Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Speaker: From HSBC Global Research, I'm Jack Reed and welcome to a special edition of the ESG Brief.
Speaker: This week we'll be talking about the plan for climate change and environmental justice.
Speaker: In case you've not heard of it by that name before, this is the ambitious 2 trillion US dollar package of environmental measures that Joe Biden had pledged during the presidential campaign.
Speaker: We'll be speaking with our co-head of ESG research, Ashim Pan, about Biden's climate program and the impact of his pledge to take the United States back into the Paris Agreement on climate change.
Speaker: We'll also be looking at the utilities sector in China, which has pledged to cut CO2 emissions to zero by 2060.
Speaker: Evan Lee, head of Asia Utilities and Conglomerates Research, will be joining us later on from Hong Kong.
Speaker: This podcast was recorded for publication on the 17th of November, 2020.
Speaker: All the disclosures and disclaimers associated with this podcast must be read with the link attached to the media player.
Speaker: Ashim, thanks for joining us.
Speaker: Thank you, Jack.
Speaker: Good to speak to you.
Speaker: So let's get started with Paris.
Speaker: It seems to loom large over Biden's agenda.
Speaker: There's no doubt that climate change was a major topic in the pre-election campaigning of Joe Biden and Kamala Harris.
Speaker: It was one of the key topics they focused on.
Speaker: And so I think there's no doubt that they're going to have to speak to their supporters by taking strong moves in this area as soon as they can.
Speaker: One specific pledge that they've made is that they'll re-engage the US with the Paris Agreement process.
Speaker: So the biggest climate meeting of the year was scheduled to take place in Glasgow this month.
Speaker: In fact, it didn't take place because of the coronavirus, and it's been postponed until next year.
Speaker: I'm wondering, how much did the US actually miss out on by virtue of being taken out of the Paris Agreement by President Trump?
Speaker: Okay, well, there's a couple of ways of answering that.
Speaker: I mean, on the one hand, until the beginning of November, the US wasn't formally out of the Paris Agreement.
Speaker: The timing fell during that first week of the month, coinciding almost exactly with the election.
Speaker: But at the same time, the US has stopped sending...
Speaker: delegations and before it was sending panels of experts to not only the annual conference of parties, but also all the intersessional talks which happened throughout the year, many of them in Bonn in Germany.
Speaker: And that's where a lot of the actual kind of hard work is done, a lot of the technical work around how the ambition, the targets of the Paris Agreement are going to be actually delivered.
Speaker: And the US has been absent from those
Speaker: for the past couple of years, we would fully expect that to turn around again in 2021 under the new regime.
Speaker: And of course, in spite of the US absence, other world leaders were still stepping forward on plans to cut CO2 emissions.
Speaker: Two other big emitting nations, China, which we'll be talking about later, and Japan, for example.
Speaker: That's right, and Korea also.
Speaker: So a lot of ambition from Eastern Asia being announced, and those plans were to reach net zero emissions by 2050, or in China's case, around 2060.
Speaker: And that's important.
Speaker: That net zero target is one way to give a timeframe to what is necessary in terms of decarbonisation to meet those global warming limit targets automatically.
Speaker: which have been set within the Paris Agreement.
Speaker: So generally speaking, we talk about 2050 being the date by which we'd need to hit net zero emissions in order to achieve the more challenging target of limiting global warming to 1.5 degrees by century end.
Speaker: And so, yeah, it's been very positive to see some of these other very large economies coming through those net zero plans.
Speaker: Okay, so it looks like we're back at the table in Paris, but there's also this big domestic commitment from the Biden administration, the plan for climate change and environmental justice.
Speaker: Now, as we know, passing a big spending bill largely depends on holding a majority of seats in the House, which is in
Speaker: Democratic control already and the Senate.
Speaker: And of course, we don't yet know and we won't know until January whether it's possible for the Democrats to wrest control of the Senate from the Republicans.
Speaker: They need those two seats in the Georgia runoff for that to happen.
Speaker: But let's assume that they do secure a 50-50 split of the Senate seats and Vice President Kamala Harris provides the tie-breaking vote in the Senate.
Speaker: Tell us a little bit more about what's in the climate plan and how will it change the U.S. commitment to the climate agenda.
Speaker: If Joe Biden can pass the plan in the shape that he announced it in July, what this will do is put a $2 trillion expenditure number behind a development of much cleaner infrastructure in order to achieve that net zero emissions target by 2050.
Speaker: And specifically, this will ring fence $400 billion for a transition within the power sector
Speaker: towards delivering zero carbon power generation by 2035.
Speaker: At the moment, the US generates power in a number of different ways, including by burning coal and by burning a lot of gas.
Speaker: This would require a phase out of those technologies towards clean technologies only,
Speaker: And so this would be a very, very material transition across the country.
Speaker: There's also pledges around developing half a million new electric vehicle charging stations by 2030, and thereby catalyzing that removal of oil from road transport.
Speaker: And there's also a focus within the plan on things like clean rail and innovation around the use of biofuels, clean aircraft fuel attached to that also.
Speaker: He also talks about trying to drive the cost of green hydrogen down.
Speaker: So this is producing hydrogen in a clean way
Speaker: rather than just doing it from fossil fuels, instead cracking water molecules using electrolysis to do so, which remains an expensive process, but it's getting cheaper over time already.
Speaker: And so that's a clear focus for him to achieve decarbonisation.
Speaker: Also kind of points around improving energy efficiency of buildings, aiming to halve the emissions from that sector by 2035, and then
Speaker: also built into that plan are some ideas around how to regulate the fossil fuel industry in such a way that it also plays a greater part in delivering lower emissions in the future.
Speaker: But on the flip side, the Senate may remain in control of the Republicans, and then things become a lot more difficult for Joe Biden.
Speaker: It does.
Speaker: I mean, we think that if he's unable to pass that plan, that would probably be a setback to his overall ambition around climate change.
Speaker: Nevertheless, that doesn't mean there's nothing he can do.
Speaker: There's a number of areas, for instance, deregulatory steps which President Trump has taken over the last four years, which impact the environment and which impact how fossil fuels are produced.
Speaker: in particular, which we think Biden may try to use executive powers himself to overturn.
Speaker: So for instance, President Trump rolled back the Clean Power Act, which was put in place during the Obama administration, which sought to reduce CO2 emissions from power plants by 32% by 2030.
Speaker: We think that Joe Biden could put that act back in place.
Speaker: We also think that he may
Speaker: seek to overturn rules which President Trump challenged around limiting methane emissions from oil and gas around offshore drilling, around the extraction of coal on public land.
Speaker: And we think that President Biden may seek to challenge that rule as well.
Speaker: So we've been focusing a lot on climate here, but walk us through some of the other environmental issues.
Speaker: Presumably there's a lot at stake here beyond just the CO2 emissions.
Speaker: Indeed, I mean, there's a broader environmental agenda which was baked into President-elect Joe Biden's July climate action plan.
Speaker: So you also talked about enhancing reforestation and about protecting biodiversity by protecting 30% of American land and water by 2030.
Speaker: And then there's some of the rules which President Trump has put through, which we again think may be challenged under the new administration, such as the decision to weaken the National Environmental Policy Act and also changes made to the Endangered Species Act.
Speaker: which weaken the protection for threatened species.
Speaker: So I think there's a much broader environmental protection agenda which may change trajectory under the new administration.
Speaker: As we know, a lot of decision-making and lawmaking powers rest not in Washington, but in state capitals and America's big cities.
Speaker: What initiatives do you see of significance at the state level?
Speaker: The ambition and policy setting of states and cities within the U.S. has indeed been extremely important so far in pushing forward the climate and environmental agenda across the country.
Speaker: So we've seen some states introducing strong emissions reduction targets in the case of California, for instance, net zero by 2045.
Speaker: And a number of other states often emulate what California does.
Speaker: And so we've seen other states introducing those net zero targets as well, or very, very steep emissions reduction targets.
Speaker: Across the country, I think we have 25 states now with similar targets in place.
Speaker: We also see some states with
Speaker: which have introduced carbon pricing regimes and linked up with others in so doing, and which have introduced 100% renewable energy targets.
Speaker: Of course, again, California is probably the largest there.
Speaker: We've seen that from New York as well and a number of other large states across the country.
Speaker: So fast forward to 2021 now.
Speaker: Give me three key milestones to watch for on the climate agenda.
Speaker: The first big flagship move that will be made will be to re-engage in the Paris Agreement.
Speaker: I think that'll be very important for the US and for the new administration to show that it's embracing a change of trajectory for the country.
Speaker: Of course, we think he can use executive authority powers
Speaker: to do that.
Speaker: Then, I mean, the big item is whether or not he can pass his big climate action plan and the $2 trillion spending plan within that.
Speaker: And so, yes, that hinges a lot on these Georgia runoff.
Speaker: So we've got some real event risk around climate policy coming up effectively in early January.
Speaker: The third thing to look at is how he will prioritize using powers that he can outside of
Speaker: the ambition of that big action plan to put in place specific new rules or overturn some of the Trump era rules around deregulation of the fossil fuel industry.
Speaker: Okay, Asham, that's a great summary.
Speaker: Thanks very much.
Speaker: Thank you very much, Jack.
Speaker: Now, as we mentioned earlier, China has put forward its own climate targets, President Xi pledging carbon neutrality by 2060.
Speaker: Our multimedia producer in Hong Kong, Graham Mackay, spoke with our head of utilities research in Asia, Evan Lee, about Xi's initiative and its impact on power generation.
Speaker: Obviously that's a very big target and by no doubt will lead to a quicker transition to a greener economy.
Speaker: Although there hasn't really been too much details as to how that would be achieved, but we're quite confident that renewable energy should benefit on the back of that growth.
Speaker: It's worth mentioning that China already has a target to bring non-fossil fuel to account for 20% of primary energy consumption by 2030.
Speaker: So it'll be quite interesting to see if that target will be brought forward.
Speaker: Based on the current trajectory on how renewable energy assets are growing,
Speaker: we believe that the target could be achieved three to five years earlier, maybe around 2025.
Speaker: Obviously, that's for the 14-5 year plan, but if you think about the longer term, in order to achieve carbon neutrality by 2060, just by assuming that 50% of the thermal power or the thermal energy has to be eliminated, that would imply wind energy will have to grow by more than 10-fold on the current base,
Speaker: and solar will have to grow by more than 20 times based on the current base.
Speaker: Okay, so those are some pretty big commitments.
Speaker: What do you see as the challenges to making them happen?
Speaker: Yes, obviously there will be challenges because right now we do see certain limitations based on the infrastructure that we're dealing with.
Speaker: The power grid obviously has a limitation on how much renewable energy they could bring into the system in the near term.
Speaker: As we know, the cost of energy storage is actually quite high, which could easily double the levelized cost of energy for wind and solar based on today's cost.
Speaker: Another challenge that we're dealing with is that China doesn't have a proper spot electricity market.
Speaker: What that means is that electricity could not be priced properly based on demand supply.
Speaker: And then lastly, we have to understand that China's electricity market is rather centralized.
Speaker: If we could decentralize a system to bring the power supply and power systems closer towards the end demand, that would also help with the integration.
Speaker: So clearly solar and wind are the focal points of your outlook.
Speaker: Is gas still relevant?
Speaker: You're quite right.
Speaker: Solar and wind obviously will be direct beneficiaries in this and the related equipment providers would obviously leverage on these green targets.
Speaker: Gas, we think, will increasingly become a bit more controversial going forward because given it is a fossil fuel, we understand that some of the developed markets are starting to question whether or not this should be part of the climate strategy.
Speaker: But in our view, we think that the case in China is a bit unique because the country is obviously burning a lot of coal.
Speaker: And to replace that in the near term, gas has to be an integral part of the energy strategy.
Speaker: So we still believe that gas should enjoy a decent amount of growth, at least in the near and medium term.
Speaker: Evan Lee, thank you very much for your insight today.
Speaker: Thank you, Graham.
Speaker: Thank you very much.
Speaker: So that's the ESG Brief.
Speaker: Special thanks to Ashim Pound, our co-head of ESG Research, and to our Asia-Pacific Utilities and Conglomerates Research Head, Evan Lee.
Speaker: Remember, all the research discussed on today's podcast is available on the research website at research.hsbc.com.
Speaker: Don't forget our other regular podcasts, our weekly macro brief, looking at the big macroeconomic research of the past week, and the equity brief.
Speaker: For all of us here at HSBC Global Research, thanks very much for listening, and we'll be back soon.
Speaker: Thank you for listening today.
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