Biden as the post-carbon candidate
This week in Keeping Tabs: how to transition the US economy off fossil fuels.
Keeping Tabs has written a lot about the new Biden administration recently. But, we would humbly say, this is entirely justifiable.
While a year ago his candidacy may have looked like a pitch for a rather undramatic return to normality for the US, a combination of circumstance and boldness means his presidency is shaping up to be transformational — with deep knock-on effects for the capital markets.
Firstly, there is the stimulus package, in the words of Chris Giles at the Financial Times a "huge fiscal experiment", where the US is banking on borrowing and spending to smash through coronavirus blues. And in a shift of ideology, many now see inflation as the major constraint on spending, rather than debt levels.
If successful, the Biden borrowing could turbocharge US growth, outpacing Europe and the UK, although perhaps leading to change on this side of the Atlantic too. If unsuccessful, it will inevitably generate yet more economic and political instability.
Secondly, Biden arrives at a time of rising demand for green investment and a transition to net zero: their preferred means to arrive there may differ, but this goal unites progressive activists and much of the business world.
And on this topic, Thomas Oatley and Mark Blyth have a interesting piece in Foreign Policy. Oatley is a fellow at the Wilson Center and a professor at Tulane University, and Blyth is professor of international economics at Brown University (plus the co-author of the book Angrynomics, covered here).
They depict the US economy today as split down the middle: on the one side, high carbon activities, and on the other, activities ready for a post-carbon future.
The former includes export agriculture, carbon extraction, refinement and production and steel. In the latter are industries like pharmaceuticals, the media, Big Tech and financial services, where data and creativity are key. Even where the latter are energy intensive, there is no need for this energy to come from fossil fuels.
The high carbon economy (or at least the people in it or dependent on it) are more likely to vote Republican, and the post-carbon economy is more likely to vote Democrat.
This divide is something new: in the not-too-distant past, a carbon coalition dominated uncontested, tying unions, businesses and farmers into its settlement.
"It is only a slight exaggeration to suggest that the United States’ post-war economy was a massive machine that transformed oil, coal, and natural gas into income and food," write the authors, pointing to automotive production and repair, the oil and gas industry, aviation, shipping, agriculture, plastics and petrochemicals.
"The carbon coalition distributed the income generated by the carbon economy. Elections determined those distributions. That model is now dying and indeed, given climate change, must die. The politics it made possible are dying too."
Now, there are two different economies in the US, with wildly divergent ideas of what the government should focus on: one side wants support for struggling industry, the other a transition to a net-zero carbon future. This seems like an underrated cause of political polarisation.
The answer isn't to split the difference, but instead, Oatley and Blyth say, to give those stuck in the high-carbon economy an incentive to transition: i.e., make net zero pay off for them too. This "must involve more than a subsidy; it requires exiting the carbon economy", they say. In other words, something akin to a green industrial revolution.
One irony in all this is that while the election was won by the post-carbon candidate, Biden's stimulus plans actually help parts of the carbon economy, such as oil, if they succeed in getting the economy roaring. Oil prices have been on the up recently, perhaps partly because of spending expectations.
Still, the longer-term push to transition the carbon economy is clearly very relevant for capital markets. Firstly, as part of the financial services sector, it has skin in the game: it would benefit from moves to dampen the risks of climate change. And secondly as a mediator, to provide transition finance.