Energy Policy in Transition

The arrival of the second Trump presidency has brought out latent tensions in the troubled area of energy policy. Over a four-year period, the Democrats, under the leadership of Jor Biden, have made it their highest priority to turn away from fossil fuels to alternative forms of energy, most notably wind and solar. The key argument for this position was, and remains, that the existential threat of continued global warming makes it critical to adopt stern responses lest—in the words of Inside Climate News—Trump, along with people like Chris Wright, who has been tapped to lead the Department of Energy, manage “to turn the US into a pariah petrostate.”

At the political level, the current trend works in sharp opposition to the Biden administration’s nonstop initiatives that began on day one in 2021 with the shutdown of the Keystone XL Pipeline, which resulted in the cancellation of the project by TC Energy some six months later. TC Energy is a Canadian outfit operating in Alberta, whose Premier Jason Kenney reported that he was “disappointed and frustrated” by the unilateral cancellation without consultation.

That initial step was part of Biden’s comprehensive program to phase out fossil fuels, which could be achieved only by a combination of sanctions against those energy sources and massive subsidies for programs that relied on wind and solar energy. At the outset of the Biden administration, most of the major fossil fuel companies were nervous, to say the least, about how these new policies would affect their established businesses, and thus mounted extensive opposition to them, so much so that not a single Republican in the House or Senate supported the legislation. The Biden initiative included the Inflation Reduction Act (IRA) that contained billions in subsidies for alternative energy sources, paired with new corporate taxes in order to achieve the now-vain promise that the increased revenues from the new program were slated to reduce the deficit by some $300 billion—hence the name of the statute. The program was destined for failure because Biden championed the program for both combating climate change—itself a vast unknown—and creating manufacturing jobs, where the cost incurred by the latter is a virtual certainty, given that there is no cap on subsidies built into the legislation. Recent estimates from Goldman Sachs reach $1.2 trillion over that same period, wiping out the promised savings that should never have been anticipated in the first place. The election outcome has not dimmed Biden’s ardor for giving out money to faltering companies such as the carmaker Rivian, which, now losing over $100,000 for each electronic vehicle sold, gets a tidy $6 billion subsidy, when it is already well on the path to bankruptcy.

The key premises of the Biden proposals were that fossil fuels were the disease and so-called clean energy sources were the cure. Yet that stark opposition could not be maintained, as the production of wind and solar energy is highly inefficient and has its own environmental issues, including the dirty costs of production and the difficulty of disposal, not to mention the disastrous consequences that will result from any effort to reduce greenhouse gases to “net zero,” as Richard Lindzen, William Happer, and Steven Koonin have warned.

Yet it is well understood that fossil fuel companies engage in diversification across energy sources, first to protect against political and market risks, and then to take advantage of explicit government subsidies on the other. At this point, it is possible to detect notable changes in industry rhetoric, as the same companies that once opposed the initial subsidy for wind and solar have now applied for grants under these same programs. Typically, with these grants, the payouts are over several years, which means that programs that would have continued unchanged under a Harris presidency are now sure to receive a second, hard look under a Trump presidency, which in turn means that these initial investments will not pay off as expected over the next few years.

This shift in sentiment can be detected over time. In July 2024, a Wall Street Journal headline read: “Oil Billionaires Bet on Trump’s Energy Agenda: Donald Trump’s plan to bolster fossil fuels and weaken environmental agencies draws support from powerful oil-and-gas backers.” But the key here may be that these most vocal backers were, and are, smaller firms who, in contrast with the industry’s biggest companies, want to slash regulations and subsidies for green energy because they have no other place to go.

Now, after the election, the latest Wall Street Journal headline reads: “Trump Vowed to Kill Biden’s Climate Law. Republicans Say Not So Fast. Billions of dollars and tens of thousands of jobs are at stake in red states.” So, it looks as though a piece of legislation that attracted not a single Republican vote will escape outright repeal, at least at the outset of the Trump administration. There are, of course, multiple intermediate responses between keeping the status quo and removing the legislation altogether. The situation is now ripe for politicking because no one really knows which programs should be cut or curtailed and by how much. The whole shebang should be an ideal target for Elon Musk and Vivek Ramaswamy, whose new quasi-government Department of Government Efficiency adds yet another element of uncertainty to the mix, as its relationship to Congress and the administrative agencies is, to put it kindly, a work in progress. One hopes it will succeed in its larger plan, given that, as budget veteran OMB veteran Mick Mulvaney writes, “the federal government really, really doesn’t want to be reformed.”

On the energy frontier, much may depend on the kinds of projects that have been blessed by administrative decisions under the IRA. Occidental Petroleum’s CEO Vicki Hollub, for instance, needs these large tax credits in order to develop processes and facilities designed to collect carbon dioxide directly from the air. But what was not included in her pitch was an explanation or any analysis as to why the social benefits of continuing these programs are worth their costs, which in turn will depend on whose estimates will be accepted on the cost (dare one say it) positive or (possibly) negative of an additional ton of carbon dioxide.

Thus, this divergence in estimates of the social cost of carbon dioxide raises yet a second question: what reduction in global warming, if any, can be expected from each particular project? The equation for the private company asks whether the new program will generate cash, mainly from public grants to keep that program alive. But the correct social calculation is to ignore the sunk costs to these large fossil fuel companies and to ask whether the social benefits exceed the additional costs in question. Given what was said above, any supposed gain from controlling global warming by these ad hoc projects is likely to be trivial. So why should the Trump—or indeed any other—administration buy into a program that proposes to construct “dozens” of similar projects if these benefits are low, even if the cost of carbon is said to be high? The same response should be given to Exxon and Chevron who plan to pump some $30 billion into carbon capture and similar low-carbon technologies.

There are not likely to be any quick answers to these questions, at which point my best prediction is that the presumption will be in favor of keeping in some form the projects that the oil behemoths desire until they are fully disproved. In contrast, the subsidies for electric vehicles will be easier to cut back or eliminate, even if California Governor Gavin Newsom is able to keep the $7,500 EV credit, because the evident lack of demand for these vehicles is likely to persist no matter what the size of the subsidy, so that the prospect of bankruptcy for these producers becomes more likely. In addition, the notable failure to build out a viable charging network for these cars can be attributed to the Biden administration’s insistence that its $15 billion funding program, with its union preferences, commitments to workplace equity, and environmental equity must survive as is. But just how will it fail? The industry forces would be happy to keep the subsidies and chuck the Biden conditions. Biden’s progressive forces would want to keep both, even if it pushed the program to the brink. But at this point, the strong anti-woke sentiment throughout the Trump administration is likely to end both with large losses in sunk costs.

There is yet another way in which the incumbents can lose by indirection even if they keep some of their subsidies. Chris Wright and the secretary of the interior designate, Doug Burgum, now governor of North Dakota, are expected to support “drill, baby, drill,” whether or not the large oil companies preserve some fraction of their largesse under Biden’s IRA. That mission may depend on the willingness of the Trump administration to end forever the Biden administration go-slow policies, including his temporary pause on exports of liquefied natural gas, which would increase the incentive to drill.

And so it goes. It seems that, either as complements or supplements, each energy reform proposal for continued subsidy or further deregulation is joined at the hip to every other. We know for sure that the Biden view that climate change is an “existential threat” will not dictate Trump policy. But fasten your seatbelts to learn what will.

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