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The Future of Energy Policy

Strategas Economic Outlook

As part of an aggressive climate change policy, the Biden administration has put forth multitrillion‐dollar legislation that could impact the Energy sector for decades. We sat down with Strategas' Courtney Rosenberger to discuss its impact and other Energy priorities the administration might pursue.

You've noted that the current administration is seeking to make fossil fuels more expensive and renewables cheaper. Can you expand on that?

The Biden administration wants to cut U.S. emissions in half by 2030, relative to 2005 levels, by increasing the cost of fossil fuels (via higher taxes, more regulation and less distribution) and lowering the cost of renewables (via subsidies and renewable energy mandates). The president has two levers to accomplish that – legislation and regulation.

On the legislative side, the administration put forth two major bills, one now law, designed to spur green energy utilization through direct funding (think electric vehicle charging and electric buses) and renewable energy tax credits. On the regulatory side, we see the administration taking a "whole of government" approach to climate change, ranging from the SEC requiring companies to disclose emissions, to the Federal Reserve incorporating climate risks into bank stress tests, to the Labor Department allowing 401(k)s to invest in ESG funds.

Are there any concerns about the administration's approach toward climate?

A big question with the approach of higher‐priced fossil fuels and lower‐priced renewables is timing. How long will it take to build out an electric vehicle charging network? And with a more onerous fossil fuel environment, would that mean consumers pay more for gas in the meantime? The same goes for power generation – even with sizable tax credits, the U.S. electrical grid can't transform overnight. So if methane fees pass into law or new emissions regulations are introduced, will consumers end up paying more in the interim period between renewable buildout and their imposition?

Consumer sensitivity to rising energy prices also leads to questions around how likely the administration's legislative and regulatory mechanisms will remain in place. Many of these measures are quite partisan, and we have seen how quickly a change in party can create a change in policy.

What unexpected winners do you see emerging from the administration's climate goals?

One of our most out‐of‐consensus calls during the 2020 election was that large integrated oil companies might benefit from a more onerous policy environment for fossil fuels. We based this off what happened in 2009, when the big tobacco companies were in favor of greater regulation because it made it difficult for smaller companies to compete. Based off smaller producers' own admissions, a more onerous tax and regulatory environment would hamper their ability to compete with larger companies. This would give large companies the opportunity to take market share as well as benefit from lower supply and less competition.

It's not uncommon for the party in the White House to lose congressional seats in the midterms. Should the Democrats lose the House of Representatives in 2022, what actions could the administration take to advance its climate agenda?

In this scenario, there would be virtually no pathway for climate legislation. Regulatory and executive powers will be the only real power that Democrats can levy. We would expect actions designed to reduce emissions and make production more costly. The most significant action, however, might be in the financials space, which could include making climate change exposure a systemic risk for companies, enhanced disclosure requirements for publicly traded companies and measures to reduce oil & gas companies' access to capital, such as through climate stress tests.

What are some underdiscussed long‐term trends in the renewable energy space?

Policy permanency is always going to be a concern in the U.S., given the potential changes in power each election cycle. We're watching how the industry engages in lobbying in the future. Looking at the industry today, we see strong lobbying efforts from green energy companies for energy storage, electric vehicles with charging and alternative fuels, and to a lesser extent wind and solar.

Also, when it comes to green energy investments, the companies that are often in ETFs and larger funds are not necessarily the greatest beneficiaries from U.S. policy. That's not to say that these companies wouldn't benefit from initiatives going on overseas, given the global climate push at play, but if investors are making decisions based off U.S. policy, there is some mismatch in terms of country domicile and labor usage they should be aware of.

What is the current outlook for federal drilling permits and fracking?

There was a lot of attention paid to the administration's suspension of new oil and gas leases at the beginning of 2021. This suspension has run into issues with the courts, and though the administration is appealing the court rulings and continues to make efforts to limit new leasing, it has announced it will proceed with auctions on new lease sales. New drilling permits on existing leases continued throughout the suspension. We don't expect any action to be taken on fracking – banning fracking entirely would require an act of Congress, an idea that does not have enough support at this time.

Do you think energy companies can evolve with the conversion to green energy, or are they destined to follow in the path of the coal industry?

The Energy Information Administration predicts that U.S. consumption of petroleum and natural gas will increase through 2050 and remain the dominant sources of fuel generation. The trend toward renewable energy may be set, but energy companies have decades to evolve or develop new technologies. There is a long way to go before the U.S. – or the world – can move off fossil fuels.

For the full two‐part conversation with Strategas, be sure to check out Baird's Energy Policy Q&A.

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