President-elect Joe Biden stood for election on a far-reaching environmental plan which, although it will be harder to implement with the Republicans likely to control the Senate, still represents a dramatic U-turn from President Donald Trump’s term in office. Even without congressional support, Biden will be able to tighten vehicle fuel economy standards, set more ambitious targets for reducing carbon emissions from power plants, and encourage individual states to implement their own measures. The net impact on the economy will, at worst, be slightly negative and, if it boosts investment and accelerates innovation, could even turn out to be positive.
- President-elect Joe Biden stood for election on a far-reaching environmental plan which, although it will be harder to implement with the Republicans likely to control the Senate, still represents a dramatic U-turn from President Donald Trump’s term in office. Even without congressional support, Biden will be able to tighten vehicle fuel economy standards, set more ambitious targets for reducing carbon emissions from power plants, and encourage individual states to implement their own measures. The net impact on the economy will, at worst, be slightly negative and, if it boosts investment and accelerates innovation, could even turn out to be positive.
- In line with the Paris Agreement, Biden’s plan is to “ensure the U.S. achieves a 100% clean energy economy and reaches net-zero emissions no later than 2050”. Although Biden can implement some elements of his plan via executive order, a large part of it would require congressional action, which is now unlikely. Biden was relying on using the revenues raised from reversing the Trump tax cuts for corporates and high-income earners to fund Federal investment in clean energy research and innovation.
- Nevertheless, since more than half of America’s Greenhouse Gas (GHG) emissions come from transportation and electricity generation that means, even without the explicit support of Congress, there is scope for Biden to put the US on track to reduce GHG emissions significantly. Furthermore, although the Senate appears unwilling to support mitigation measures like cap and trade programs or carbon taxes, the states themselves are already acting independently of the Federal government. States in the Northeast have a long-running cap and trade system covering the power sector, which has accelerated the transition from coal-fired power plants to cleaner natural gas and renewables generation. California’s cap and trade system also covers large industrial polluters, and it has led a coalition of states to impose tougher air pollution standards on vehicles.
- With the key interim reports for the IPCC’s 6th assessment due for release next year, we expect climate change to rise back toward the top of the global policy agenda in 2021. The appointment of John Kerry to be Biden’s global climate envoy indicates that the incoming administration wants to be a global leader on the issue. Nevertheless, we strongly doubt that the Biden administration will end up imposing sanctions on other countries for perceived inaction on climate change. Biden would be risking his own credibility if he demanded action from other countries that his own Senate was unwilling to support domestically, and when the US remains one of the worst offenders in terms of fossil fuel energy consumption on a per capita basis.
- Estimates of the cost of taking action to prevent climate change and the cost of not acting are both the subject of wild speculation. The impact on the US economy of not acting would probably be limited to 1% or 2% of GDP, and even that is the cost by the end of this century, but GDP statistics do a poor job of measuring the negative externalities from climate change.
- We also think the costs of preventing climate change are often over-stated. (See here.) Cap and trade programs and carbon taxes are usually designed to be revenue neutral, with the money raised used to fund investment in new green technologies. The ten-fold gain in Tesla’s stock price over the last 12 months may not be fully warranted, but it illustrates that investors expect the shift to electric vehicles to be profitable. There will be losers as well as winners – with states like Texas and West Virginia and fossil fuel energy firms negatively impacted – but, overall, the impact on the economy should be close to neutral and might even be a net positive in the long-term.
What steps will Biden take to tackle climate change?
In this Focus we first review the basics of climate change and greenhouse gas (GHG) emissions, then discuss what steps we think the Biden administration will take to tackle climate change and what impact that might have on the economy.
Climate change targets – the basics
In its 5th Assessment Report released in October 2014, the UN’s Intergovernmental Panel on Climate Change (IPCC) concluded that human activity was the dominant cause of climate change mainly via increasing GHG emissions which, if left unchecked, would be likely to lead to a rise in the global surface temperature of two degrees Celsius or more compared with pre-industrial temperatures. (See here.) According to the scientific consensus, a rise in temperatures of that magnitude would cause widespread environmental and economic destruction via higher sea levels, more extreme temperature swings and an increase in heavy precipitation events.
That said, the impact of not preventing climate change would fall disproportionately on emerging economies, particularly those closer to the equator and those with large agricultural sectors. Although some parts of the US would be affected – with California already experiencing a surge in wildfires and drought conditions – the overall impact on US GDP is expected to remain small, even by the end of the century.
The Paris Agreement, signed in 2016, committed its signatories to pursue efforts to limit the increase in global temperatures to 1.5 degrees Celsius, by ultimately reaching net zero GHG emissions by the middle of this century. Many countries have now pledged to reach net zero GHG emissions by 2050, with some signing up to an interim goal of halving their net emissions by 2030. (The European Union is currently discussing a proposal to increase its target for reducing emissions by 2030, from 1990 levels, from 40% to 55%.) Nevertheless, while the Paris Agreement binds each country to plan and report on their efforts to mitigate climate change, it does not include mechanisms to enforce those goals.
The IPCC is currently working on its 6th Assessment, with the full analysis included in the Synthesis Report due for release in June 2022. Before that, however, the IPCC will release the accompanying report updating the analysis on the current impact of climate change in October 2021. The news is unlikely to be good. Between 2015 and 2019, the average global surface temperature was 1.1 degrees Celsius higher than the pre-industrial 1880-1900 average. (See Chart 1.) That most recent five-year average represents a 0.25 degree increase over the preceding five-year period of 2010 to 2014. (See here.) 2020 is on track to be the second hottest year on record, trailing only 2016.
Chart 1: Global Surface Temperature
(Change in Degrees Celsius from 1880-1900 Average)
The upshot is that the goal of reaching net neutral GHG emissions by 2050 is already out of date. Because of the more rapid than expected increase in global temperatures, countries will come under pressure to act even sooner on climate change. Admittedly, the pandemic means that GHG emissions probably fell sharply this year but, with vaccines likely to allow a return to normal life next year, emissions will rebound in 2021.
As the pandemic fades, and on the back of the publicity that the IPCC’s 6th assessment will generate, we expect climate change to rise to the top of the global policy agenda next year.
GHG emissions – the basics
US GHG emissions did peak in 2004, in both gross and net terms, but the pace of decline has slowed in recent years. (See Chart 2.)
Chart 2: US GHG Emissions (mmt CO2 Eq.)
As Table 1 shows, the energy sector is responsible for the vast majority of total GHG emissions, with the agricultural sector also a significant contributor. Carbon sinks – mostly absorption by forests – reduced emissions by nearly 775 million tonnes of CO2 equivalents in 2018 but, as deforestation continues, that figure has been trending lower.
Table 1: US GHG Emissions (MMT CO2 Eq.)
Source: EPA (See here)
Nearly all energy-related GHG emissions are CO2 emissions generated by fossil fuel combustion. Table 2 breaks down those specific emissions by the end-using sector.
Transportation is now the biggest emitter, with industrial emissions falling steadily over the past couple of decades. That decline is in part because some heavy industry has been outsourced abroad and in part because, unlike transportation emissions that are mostly direct combustion from petroleum engines, industry emissions are largely indirect emissions from the associated electricity generation. The industrial, residential and commercial sectors have all benefitted from a reduction in indirect emissions achieved by shifting electricity generation from coal to cleaner natural gas and renewables.
Table 2: US CO2 Emissions From Fossil Fuel Combustion (MMT CO2 Eq.)
Source: EPA (See here)
Coal use for electricity generation began to plummet from the mid-2000s onwards and, despite the Trump administration’s aim of reviving the coal industry, it has continued to decline over the past few years. (See Chart 3.)
Chart 3: US Electricity Generation (Terrawatt Hours)
Source: BP Statistical Review 2020
As Chart 4 shows, nearly 40% of electricity generation now comes from natural gas combustion, with renewable sources accounting for slightly more than 10%.
Chart 4: US Electricity Generation (Terrawatt Hours)
Source: BP Statistical Review 2020
Dramatic improvements in fuel economy have helped to keep a lid on overall transportation CO2 emissions, with the CO2 emitted per mile driven by current vehicle models down nearly 25% from 2005 levels and 50% from 1975 levels. (See Chart 5.)
Chart 5: Emissions of New Vehicles (CO2 g/Mile)
Source: EPA Automotive Trends Report
But those gains in fuel economy have been largely offset by an increase in total miles driven by Americans. After doubling between 1975 and 2005, miles driven did briefly level out in the late 2000s, as high fuel prices and the recession triggered by the financial crisis took their toll. (See Chart 6.)
Chart 6: US Total Vehicle Miles Driven (bn, 12m Ave)
Source: Federal Highway Authority
Miles driven began to increase markedly again after 2015, however, as gasoline prices fell back and the economy continued to go from strength to strength. But those increases were dramatically reversed earlier this year when much of the country went into lockdown contain the coronavirus pandemic. If Americans end up driving roughly 10% less miles this year and the structural improvements in fuel economy continued, then that should result in a similar-sized drop in total transportation GHG emissions in 2020.
The big question is whether those declines will be reversed next year – assuming that vaccines largely eliminate the COVID threat – or whether some of the downshift ends up becoming permanent? Many will continue to work from home, at least for a few days a week, and some business travel will be replaced by online meetings. Nevertheless, we expect most of the drop off in miles driven to be reversed over the next year or two.
US GHG emissions in a global context
Although US GHG emissions have fallen over the past couple of decades, global emissions have continued to rise inexorably, largely because of China’s emergence as an economic powerhouse and growth in other key emerging markets with big populations, like India. (See Chart 7.)
Chart 7: CO2 Emissions (mmt)
Source: BP Statistical Review
Nevertheless, China has done a better job of holding down the growth in its emissions in recent years, albeit partly because low-emission service sectors now account for a bigger share of the economy. But there has nevertheless also been a dramatic increase in renewables consumption which, for the first time, exceeded the US in 2019. (See Chart 8.)
Chart 8: Renewable Consumption (Exajoules)
Source: BP Statistical Review
Moreover, despite the massive surge in its emissions during its industrial transformation, on a per capita basis China still emits significantly less than both the US and the EU. (See Chart 9.)
Chart 9: Per Capita CO2 Emissions (mmt)
Source: BP Statistical Review
GHG emissions and global trade
As we noted earlier, deindustrialisation in the US has effectively outsourced some carbon emissions alongside the underlying production. The OECD’s figures, which only run to 2015, show that China was a net exporter of 1,309 million tonnes of CO2, whereas the US was a net importer of 785 tonnes. (See Table 3.) Russia and India are also big net exporters of carbon emissions to the rest of the world, with Japan and the European Union both significant net importers.
Table 3: CO2 Embodied in Global Net Exports (mmt) (+ve number => net carbon exporter)
Looking at bilateral trade with the US specifically, however, the picture changes slightly. (See Table 4.) China and then India are the biggest net exporters of carbon emissions to the US, but Canada runs a close third with Mexico fourth. Canada’s emissions are explained by the expansion of oil sands production, which uses roughly half a barrel of oil in energy to extract one full barrel of usable oil from the sludge.
US climate change policy in review
The Obama administration’s Climate Action Plan aimed to reduce GHG emissions by around 27% from 2005 levels by 2025. The key components of that plan included progressively tightening vehicle emissions standards and, via the Clean Power Plan, cutting carbon emissions from electricity generating power plants by 32%, from 2005 levels, by 2030. The latter reduction was to be achieved largely by closing coal-fired power plants and replacing them with plants powered by natural gas and renewables. Announced in 2012, the EPA targeted improving fuel economy standards for cars and light trucks to an average of 47 miles per gallon by 2025, equivalent to an increase of around 5% per year.
Table 4: CO2 Embodied in US Imports (mmt)
In addition to pulling out of the Paris agreement, President Trump also rolled back the Obama-era targets for improved fuel economy standards and cancelled the Clean Power Plan. The current rules, only set within the last 12 months, do still call for further improvements in fuel economy standards and reducing emissions from electricity generation, but the targets are very modest.
The complicating issue for fuel economy standards is that, historically under the Clean Air Act, California has been granted an exemption since the late 1960s to impose its own air quality standards. Other states have chosen to follow those rules instead of sticking to the Federal guidelines. As it stands, California and 23 other states are currently suing to stop the Trump administration’s attempts to ease the Federal fuel economy targets, while the administration has been attempting to strip California of its exemption on air pollution rules. None of this litigation is likely to reach a conclusion before Trump leaves office and Biden takes over.
The Green New Deal (GND), originally unveiled by two Democrats, was heralded as a potentially game-changing plan for tackling climate change. In reality, however, it is a 14-page non-binding congressional resolution that is long on virtue signalling and short on the detailed specifics of how to achieve net carbon neutrality. It’s stated goal is to ensure that within a decade, 100% of “power demand” be met through “clean, renewable and zero-emission energy sources”, which would include retrofitting existing buildings to make them more energy efficient, promoting clean manufacturing and overhauling transportation systems. But there is very little detail on exactly how to reduce America’s demand for fossil fuels all the way to zero by as soon as 2030, which is a completely unrealistic target.
Despite the lack of details in the GND proposal, Republican Senate Leader Mitch McConnell had his chamber vote on the resolution last year and, while most Democrats (or those who usually caucus with the Democrats) abstained, three Democrats and one independent voted against it. Of those four, three will be returning to the Senate next year, illustrating that, regardless of the results of the Georgia Senate run-off elections, there won’t be majority support in the next Senate for any environmental legislation as radical as the GND.
US climate change policy under Biden
Joe Biden’s pre-election environmental plan was less grandiose than the GND in its aims but included more concrete details. In line with the Paris Agreement, its stated aim is to “ensure the U.S. achieves a 100% clean energy economy and reaches net-zero emissions no later than 2050”, which is a much more achievable timeline. The appointment of John Kerry to be the first cabinet-level climate envoy, who will also be a member of the National Security Council, is a statement of intent that addressing climate change will be a high priority for the Biden administration.
To quote from his election website, “on day one, Biden will sign a series of new executive orders with unprecedented reach that go well beyond the Obama-Biden administration platform and put us on the right track.” That illustrates he will be seeking to impose tougher fuel economy standards on vehicles than Obama’s targets and push for a greater reduction in carbon emissions from electricity generation.
Biden’s plan pledges to develop “rigorous new fuel economy standards aimed at ensuring 100% of new sales for light- and medium-duty vehicles will be electrified”, although it doesn’t give a deadline for when new gasoline-powered cars and light trucks would be phased out. The campaign did, however, put a deadline of 2035 on reducing carbon emissions from buildings by 50%, which would imply a reduction in total US net GHG emissions of close to 10%.
Although Biden can address vehicle fuel economy standards and reducing carbon emissions from electricity generation by executive order, a large part of the rest of his plan would require congressional action, which is now unlikely to become reality. Biden was relying on using the revenues raised from reversing the Trump tax cuts for corporates and high-income earners to fund Federal investment in clean energy research and innovation.
The pledge on the campaign website that “polluters must bear the full cost of the carbon pollution they are emitting” suggests that a Biden administration might have considered trying to implement Federal carbon taxes and/ or cap and trade programs to reduce emissions by different sectors. But, again, since Congress holds the power of the purse, those would be non-starters given the lack of support among not just Republicans in the Senate, but at least several Democrats too.
Nevertheless, ten states in the Northeast that belong to the Regional Greenhouse Gas Initiative already have cap-and-trade programs, to reduce carbon emissions from the power sector specifically. California has a broader multi-sector cap and trade carbon program that covers large industrial polluters too. So even if Congress doesn’t implement a Federal cap-and-trade system, Democrat-controlled states will continue develop their own programs and might expand those programs to cover more sectors or to add carbon taxes too.
Cap and trade programs set the quantity of carbon emissions and then, via auctions of emissions allowances, the market sets the price for carbon. Cap and trade programs work well when there are only a few large polluters in a sector – particularly the power sector. By putting a price on carbon emissions, they encourage power companies to switch from coal-fired power plants to lower-carbon natural gas plants and to encourage the adoption of renewables sources. But cap and trade programs could be extended to other industrial sectors that are particularly big polluters.
But the administrative costs of running auctions of emissions allowances would quickly become unworkable in sectors like transportation, where there are many individuals who are all responsible for a small share of the emissions. In those circumstances, a carbon tax would be more appropriate. Carbon taxes raise the price of the carbon-emitting good, in this case gasoline, and the market determines the quantity consumed.
Biden also wanted Congress to set legislative interim targets for reaching net carbon zero by 2050, including a target for the end of Biden’s first term in 2025, and enforcement mechanisms to ensure that progress was made toward those targets. That is now unlikely to happen, unless Democrats make significant advances in the 2022 mid-term elections. Again, however, although Federal action is unlikely, individual states are already setting their own targets. California has aggressive targets of reducing its GHG emission from 1990 levels by 40% in 2030 and 80% in 2050.
Climate change in US foreign policy
Biden’s campaign pledges on climate change also include commitments to hold other countries to account for reducing their GHG emissions. According to the campaign website, he will “fully integrate climate change into [US] foreign policy and national security strategies, as well as our approach to trade.” The more specific threat is that “the Biden administration will impose carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations.”
The Biden website singles out China for particular criticism, warning that he will “make future bilateral US-China agreements on carbon mitigation… contingent on China eliminating unjustified export subsidies for coal and other high-emissions technologies and making verifiable progress in reducing the carbon footprint of projects connected to the Belt and Road Initiative.” As we noted earlier in Table 3, China is the single biggest net exporter of carbon emissions globally.
Section 232 of the Trade Expansion Act does give the President the executive power to impose tariffs or other restrictions on imports that threaten national security. There is no reason why the definition of national security couldn’t be expanded to include climate change and the detrimental impact it could have on America’s environment.
That said, we strongly doubt that the Biden administration will end up imposing any sanctions on other countries for perceived inaction on climate change. It would be a staggering display of hypocrisy if the US demanded action from other countries that its own Senate wasn’t willing to support domestically, and when the US remains one of the worst offenders in terms of fossil fuel energy consumption on a per capita basis.
China is also making surprisingly good progress on limiting any further increases in its GHG emissions. It has already committed to phasing out conventional gasoline-powered vehicles and selling only “new energy” vehicles by 2035, taking it well beyond America’s own commitments. As part of the landmark bilateral climate agreement between China and the US, signed by President Barack Obama in 2014, China also pledged to stop its GHG emissions from increasing beyond 2030.
Admittedly, imposing carbon taxes on imports would be a way for Biden to take ownership and justify continuing with Trump’s existing tariffs on China. But it was notable that in Biden’s recent interview with the New York Times, while he took China to task for “stealing intellectual property, dumping products, illegal subsidies to corporations” and forcing “tech transfers” from American companies to their Chinese counterparts”, he didn’t include China’s environmental policies in that laundry list of complaints.
US GHG emissions – the outlook
The EPA’s latest long-run outlook suggests that the US will fall woefully short of reducing its GHG net emissions to zero by 2050. As Chart 10 shows, the EPA expects CO2 emissions to be broadly unchanged in thirty years’ time. Transportation energy consumption is expected to fall over the next couple of decades, albeit quite modestly, as electric vehicles replace gas-powered vehicles. But industrial emissions begin to creep up in the 2030s, as the growing size of the economy more than offsets any improvements in reducing the average emissions per dollar of GDP.
The question is whether the Biden administration, working within the constraints of a split Congress, will fundamentally alter that outlook? We doubt it, at least not within the next couple of years. There just isn’t the appetite among Senators, even some in the Democratic caucus, to push through a radical environmental agenda.
Chart 10: CO2 Emissions (mmt)
As President, Biden will use his executive powers to re-instate more aggressive targets for improvements in vehicle fuel economy standards and to reduce carbon emissions from electricity generation by phasing out coal use in favour of natural gas and renewables. But without Federal investment in clean energy technologies, attaining those targets could prove to be difficult without sufficient progress in developing things like new higher capacity batteries for electric vehicles and smart grids.
The private sector is perfectly capable of driving that innovation on its own but, as the Trump administration’s Operation Warp Speed program has recently demonstrated, progress can be accelerated with Federal investment, particularly if that is accompanied by a more streamlined regulatory approach.
Even without Federal support for investment in GHG reduction technologies, however, we suspect that states will increasingly take on the burden themselves, by either introducing their own cap-and-trade programs for controlling carbon emissions or expanding the programs they already have to cover more sectors or adopt more aggressive emissions-reduction targets. In sectors like transportation, states may consider introducing carbon taxes – although we suspect they would be more unpopular with voters, who would be directly affected by higher gasoline prices.
Climate change – the economic impact
Estimates of the cost of taking action to prevent climate change and the cost of not acting are both the subject of wild speculation. Republicans have claimed that the Green New Deal would cost close to $100 trillion, equivalent to five times current GDP. But putting a price on the GND is almost impossible because it doesn’t include any concrete proposals that could be accurately costed. Although that didn’t stop Republican-leaning think tanks from doing just that, most of the estimated costs were for social welfare programs and universal health care, not costs for addressing climate change specifically.
At the same time, Senator Ed Markey, who is the co-sponsor of the GND has claimed that not acting would reduce GDP by 10% by the end of this century. But that claim is based on the most extreme scenario in a National Climate Assessment, which is unlikely to become reality. Most estimates suggest the impact of not acting to address climate change on the US economy would be nearer 1% to 2% of GDP – and even then, only by the end of this century.
Cap and trade programs and carbon taxes are, by design, almost always revenue neutral. The money raised from cap and trade auctions of emissions allowances or taxes on carbon-intensive activity is normally used to fund investment in green technologies and innovation or improving zero-carbon public transport systems. In the same way, one of the key reasons why the Trump administration’s tariffs on imported goods from China didn’t have more of a negative impact on the US economy is because the funds raised from what was essentially a tax on US consumers, were redistributed as increased subsidies to farmers.
There is also no reason why phasing out domestic production of coal, crude oil and other fossil fuels would have a dramatic negative impact on national GDP, although there would be important regional and sectoral distributional effects. Coal mining only employs 44,000 Americans now, with oil and gas extraction accounting for another 160,000. Admittedly, another 100,000 work in petroleum refining and another 200,000 work in mining support services. Nevertheless, these are still relatively modest numbers in an economy that employs 143 million people. By comparison, Tesla already employs close to 50,000 people and, as far back as 2011, the BLS estimated that 3.4 million people were employed in the production of green goods and services.
Tesla’s soaring stock price is another reason for optimism. The ten-fold increase over the past 12 months may not be entirely justified, but it demonstrates that investors expect the switch from gasoline-powered to electric-powered vehicles to be highly profitable.
Overall, we wouldn’t necessarily conclude that environmental-protection measures taken by the Biden administration would be negative for the aggregate economy, although there will be big distributional impacts in states Texas and West Virginia and for firms in the fossil fuel energy sector. The national-level impacts are likely to be relatively muted and may, in the long-term, even be a net positive.
Paul Ashworth, Chief US Economist, firstname.lastname@example.org