It is curious to see how an attention grabbing Donald Trump is sucking the air out of major developments that are proceeding regardless of his posturing. There is little doubt that two related events are charting a massive change in the investment scene, and yet the changes being caused by these developments are still often overlooked by the mainstream investment community. They certainly are not competing with the "Trump show," but this might change soon as Trump is likely to inject his personality into the story.
The big themes are:
1) A dramatic change in the world energy system, which involves exiting fossil fuels and adopting renewable energy, primarily wind and solar PV, with additional investment in storage involving pumped hydro and lithium batteries.
2) Decarbonization of the world's energy system through the above change in the source of power. The reason for decarbonization is dramatic changes in climate due to burning fossil fuels. There are active attempts to deny this stuff, supported now by Donald Trump. However around the world people are changing their practices as a result of climate change, be they grain farmers in Kansas, wine-makers in Australia, or just people everywhere coping with climate change-induced heat or cold.
Virtually every retirement portfolio has at least one major oil and gas company in it -- e.g., Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Shell (NYSE:RDS.A) (NYSE:RDS.B), BP (NYSE:BP), and Total (NYSE:TOT). Only Total has a major commitment to decarbonize its business, and even Total is still heavily committed to oil and gas.
Many other companies that have a place in a retirement portfolio are also going to be impacted by this change. For example, the car industry is changing with the emergence of the fully electric vehicle. There will be winners and losers as this transition takes shape. Several companies have emerged from obscurity to be major players. The include Tesla (NASDAQ:TSLA), which is well known to Seeking Alpha readers. There are also several emerging Chinese companies, including BYD (OTCPK:BYDDF) and BAIC Motor Corp (HK:1958), that are leading the BEV (Battery Electric Vehicle) space. And then there are existing companies such as GM (NYSE:GM), Ford (NYSE:F), Volkswagen (OTCPK:VLKPY), Mercedes (OTCPK:DDAIY), Nissan (OTCPK:NSANY), that are dramatically revising their product lines. I've indicated elsewhere that car companies, which do not engage in this change may not have a future. I've followed Toyota as it has recently engaged in a major catch-up program on BEVs.
The importance of the BEV is that significant penetration by BEVs will dramatically reduce oil requirement and if this happens this could be a disaster for oil prices. On the other hand, there are now a number of companies becoming well established in the wind power industry -- e.g., GE (NYSE:GE), Vestas (OTCPK:VWDRY), Siemens (OTCPK:SIEGY), and DONG Energy (DC:DENERG), which is growing rapidly both on and offshore. The outlook in the U.S. is optimistic for 2017.
In the case of solar power the winners are less clear and the stock prices of companies in this space does not reflect where the industry is heading. This area needs a report of its own as there are complexities for 2017, even though it is clear that there will be massive amounts of solar PV installed in 2017. Batteries are even less clear, although major Korean (e.g. LG Chem (OTC:LGCLF), Samsung (OTC:SSNLF)) and Japanese (e.g., Panasonic (OTCPK:PVRFY)) companies have a strong position in lithium battery production for power and BEV drivetrains.
The question that I address here is whether Donald Trump, who vows to take the U.S. back to the fossil fuel era, and possibly Russia's Vladimir Putin, are going to have any impact on the change that is happening now as investment in renewable energy starts to takeover from fossil fuel investment. This is such a transforming time in technology that world governments have a role to play to assist the transformation. I've written at length about the December 2015 Paris Climate agreement and the progress that was made last year to implement the agreement that has the goal of containing global temperature rise to less than 2C, with a goal of 1.5C.
Virtually all countries signed the agreement and, as I show here, most have now ratified the agreement and are starting to define the path to constraining global temperature rise much more aggressively than has been done to date.
International agreements to reduce greenhouse gas emissions
While much has been made by coal enthusiasts of President Trump's plans to exit the Paris climate agreement, there is no sign of appetite from any in the international community to support a move for the U.S. to exit the climate agreement.
My take on the numbers is that the actual number of countries with substantial commitment to reduce CO2 emissions is now 150. I calculate this from the 127 countries that have ratified the agreement as of Jan. 31, 2017, plus countries in Europe that have effectively ratified through the EU, and members of the Climate Vulnerable Forum, (who have committed to more aggressive commitments than the Paris agreement). This number includes Iran, which while not showing ratification on the UNFCC list, has been reported in the Iranian press to have ratified in November 2016. Iran is significant as it is one of the last major emitters (1.30% emissions) to have not yet been reported to have ratified. If Iran is included, my calculations suggest that 85.7% of emissions are covered by direct ratification, ratification through the EU or via the Climate Vulnerable Forum. This leaves just the Russian Federation (7.53%) and Turkey (1.24%) as emitters with more than 1% emissions who are yet to ratify.
So the actions since November 2016 have been to consolidate rather than weaken international resolve. Of course, the Paris Agreement is not sufficient to contain warming to 1.5C and more work is needed, but the U.S. emissions account for now less than the 17.89% of total emissions agreed to in the Paris accord. It is no longer a given that if the U.S. withdraws that international action will fail.
Below I will make some comments about significant actions in some key countries.
China is widely agreed to be the country that will step up to lead the Paris Agreement if the U.S. withdraws. It is already investing $360 billion in renewable energy up to 2020. Chinese Premier Xi Jinping urged Donald Trump to keep the U.S. in the Paris Agreement during a speech the World Economic Forum meeting in Davos recently. China already outspends the U.S. in renewable energy, with $88 billion invested in 2016, 30% more than the U.S. investment in 2016.
The World Economic Forum indicates that non-fossil fuels will contribute 57% of India's electricity capacity by 2027. This will exceed India's Paris target of 40% by 2030, by almost 20% and 3 years ahead of schedule. Green energy costs in India are reported to have fallen 80% in the last 5 years, which is driving the decarbonization of the Indian electricity sector. This is also the kind of action required if the Paris Agreement is to prevent warming exceeding 2C.
Elements within the Australia Government still think that there is a future for coal and right wing commentators are seeking for Australia to join with President Trump to exit the Paris agreement. However, there is no sign of a change in the intention to deliver on the Paris commitment, although one could argue that the Australian Government is yet to understand that a core plank of the Paris accord is strengthened commitments to climate action as the initial pledges won't achieve the goals. The Federal Australian Government isn't acknowledging this aspect of the Paris Agreement.
Just as the heavy lifting is occurring in the states rather at the Federal level in the U.S. (see below), the same story is playing out in Australia, with several states and territories (South Australia, Queensland, Victoria and the Australian Capital Territory) all having ambitious targets that the Federal Government is unhappy with, but which are likely to make the Paris Agreement targets possible.
In a surprising move, it looks as if Prince Charles might engage with Donald Trump about the importance of the Paris Climate Agreement. Perhaps a game of golf on the exclusive royal Balmoral golf course might be the kind of trade-off Trump needs to pay attention to climate action?
Germany is the country that invested heavily in renewable energy at a time when it needed to become cheaper. In fact, its adoption of major renewable energy targets led to the dramatic falls in renewable energy costs, of course with the strong adoption by China.
It still has aggressive targets for renewable energy of 80% renewable energy by 2050, but it is under some pressure from being a generous country in supporting the massive numbers of refugees that have been absorbed by Europe. The indication is that it will be happy to continue its support for the Paris Agreement, in spite of U.S. efforts to destroy it, but it will perhaps be relieved to let China take the international lead.
In a call with President Trump last weekend, French President Hollande highlighted the importance of the Paris climate accord.
Climate Vulnerable Forum (48 countries)
At the COP22 meeting in Marrakech in November last year, the 48 members of the Climate Vulnerable Forum committed to substantially more aggressive goals than the COP21 document indicated. This group of countries has a sense of urgency as they perceive the climate threats as acute rather than in the long term. So their goal is to accelerate the greenhouse gas reductions by updating their goals as early as possible and before 2020 where possible. Their commitment is to 1.5C increase (not less than 2C increase) so they are building very aggressive reduction targets. While most of the countries in the Climate Vulnerable Forum are small emitters, some (e.g., Bangladesh, Colombia, Ethiopia, Morocco, Philippines, Sudan, Tunisia, and Vietnam) have significant emissions.
Russia a spoiler?
The Russian Federation is perhaps the hardest group to make sense of. With 7.53% of greenhouse gas emissions, Russia is by far the largest country not to have ratified the COP21 Paris Agreement. It signed the Agreement in April 2016, but its commitment to greenhouse gas reduction (INDC: Intended Nationally Determined Contribution) is weak because it used 1990 as its baseline for emissions reductions. This makes its commitment to 25%-30% reduction by 2030 contrived. Emissions in 1990 in Russia were higher than at any time in the past 25 years and in fact with the collapse of the Soviet Union emissions declined 50% from 1990 to 2012. So even achieving the proposed emissions reduction based on 1990 figures, Russia could increase its emissions by 40-50% from 2012 levels by 2030.
The Russian economy going forward is heavily dependent on oil and gas developments, so a serious climate commitment by Russia would be a big deal. Russia has made it clear that it is in no hurry to ratify the COP21 agreement, but this was based on an expectation that COP21 would not become binding until 2020 (this happened in 2016). There seems to be a battle going on between renewable energy advocates and fossil fuel interests and it may be some time before this becomes clear.
Who knows if President Trump and President Putin might try to stitch up something in relation to climate action?
Where does the U.S. stand?
All of the above indicates that the rest of the world (except possibly Russia) has collectively decided to take action on climate change and through that embrace a massive energy transition, with huge upside for the winners.
Under the Obama administration, the U.S. played a significant role in assisting that process, especially through partnering with China to ratify the Paris Climate Agreement, which will have the outcome of decarbonizing the world economy. The U.S. role may change under the Trump administration as he alone among world leaders rejects the facts about climate change. This means huge risks for the U.S. if Trump decides to take the role of international pariah in this area.
There is an intriguing battle going on to influence President Trump to exit the Paris Climate Agreement. Climate denier Myron Ebell, who was an advisor on the EPA to Donald Trump prior to the election but who is not part of the Trump administration, is aggressively trying to force Trump's hand. At issue seems to be caution on the part of Trump's Secretary of State designate Rex Tillerson about withdrawing from the Paris agreement because he has indicated that the U.S. should be a part of international efforts in the area. In a widely reported presentation in London yesterday, Ebell sought to force Trump into exiting the agreement.
It seems to be the case that whenever a vacuum is created, someone fills it. In the case of Trump's intention to exit emissions controls and other climate related activities, there is action at the corporate level to have company boards pay more attention to their duties in relation to climate change. Public pension funds are significant players in this process.
In the area of scientific communication, where the Trump administration is seeking to silence factual scientific discussion, Al Gore and the American Public Health Association has stepped into the breach to host a climate and health summit that was cancelled last week by the U.S. Centers for Disease Control (CDC) and Prevention. It has been suggested that the CDC cancelled the summit in fear of reprisal from the Trump administration. Gore indicated that the summit will be held in Atlanta Georgia on Feb. 16. Gore stated that "health professionals urgently need the very best science to protect the public and climate science has increasingly critical implications for their day-to-day work." (Think: Zika virus infection…)
The above is just the beginning of Trump's plans to roll back environmental initiatives. Much of what he has planned will impact directly on U.S. citizens in areas like water testing, dealing with stormwater and other climate related impacts. In many areas related to climate change and the energy transformation, the states already have a key role and this is likely to intensify. California isn't being intimidated by Trump. In a recent speech Governor Gerry Brown defended climate action and attacked "alternative facts."
Of course, there are actions that Trump and Congress can take to try to stymie state actions in the climate area. Perhaps the most extreme argument for the U.S. staying in the Paris Agreement is the suggestion that the "U.S. military cannot do its job of protecting the homeland or American interests abroad if it is hamstrung by a refusal to address the reality of climate change or its impact on international security."
What is happening with the Trump Administration?
The start of the Trump administration doesn't seem sustainable. He is picking fights with not only his perceived enemies, but also his allies. To allow a hard right ideological group to control policy in the migration area without reference to his own experts is dangerous and the outcomes unpredictable. To act as if he is above the law is even more disturbing. Indeed global market reaction to the travel bans introduced by Trump could be the beginning of problems caused by ill thought out policies. Sacking his acting Attorney General indicates he might think he is back on "The Apprentice!"
Given the above it is hard to predict what is going to happen in relation to climate and energy policy. It is clear however, that the rest of the world is actively engaged with climate change and the energy revolution and it is not deferring to U.S. views, notwithstanding Trump's aggressive stance.
We are living through extraordinary times that are full of risks, but also great opportunity. One might argue that perhaps it is a good idea to be on the sidelines to see how the Trump administration is going to impact the energy/climate area. On the other hand, there are clear indications of the transition in the energy area from a world economy based on fossil fuels to one centered on renewable energy economy. I don't see either the U.S. or Russia being able to stop this, although there might be some roadblocks along the way.
I do not think that Trump's strong positive stance on fossil fuels should be taken as a sign that the switch to renewable energy will be weakened or that climate action will be stopped. So I think companies involved in renewable energy and climate action are worth looking at. Wind investments have more obvious and conservative opportunities than the solar industry which is yet to settle down after a massive growth spurt.
I am not a financial analyst. I'm interested in disruptive change and its impact on an investment portfolio with particular emphasis on energy and transport. If my commentary helps you think more broadly about your portfolio and the risks and opportunities, please consider following me.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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