Upon assuming office, President Trump signed several executive orders around the issue of climate change. These orders represent an expected and substantial shift in Federal U.S. environmental policy, emphasizing fossil fuel development and dramatically reducing Federal engagement in climate change mitigation initiatives. The executive orders included withdrawing the U.S. from the Paris Climate Agreement, declaring a national energy emergency to expedite fossil fuel development (along with lifting numerous restrictions on oil and gas exploration), halting new leases for wind farms in Federal waters, and removing incentives for electric vehicles while ordering that all Federal agencies immediately pause any disbursement of funds that have been budgeted for electric vehicle charging infrastructure.

Given the dramatic change in energy/climate policy at the White House, we thought it would be helpful to provide our view on what all of this mean for environmental markets including how these markets have responded in prior challenging periods.

The knee-jerk bearish sentiment around climate issues can be easily understood in the days following the election. Clean energy stocks declined in value, and while many of those stocks have recovered, they continue to experience notable volatility. Sentiment around State regulatory programs, which strengthened in response to President Trump’s first victory and the many direct challenges he brought to them, appear to be mixed. On the negative sentiment side of things, New York Governor Hochul announced in January that she has decided to delay NY’s “cap and invest plan” which she said was due to lack of accurate emissions data. In California, the Cap-and-Trade program is trading at multi-year lows due to continuing delays that many attribute to the Governor's Newsom’s office. On the other hand, Washington State voters have just voted in large numbers to reject a ballot initiative that would have removed their Cap-and-Invest program and the Washington State regulator is now working hard on a future linkage with California and Québec's joint program. The northeastern U.S. energy-sector carbon market known as “RGGI” has not seen any meaningful price moves since the election. Lastly, a variety of other environmental commodity markets prices in many of the states that have Renewable Portfolio Standards in place are seeing prices that remain at roughly the same elevated levels as prior years.

Ultimately, we do not believe that Federal actions are bearish for environmental commodity markets as a potential increase in emissions due to Federal policies will require these mostly regional markets to work even harder to meet greenhouse gas reduction targets. Governors and regulators supporting these programs are delaying new launches or proposed amendments in direct response to voter concerns around more than just climate change. Affordability has come to play the largest role in the recent election results, the cost of energy being a key component. As such, we believe governing bodies are readjusting their messaging around these programs and seeking full consensus from all key players, potentially delaying but certainly not backtracking or rescinding in any manner.

That said, it is important to note that popular support for these programs remains, with Washington State beating an initiative to halt its program by a wide margin during the very same election cycle. It is also important to note that the California carbon market (CCA) raised roughly 1.7% of the state’s annual budget last year and 76% of the funds raised by CCA auctions to date have gone to low-income communities, which is exactly what makes these programs so essential to the regions they serve. While there will likely be more scrutiny and politicking around how these revenues are used, we believe backtracking or rescinding on the programs overall is highly unlikely given the dollars raised from many of these programs, public support for climate action where U.S. based cap and trade programs are based and, in most cases, the long history across multiple Governors from both political parties over the decades. With the exception of the CCA market, which suffered a recent price drop upon news of continued delays by its regulator, pricing in other US-based markets has been relatively stable, supporting the view these programs are here to stay.

Our underwriting continues to view the politics of climate change and the strength of these programs as related but ultimately separate. President Trump’s actions are ultimately more bullish for environmental commodity market fundamentals as they will create more emissions which will only increase the need of these programs to meet more stringent goals. With the risk of climate-related disasters only increasing (as witnessed by the ever more frequent and greater intensity hurricanes and the recent devastating fires in Los Angeles and our home state), we believe that this affordability crisis is only being fueled by the effects of climate change (rising insurance costs as one example), and the more the public continues to be affected by climate related impacts, the more sentiment will continue to change to address it. Moreover, it is important to note that cap-and-trade programs that effectively price carbon are typically the mechanism that is used across the globe (Europe, United Kingdom, China and New Zealand to name some of these programs specifically because they are considered by economists and policymakers to be the lowest-cost option to mitigate climate change as they are specifically designed to allow the marketplace to compete for the lowest cost of abatement. In addition, many of these programs are also designed with the goal of affordability in mind.

As a medium-to-long-term investor, ECP understands the near-term bearishness in certain markets. Yet how these programs have been constructed and the fact that they are codified in the laws of their respective local jurisdictions makes the chance of them simply going away with the stroke of a pen unlikely. Further, in our view, no one election can dismantle the momentum built by stakeholders and coalitions over the last two decades, or the trillions of dollars invested into the energy transition (2024 saw for the first time over $2 trillion dollars invested globally in clean energy source: Bloomberg).  We continue to adapt in the ways we navigate these markets and look forward to participating in a constructive manner in many of these markets in the years and decades ahead.