart of the Week”, with solar and wind making up 85% of these additions. The end result would be that by the end of this decade, clean electricity could provide 77% and renewable energy 49% of total U.S. power generation, respectively.”

As I say, expect a massive boost to renewables in the US in the next few years.  All of which brings me nicely to the missing jigsaw in the puzzle – carbon pricing. Personally, I would much prefer that the US and Europe set realistic prices for carbon emissions and then let the market figure out how best to reduce emissions. That way we would stop money from being squandered on the wrong technologies. Europe is much further along the curve here but they don’t have a carbon tax as such but rather EU Allowances (EUAs) which are a form of carbon allowance used as the main currency in the EU Emissions Trading Scheme (EU ETS). The EU ETS is a form of Carbon Emissions Trading Scheme whereby total emissions are capped, Carbon Credits are allocated (free or by auction) and companies are allowed to trade those Carbon Credits between themselves.

This pricing is already tracked by at least one UK listed exchange-traded fund which I talked about a few months ago in my FT column. In truth, this emissions scheme has not been perfect and isn’t really a proper reflection of the price of carbon but its not useless either and interestingly there’s growing evidence that investors are starting to take a keen interest. Ocean Wall, a UK advisory house that focuses a fair bit of attention on clean energy has a note out today called CARBON – CREDITS, CAPTURE AND STORAGE, which has some interesting observations on this relatively new market. Their key point is that along with an uptick in carbon credit prices, more and more hedge funds have entered the space. Ocean Wall reckons these investors are anticipating that Covid will accelerate the move to be cleaner and so time frames to achieve greener emissions will tighten. Crucially there’s talk amongst these hedgies of Euro 40 pricing by 2022.

Here’s the longer Ocean Wall narrative:

“At about €25 a tonne, the carbon price is already high enough to have started to push coal off the electricity grid, with utilities switching to less-polluting natural gas or carbon-free renewables. The next stage, traders suspect, is for the carbon price to rise high enough — between €40 and €50 a tonne — to start forcing other sectors to invest in cleaner technology and fuels — good for the environment, but a seismic change for industry, the impact of which is not yet fully understood.

“It’s not just hedge funds that are showing an interest – Vitol, the world’s largest independent energy trader, is expanding its five-strong carbon team. Some of the world’s biggest hedge funds like Brevan Howard and Citadel are also said by rival traders to be playing more of a role, while banks such as Morgan Stanley, Macquarie and Citi have been steadily building their teams, looking to profit both from increased client activity and in-house trading. Insurers and pension funds are also reported to be taking a bigger interest as a potential hedge against climate-related parts of their portfolios. In the face of a deep recession, the EU has not wavered in its commitment to tackle climate change, despite the associated costs. Its revised aim is to reduce greenhouse gas emissions by 50-55 per cent by 2030 from 1990 levels, up from the current target of 40 per cent. Expectations of where the price may eventually settle vary widely. But in more than a dozen interviews with hedge funds, banks and investors active in the sector, not one said that they believed prices would fall significantly. The only differences were in how far they might rise, over what  timeframe and how big the political risk might be should the mood in Brussels change. “The carbon mechanism is already pushing out thermal generation and the next carbon abatement is likely to come from the industrial sector, for them to reduce their carbon emissions and encourage investment you need to see a much higher carbon price.” 

“EU leverage Traders estimate that the price may need to double to about €50 a tonne in the coming years to have the full impact the EU intends. The key difference to the oil market is that in the carbon market the EU essentially holds all the levers of supply, writing the rules and deciding how many EU carbon allowances, or credits, to release — or absorb — to influence the price over time. The EU ultimately controls the whole supply. That is not to say it isn’t a real market. In the short-term buyers and sellers often respond to the usual signals of supply and demand. If the economy slows and emissions go down, more participants are likely to sell, as seen this spring when coronavirus curbed demand and prices dropped almost 40 per cent from €26 to €16 a tonne. If the price falls too much — or potentially rises too high — the EU has the ability to tighten or loosen supplies through the “market stability reserve”, or MSR, which was launched in 2019 to in effect reset the market after it had languished under the weight of excess supply built up during the financial crisis.”