This weekend, financial services company Jefferies published a report outlining three U.S. climate policy scenarios and their implications for investors.
The report draws attention to two major policies that are currently being debated in Congress, which Jefferies says “may be the most impactful U.S. policy on climate change and human capital investments of the generation.”
The first is a $1.1 trillion infrastructure bill that represents the “largest infusion of federal investment into infrastructure projects in more than a decade.” The bill would fund projects such as power grid modernization, energy-efficiency building retrofits, and renewable energy power plant construction.
The second is a $3.5 trillion reconciliation investment program that encompasses everything from climate initiatives to education, health care, child care, and paid family leave.
The report focuses on a proposed utility policy titled the Clean Energy Payment Program, which would require utilities to up their clean energy supplies by 4% per year. Compliant utilities would receive payments while non-compliant utilities would incur fines. The program as-written does not count natural gas as clean energy.
Jefferies’ three outlined scenarios are “everything,” “nothing,” and “muddle through.”
The “everything” scenario assumes both bills pass and the Clean Energy Payment Program goes into effect without alterations. In this scenario, Jefferies recommends owning solar and wind exposure given that the bills will accelerate development via tax credits, grants, and favorable permitting. Conversely, Jefferies advises against owning fossil fuel exposure as the bills would terminate fossil fuel subsidies. Recommended utility exposure is selective, concentrating on utilities with high quantities of traditionally generated energy, which gives them lots of potential for transition. Jefferies rates this scenario as the least likely.
The “nothing” scenario, with a “middle of the pack” likelihood, assumes neither bill passes, leading Jefferies to recommend owning fossil fuels given continued subsidies and owning natural gas infrastructure exposure.
Finally, the “muddle through” scenario assumes that “both bills are passed, but the packages are smaller and impacts are diluted.” For instance, the CEPP is weakened to allow less aggressive annual targets and opt not to fine non-compliant companies. This scenario, which is rated most likely, comes with the recommendation to “own wind and solar but also natural gas.”
Jefferies concludes the report with three observations on commonly received investor questions:
- The $3.5 trillion infrastructure reconciliation package will not pass this month, but select parts likely show up in future reiterations.
- Natural gas is here for the foreseeable future given its affordability, reliability, job-creation potential, and national security implications.
- Net Zero policies will look vastly different depending on the who and then when of the bill.
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