Despite Headlines, US Climate Policy Advances

Mid-term election results showed that decarbonization remains a second-tier issue for most voters. Initiative 1631, a carbon tax in Washington State was defeated, the second time the Washington electorate voted no on a carbon tax. In addition, Carlos Curbelo, the Republican incumbent from Florida’s 26th District was defeated. Curbelo started the Climate Solutions Caucus in 2016, a bipartisan group of 70 US Representatives, and sponsored a federal $24 per ton carbon tax bill earlier this year.

Yet despite these headline-grabbing defeats on climate, there was actually substantial under-the-radar political progress during the first two years of the current presidential administration.

In September of this year, SB100 was passed in California, a law that mandates 100% zero-carbon power by 2045. Likewise in July 2017, California passed AB-398, which provided the political backdrop to extend California’s franchise carbon cap-and-trade program, the nation’s first and only carbon tax program. As the world’s fifth largest economy, all eyes are on California’s energy transition, not least because the drought-fueled wildfires are one of the most conspicuous examples of a warming planet.

At the federal level, FERC Order 841 quietly went into effect in February 2018. This ruling requires US regional power regulators to recognize and compensate energy storage for all the ways in which it creates value for the grid. This includes paying grid-scale battery owners for providing backup power and for reducing the load requirement during expensive peak demand situations.

In the solar market, 2018 headlines spent much ink on the industry’s Section 201 tariff, which went into effect in February 2018. After an exemption on the first 2.5GW of imported panels, the ruling adds a 30% tariff in 2018, stepping down 5% per annum before disappearing in 2022. What made less news, but may have a greater impact, was the IRS’s Notice 2018-59 in June 2018, which provided a small but significant change to the Solar Investment Tax Credit (ITC). The Solar ITC provides a 30% tax credit in 2018, 30% in 2019, 26% in 2020, 22% in 2021, and 10% in 2022 and thereafter. The original ITC credit standard dictated that developers receive the tax credit during the year they physically begin construction. But now the new guidance applies a given year’s tax credit if at least 5% of the total project cost is incurred in that year. This allows developers to earn higher, early-year credits on the whole project cost by pre-ordering a minimal amount of solar equipment.

As ESG-minded investors, we view policy changes in the energy sector like those cited above as important signposts. No one ever said they didn’t see a new energy technology coming. Rather, the field moves slowly. Energy transitions occur over decades as policies enable pricing signals and the regulatory environment to attract considerable amounts of capital.

The IPCC Special Report on Global Warming published in early October predicted that the world had twelve years to limit global warming to 1.5° C. The Report prescribed a 45% cut in carbon pollution by 2030 vs a 2010 baseline, and net-zero carbon emissions by 2050. As climate change increases the prevalence and impact of severe storms, drought, flooding, and forced migration, we believe government leaders will be further pressured to enact meaningful policy changes that lead to even more rapid decarbonization.