As the saying goes, you wait ages for a bus and then two arrive at the same time. And so it was with politics last year, with the rebellion against the ‘establishment’ on both sides of the Atlantic spawning Brexit and a Trump presidency. Nine months on from Brexit and two months into a Trump administration, what impact could these have on the energy market?
A common theme of Brexit and Trump is control; the UK wants parliament to be sovereign, while Trump envisages a ‘great America’ that is characterised by increasing economic independence. The irony of both Brexit and Trump is that rather than railing against the establishments in Brussels and Washington DC, they are potentially creating protectionist markets that could easily conform to establishment rule.
The key economic risks of Brexit and Trump are that they create more inward looking markets in economies that have historically been outward looking. From an energy perspective the risk is reduced reciprocity, which potentially undermines investment, reduces affordability and constrains sustainability development.
Consider investment. Trump’s election mantra was jobs for Americans and the reversal of manufacturing industry being lost to lower labour cost markets, such as Mexico. If companies are financially incentivised to re-invest in US manufacturing industries they will probably invest less in foreign markets, which could impact US foreign direct investment flows. Reciprocally, foreign companies may be less inclined to invest in the USA and as energy demand is correlated with manufacturing output any shift in investment dynamics will impact energy supply-demand dynamics.
Investment is linked to affordability, as end-user sales revenue has to be sufficient to enable a return on investment. In less developed economies where energy infrastructure is aged and inefficient, with poor electrification rates and gas pipeline connectivity, the need for investment is greatest. But if US foreign investment at current revenue returns is unattractive compared with incentives to invest domestically then these developing economies could be forced to consider government subsidy of the investment or increased energy prices. Both would have a socio-economic impact. Government subsidies reduce the money available to invest in the social infrastructure, while higher energy prices make energy less affordable to the fuel-poor and can make the country less competitive in attracting business investment, which further undermines socio-economic growth.
While the potential impact of Trump on investment and affordability is theoretical, although not entirely unrealistic, the potential impact of both Trump and Brexit on climate change is not.
Donald Trump is a self-confessed climate change denier, and his choice for director of the Environment Protection Agency (EPA) reflects his views, although EPA head Scott Pruitt testified to the Senate Committee in January that he no longer considered climate change to be a hoax.
But Pruitt did not indicate he would take swift action to address environmental issues that may contribute to climate change, preferring to adopt a non-confrontational approach by declaring that there is still debate over how to respond. Yet for the EPA to be undecided on how to respond to climate change is in itself a climate risk.
Actions speak louder than words. In the first week of his presidency Trump replaced the climate page on the White House website with a fossil fuel based energy page and resurrected two controversial oil pipelines. Trump has also pledged to remove the US from the Paris Climate Agreement that commits parties to nationally declared contributions on climate actions.
While Trump’s anti-climate change rhetoric has been somewhat muted in recent weeks, his advisors have not diluted their militant views, with Myron Ebell, who led Trump’s transitional team for the EPA, calling the environmental movement ‘the greatest threat to freedom and prosperity in the modern world.’
The first, and arguably most important policy action concerning climate change will be the Clean Power Plan (CPP), intended to be Obama’s climate legacy. And as with his ‘Obamacare’ health care legacy it risks being either revoked or substantially amended.
When Pruitt was Oklahoma’s attorney general he filed at least 12 lawsuits challenging environmental protections and sued over the EPA’s clean power plan, which sets carbon emissions reduction targets for power generation plants and methane emission reduction targets for the oil and gas industry. The US exit from the Paris Agreement and revoking the CPP without any replacement emission reduction policy would remove the environmental integrity built by the previous administration. But the associated economic risks could be greater. Exports could become environmentally uncompetitive if government policy undermines the USA’s corporate environment reputation, and foreign investment could fall with reduced environmental integrity.
Brexit also raises environmental concerns. Green campaigners warn that without Brussels’ guiding hand the UK will renege on its environmental commitments as part of the EU. However, it is the remaining 27 EU member states that are potentially at greatest climate risk from Brexit, not the UK.
The UK government has taken a leadership role on carbon pricing at the European level and is the lead lawmaker on reforming the EU emissions trading scheme (ETS). It also provides almost €2 bn of funding for the scheme, which is central to the EU emission reduction policy.
Without the involvement of the UK post–Brexit there is a risk the ETS could be undermined, both financially and legislatively, and with it EU emission policy. But the UK does not have to be part of the EU to participate in the ETS.
Taken collectively, an impaired ETS post-Brexit together with the US exit from the Paris Agreement, the revoking of the CPP and an uncertain address of climate change, could significantly undermine global efforts to tackle climate change. It could also significantly elevate the role of China in global environmental economics, something that would surely be anathema to Trump. This alone should be reason enough for a re-appraisal of his climate thinking.
*Jeremy Wilcox is managing director of the Energy Partnership, an independent Thailand-based energy and environment consulting firm, T: +66 2 653 1263 Mobile: +66 860993375 S: energypartnership
