A new global paradigm for global climate action
President Elect Joseph R. Biden comes to office with what has, correctly, been called a "transformational" plan for action to curb climate change and to cope with its unavoidable consequences.
The cornerstone of his policy1 — officially called the Biden Plan for a Clean Energy Revolution and Environmental Justice — is to recommit the United States to the Paris Agreement on climate change, and to set a target for the US to achieve net-zero carbon emissions by 2050. That target is generally accepted as being in line with the goals of the Paris Agreement on climate change which seeks to limit global climate heating to well below 2 degrees Celsius above pre-industrial levels, and ideally, to keep it closer to 1.5 degrees.2
The impact of the world's largest economy pivoting to this new policy cannot be understated. It is particularly important given that it tops off two months in which several of the world's major economies have now announced net-zero commitments.
While the prospects for legislative adoption of the Biden climate agenda by Congress may prove challenging, it provides a clear directional indication of the new administration's intentions and priorities. To that end, the Biden administration is likely to hit the ground running with orders, actions, policies and proposed regulations aligned with the climate agenda that do not require congressional approval. Such efforts could range from changed federal government procurement policies to enhance renewables and biofuels to new federal building standards and proposals to revisit major regulations involving auto emissions, fuel standards and power plant emissions. Even in the absence of wholesale congressional legislative adoption, other levers are available to the administration to advance materially the objectives set forth in the climate agenda discussed below.
Key aspects of the Biden Climate Plan
The extensive plan covers every part of the American economy, and touches on social, racial, and foreign policy issues. As yet, some aspects remain high-level, with details on the mechanisms to achieve them yet to be announced.
The following are the key elements, along with concrete commitments published to date:
- Infrastructure & housing policy: commitment to spend US$1.7 trillion over the next 10 years, leveraging additional investments from the private sector, and state and local governments, to total more than US$5 trillion; commitment to reduce the carbon footprint of the US building stock by 50% by 2035.
- Renewable energy: Clean Energy Revolution legislative package, including investment in clean energy, and climate research and innovation; incentives for rapid deployment of "clean energy innovations" across the economy; doubling offshore wind by 2030.
- Carbon sequestration: Commitment that all federal funding will reduce climate pollution "as much as possible"; and to natural solutions to removing carbon dioxide from the atmosphere, such as carbon sequestration projects based on forests and agriculture.
- Adaptation and resilience: The plan commits to creating "clean and resilient" communities; infrastructure spending to achieving coastal restoration including bridges and roads that withstand high winds and don't wash out in storms and high tides.
- Disclosure: Requiring public companies to disclose climate risks and greenhouse gas emissions in their operations and supply chains
- Technology & research: Focuses on electric vehicles; establish a new research body, called ARPA-C, for "Advanced Research Projects Agency focused on climate", with priorities including green hydrogen, refrigeration and coolants, biofuels, green steel, and nuclear energy.
Countries race to the "top" for climate ambition
In the past two months alone, China,3 Japan,4 and South Korea have all announced aggressive emissions reduction targets.5 China seeks to achieve net-zero emissions by 2060, while both Japan and South Korea have set a 2050 goal for reaching net-zero emissions.
The European Union in September also announced a proposal to increase its climate ambitions, with a new target of reducing emissions by at least 55 percent from 1990 levels by 2030, and a continued commitment to net-zero by 2050.6 In 2019, the United Kingdom enshrined its net-zero by 2050 commitment into law.7
Upon President Elect Biden's inauguration in January, the United States of America will join the ranks of jurisdictions that have a firm target. These countries comprise some two-thirds of global GDP.8 The total percentage of the world's economy where a net-zero by 2050 commitment now applies is in fact higher, with several jurisdictions enshrining the target into law, including for instance the United Kingdom and New Zealand.9
Private sector ramps up climate ambition
This year has also seen a ratcheting-up of targets by major emitters in the private sector.
Companies from a range of sectors, including finance,10 energy,11 transportation,12 consumer goods,13 and many others, have announced targets that meet the net-zero by 2050 goal — and often exceed them.
These measures include reaching zero-emissions and even offsetting all emissions caused by the company in the past. Major investment houses are also divesting from thermal coal and making murmurs about other fossil fuels.
A careful reading of the most recent climate plans reveals that big players are now looking closely at supply chains and procurement policies, suggesting plans to push carbon out of the operations of their business partners.
Rare phenomenon, race to the top presents enormous risks and opportunities
We are witnessing, it appears, a rare phenomenal in global politics and policy: a race to the top has broken out on climate action.
Such a race carries tremendous opportunities for business, but an acceleration of climate action also poses risks such as a faster than expected emergence of stranded assets and a decline in some goods and services, as well as rising prices for carbon credits and offsets as demand for them increases.
For instance, the recent announcements by Japan and South Korea will likely mean that those countries will move more quickly to a wider adoption of renewables and hydrogen. They may also look to a greater role for carbon pricing; South Korea already has an emissions trading system, and Japan may expand its voluntary scheme. In both of those jurisdictions, the role of offsets may be key. Under a Biden administration, the US also proposes to explore greater support for offsets, in particular those related to agriculture and forestry. There is also clear support for technologies such as carbon capture utilisation and storage (often referred to by its acronym, CCUS), and other innovative methods to sequester carbon dioxide and other greenhouse gases from the atmosphere.
Biden's plan includes establishing a new research institute to support this kind of innovation, to be called ARPA-C.
These developments present a host of opportunities and risks for businesses operating in, or with, the United States.
For instance, there is scope for certain businesses to benefit from increased collaboration with, and investment from, the US for the development of a green hydrogen industry. Given that several nations have already made relatively good progress in relation to hydrogen, there may be opportunities for businesses in those places to transfer skills, services, and products to the US. Similar opportunities are likely to arise in relation to the other types of technology that will form part of the response to climate change, both to mitigate and sequester emissions, as well as for adaptation and resilience.
The plan also relies on creating nature-based projects that will sequester carbon dioxide, opening the door for a large expansion of the carbon farming sector in the United States.
To the extent that the US chooses to expand its use of offsets, and depending on how it goes about doing so, there may be opportunities arising from markets in carbon credits.
On the risk side of the ledger, if the US makes it mandatory to report on climate risks, some companies may find themselves either unprepared or with uncomfortable stories to tell. Preparation for this possibility should commence now.
There is also a chance that the Biden administration could enact border adjustment taxes that could account for the emissions produced by particular suppliers of goods. The European Union has signalled that it may adopt this measure, and Japan and Korea could also look to treat products differently depending on their associated carbon emissions. This could pose a risk to the competitiveness of some products.
It is difficult to predict the precise ways these measures could impact specific companies, but it is important to note that these measures are all now under active consideration by major economies.
The debate over climate action has shifted dramatically in the past five years. Major economies are moving beyond the old notion that reducing emissions must come at the expense of economic growth.
Now, the conversation occurring globally — in both the public and private sectors — is over long-terms targets, whether they are sufficient to contain emissions to meet the goals of the Paris Agreement, and the best ways to achieve those goals, with an emphasis on opportunities for economic growth and development.
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2 There is debate over this target, and much depends on other actions taken between now and 2050.
9 See e.g., https://www.gov.uk/government/news/uk-becomes-first-major-economy-to-pass-net-zero-emissions-law. Note that Canada also proposes to introduce law to support its policy commitments later this year
11 See e.g., https://www.theguardian.com/environment/2020/feb/26/rio-tinto-announces-1bn-spend-to-reach-net-zero-emissions-by-2050; https://www.smh.com.au/business/companies/bhp-sets-new-bar-with-carbon-cuts-targeting-steel-mills-shippers-20200910-p55ua3.html; https://www.theguardian.com/business/2020/feb/12/bp-sets-net-zero-carbon-target-for-2050