Trump and clean energy: five crucial policy areas to watch

After four years of unprecedented federal support, the US renewables sector is on the defensive.

President-elect Donald Trump, who takes office 20 January, has said he wants to dismantle the legislative and regulatory framework put in place by outgoing Joe Biden to address climate change and facilitate the energy transition.

What could occur – how, when and where – is creating heartburn for anxious sponsors of battery storage, offshore and onshore wind, solar, and related clean manufacturing projects.

With several hundred billion dollars potentially at risk, they are weighing whether to place projects on hold to await policy clarity from the new administration and Congress, continue with advanced development, or proceed with construction.

Adding uncertainty is Trump’s enthusiasm for muscular “American First” trade policies that threaten to up-end global supply chains and raise project costs at home.

The Inflation Reduction Act (IRA)

Trump campaigned for a second four-year term vowing to terminate the landmark law.

Since then, Republican leaders in Congress have sent mixed signals over their willingness to end, roll back, and withhold funding for IRA climate-related grants, loans and other spending programmes. Or, to claw back money committed and spent under the law.

Charting a path forward could prove difficult. In the fractious House party conference some members support IRA programmes that benefit their districts.

Estimates differ over how much of the $142.5bn allocated for those purposes is unspent. It could be as low as $50bn, or less. That’s an amount barely worth chasing to help pay for Trump’s proposed extension of income tax cuts passed in 2017 during this first term that will expire at year end. The cost: $4.6trn over a decade, according to the non-partisan Congressional Budget Office.

IRA tax credits appear more vulnerable. Their eventual cost will be three to five times higher, or more, over 10 years than advertised by Biden and congressional Democrats, according to private consultancies and Wall Street banks.

This is because, in most cases, there is no cap on their use, and loose interpretation of eligibility requirements by the Biden administration. Even at a forecast low-end $1.15trn price tag, their cost would pay for about 25% of Trump’s tax cut extension - if Republican lawmakers were to eliminate all IRA tax credits, an unlikely prospect.

At Trump’s behest, they do appear willing to axe those for electric vehicles whose estimated cost is $112bn, according to Department of Treasury.

Tax credits for solar and wind, two of the biggest IRA subsidies, will probably survive in truncated form with tougher eligibility criteria and be worth less. That could free up hundreds of billions of dollars for Trump's fiscal policies.

“Changes to the manufacturing and energy tax credits supporting these projects, or even the uncertainty that these policies may change could put at least some of these unspent investments at risk of disappearing,” Rhodium Group, a New York-based climate and energy research firm, said in a recent report.

Since third quarter 2022 when IRA took effect, $264bn has been invested in clean technology manufacturing, grid-scale clean energy, and industrial decarbonisation projects. Republicans opposed the legislation.

Those numbers were also positively influenced by the bipartisan $1.2trn Infrastructure Investment and Jobs Act of 2021 and $280bn CHIPS and Science Act of 2022 that assists domestic research and production of semiconductors. Trump also wants to claw back unspent funds from those two laws.

Environmental regulations

Trump has vowed to either repeal or roll back federal regulations that curb greenhouse gas (GHG) emissions. In his view, they constrain the US from achieving “energy dominance” with fossil fuels.

The headline targets are GHG standards for existing and new fossil fuel-fired power plants, and those for light-duty vehicles which comprise most of the national fleet. Also, methane emissions limits for oil and natural gas production.

In the big picture, watering down these regulations – if they withstand legal challenges – would slow US progress under Biden toward meeting his Paris Agreement pledge to reduce GHG emissions 50-52% by 2030 from 2005 levels. Trump doesn’t care as he plans to withdraw the US from the pact.

Utilities would face choices in response to a regulatory rollback combined with potentially less federal subsidy support for solar and wind under Trump.

Keep older fossil plants online longer, particularly those fired by coal as Trump wants, convert them to natural gas where possible, or close them on schedule and replace capacity with more natural gas, renewables, or nuclear.

New coal would appear off the table as utilities have cheaper and cleaner alternatives. Trump is betting that utilities will choose abundant natural gas far more often than renewables.

He may be wrong. US electricity demand is set to surge 16% over the next five years driven by new data centres and factories, after two decades of little growth, according to Grid Strategies, a research firm.

Renewables, particularly solar, will play a key role in helping meet demand with technology and a growing number of other firms committed to clean energy, which can often be brought online cheaper, closer to load, and faster than natural gas.

Permitting reform

Near the top of his domestic priorities, Trump vows to act fast to reform a federal permitting process for energy and infrastructure projects that both political parties agree is too costly, cumbersome, duplicative, and lengthy.

Their focus differs. Republicans favour reforms for both fossil (mainly natural gas) and renewables, a position supported by centrist Democrats, while those to the left want reform limited to carbon-free infrastructure.

Failure to act on permitting reform puts an estimated 100GW of US clean energy projects at risk of significant delay, representing 150,000 fewer jobs, according to American Clean Power Association, a national trade group. The average timeline for a power project to obtain federal reviews is 4.5 years and 6.5 years for transmission, leaving the US badly placed to fully meet future electricity demand growth.

To start, Trump has pledged executive agencies will expedite federal approvals and permits for energy projects and other construction worth more than $1bn. “GET READY TO ROCK!!!,” he posted on his Truth Social site.

Using that criteria, dozens of energy projects alone qualify including hydrogen, interstate transmission, natural gas export terminals and pipelines, solar, and offshore and onshore wind.

Environmental groups blasted the idea as illegal and a violation of the National Environmental Policy Act (NEPA), a landmark 1970 statute which requires federal agencies to evaluate the environmental effects of their decisions, including unavoidable adverse impacts.

Republicans in Congress want to reform NEPA and limit the ability of project opponents to delays projects for years through litigation. This would require a new law.

Tariffs

This may be the biggest wild card with Trump. The self-described “Tariff Man” has embraced tariffs more than any president in modern America. He views them as both a bargaining tool on trade and a bludgeon to punish both friend and foe for perceived inaction on unrelated issues.

On trade, Trump said one of his goals is to get other countries to reduce and ultimately end their tariffs on US goods. “It’s called you screw us, and we screw you,” he said, adding that if they impose a new tariff, the US in response would slap on a “reciprocal, identical” tariff.

As a carrot and stick, he believes the threat of tariffs will pressure mainly China and neighbouring Canada and Mexico to help crack down on the flow of illegal drugs and immigrants to the US.

He wants to end US dependence on China for essential manufactured goods and processed critical materials within four years. His sees tariffs forcing development of alternative supply chains.

Trump has floated so many proposals for increasing tariffs and creating new ones that investors’ heads are spinning, leaving them confused and seeking clarity from him or his inner circle. So far with little success.

Among his proposals are new universal baseline tariffs up to 20% on most foreign goods regardless of origin, a new 25% levy on all commodities and products from Canada and Mexico, up to 60% tariffs on all Chinese imports, and others of varying amounts on EU aluminum, steel, and industrial products.

What Trump doesn’t talk about, at least publicly, is what he will do if his policies provoke trade wars and close US export markets.

Clean energy executives dread the possibility of trade wars given US battery, solar, and wind sectors all rely on imported components and processed critical materials.

The corporate tax rate

Trump has proposed plans to reduce the federal statutory corporate income tax rate from 21% to 15%. This would only apply to firms that make their products in the US, according to Trump. How limiting this eligibility requirement would be in practice is unclear for American companies with overseas manufacturing operations and foreign ones operating here.

For those that qualify, a lower corporate tax rate would provide a strong incentive to reshore manufacturing and reinvest profits in the US.

The flip side is that a lower corporate tax rate could weaken the market for tradable federal clean energy and manufacturing tax credits available in the Inflation Reduction Act (IRA). These must be claimed against taxable income.

The 2022 climate law’s so-called transferability feature has been a solid success thus far, creating a new market-based system whereby project owners who qualify for, but are unable to use tax credits can immediately sell them at a discount to an unrelated third-party investor.

This enables them to raise cash and financing, while bringing non-traditional players into the fast-growing clean energy market that are looking to lower their tax bills.

Crux, a tax credit trading platform, estimated the deal value of transactions at $7bn to $9bn in 2023, the first full year under IRA, and between $9bn and $11bn in the first half of 2024.