Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research and Head of Research Product for the Americas.
Laura Sanchez: And I'm Laura Sanchez, Head of Sustainability Equity Research for the Americas.
Stephen Byrd: Today, Laura and I will talk about the potential impact of the next Trump administration on the US energy transition, and on the US ESG Investing landscape.
It's Thursday, November 21st at 8 am in New York.
Now that Donald Trump has been re-elected, all eyes are on potential changes to the Inflation Reduction Act or IRA. So Laura, what are your expectations and on what kind of timeframe?
Laura Sanchez: There has been a lot of dialogue internally between our clean tech and public policy teams exactly on this question, Stephen. Basically, we continue to believe that a full repeal of the IRA is unlikely because a significant amount of investment has gone to Republican states that has in turn driven a good amount of good paying jobs. On the back of this, we have seen a large number of Republican legislators, as well as large oil and gas companies, write letters to high members of Congress supporting portions of the IRA.
Now, unfortunately, that doesn't mean that it won't be noisy. We do think that a partial repeal is likely, potentially a rebranding, and/or a clear phase out of the tax credits, by, let's say, the end of the decade.
It will take some time to get clarity around what's in and what's out to the second part of your question. We believe clarity on final changes is likely by the end of 2025 at the earliest, which is when the TCJA, or the Tax Cuts and Jobs Act, is set to expire. And so, a lot of tax related conversations and concessions will happen then.
Lastly, a point that I want to make here is that many technologies received support in the IRA, and even though the next 12 months will be volatile or noisy, as I said before, we do think that some of them are relatively safe. And those include the domestic manufacturing tax credit, the production tax credit for nuclear power, and the tax credits for carbon capture and sequestration technology, as well as for clean hydrogen.
Stephen Byrd: That's really interesting, Laura. So, it really is a bit more nuanced than we often hear from many investors with portion of the IRA that are clearly at risk, others much less so at risk. That's really helpful. And Laura, a related topic that comes up a lot is concern around tariffs. So, do you see any risk to clean technologies from elevated trade tensions?
Laura Sanchez: Yes, I see multi multilayered risks. The first, which is I think well understood by investors, is the potential risk for higher tariffs on goods imported from China. We know that the supply chain for energy storage specifically, and particularly lithium-ion storage batteries, is highly linked to China. And even though solar equipment also tends to come up in conversations with investors, the supply chain there has somewhat decoupled from China.
However, a significant amount of supply is still sourced from China domiciled entities that operate in low-cost countries, such as those in Southeast Asia. But another risk, and I think this one is less understood or discussed by investors, is the potential inflationary pressure that could result from number one, higher tariffs on imported materials that are needed in the manufacturing of clean energy technologies. And number two, the potential risk of China responding to US imposed tariffs with additional export bans on minerals or materials that are key for the energy transition.
We have analyzed a long list and believe that those at the highest risk of disruption include rare earths, graphite, gallium, and cobalt, which are all used in electric vehicles, but also in other clean tech equipment such as wind and solar systems, stationary battery storage, and electrolysers.
Now, Stephen. Along with tariff escalation, President-elect Trump may look to roll back important EPA regulations that were put in place by the current administration to put the country on track to meet Paris aligned goals. What are the most important regulations investors should watch in your view?
Stephen Byrd: Yeah, Laura, I think there are going to be several EPA regulations that are going to be targeted for rollbacks. Let me just start first on the truck side of things, the Clean Trucks Plan that's commonly known as the EPA Tailpipe Emissions Rule – could be rolled back. We could also see the greenhouse gas standards and guidelines for fossil fuel fired power plants get rolled back. And lastly, we could see waste emissions charged for petroleum and natural gas systems get rolled back.
So, I think the overall message is actually; that the stock implications of this are actually relatively modest in most cases. What this does, in my view, is it sends a signal in terms of greater support from the Trump administration for fossil fuel. Usage in a number of areas, transport, infrastructure, et cetera I think we'll see that in power. And this does line up with some of the work we've done around the growth in data centers that we think will be powered by natural gas fire generation. So, this is consistent with that, and we do expect to see multiple layers of rollback at EPA.
Laura Sanchez: And outside of changes to the stick – which are the EPA regulations that you mentioned – and changes to the carrot – which is the IRA – what are other factors or risks that investors with a mandate on sustainability should consider during a second Trump presidency?
Stephen Byrd: Yes, for investors that do focus on sustainability, a few things that are on our mind. We could see additional states restrict the ability of state pension funds to consider ESG factors in their investment decision making process. We also, I think will see a lack of federal regulation that will require corporates to disclose certain ESG information. I think that's quite clear. And then also there could be additional legal and regulatory challenges around corporates and asset managers using sustainability as part of their decision-making process, as part of their fiduciary duties. So those are all the things that are on our mind.
Laura Sanchez: I think it's worth noting that some states, California particularly, are moving forward with their state level decarbonization goals and greenhouse gas emissions rules. But there is one dynamic to consider or track and that is the EPA granting the state of California a waiver that is needed for the state to move forward with heavy duty low NOx rules. So, linking this back to the EPA rules commentary, Stephen, I think that one, the EPA 2027 low NOx rules is one to keep an eye on because it links to the California waiver and the California rules; and is something that could potentially impact some of those stocks.
Stephen Byrd: Well, that's a good point, Laura, and I think that highlights this potential distinction between actions at the state level versus at the federal level, but sometimes those do intersect, such as, with the California heavy duty low NOx rules. So that’s helpful.
Well, Laura, thanks so much for taking the time to talk.
Laura Sanchez: Great speaking with you, Stephen.
Stephen Byrd: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.
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