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Whatever happens to the Inflation Reduction Act, high interest rates could still hurt.
The Federal Reserve’s interest rate cuts were supposed to be a bonanza for the clean energy business. Renewables, with their high upfront costs compared to their costs of operating (the “fuel” — i.e. the wind and the sun — is free), are especially sensitive to the cost of borrowing money. When rates go up, it becomes more difficult for projects to hit the profitability targets necessary to lure investors without jacking up prices for customers beyond the realm of the possible. When rates comes down — which the Fed has been working on doing since September — suddenly those investments start to look a lot more appealing.
But there’s more to financing costs than the Fed. There’s also the president.
While much of the focus on Donald Trump’s electoral victory has been trying to discern what a Republican trifecta could do to the Inflation Reduction Act, Trump’s effect on the bond market may be just as important. We may still living in James Carville’s world, where the bond market can “intimidate everybody.” And it’s rearing its head against the president-reelect.
Since Trump came to be seen as the likely winner in the months before election day, yields on U.S. government debt — that is, the returns bondholders and issuers have to offer to entice investors — began to shoot up. Interpreting moves in the bond market is always tricky, but many market commentators interpreted the recent run-up as at least in part a reaction to Trump, whether they thought he was going to juice economic growth or stoke inflation, or some combination of the two.
“If Trump is proposing a broadly inflationary high-tariff, low-tax agenda, anyone expecting inflation is looking for a higher return,” explained Advait Arun, a climate and infrastructure finance analyst at the Center for Public Enterprise.
Each of these policies — high tariffs and low taxes — could have an inflationary effect. Tariffs could lead to higher consumer prices (especially the kind of broad-based tariffs Trump has proposed) while tax cuts act as stimulus by keeping more cash in the economy. Combined with higher defense spending and a reduced labor force if Trump follows through on his plan for mass deportations, the whole policy agenda could wind up reversing some of the progress the economy has made recovering from the high inflation of the immediate post-COVID period, or at least make it so the Federal Reserve sees no further need to cut interest rates.
“Tariffs, especially if universally placed on all imports, is broadly viewed as an inflationary policy, which may pose a risk to the outlook for lower interest rates,” Morgan Stanley analyst Andrew Perocco wrote in a note to clients. “All else equal, higher rates are seen as a headwind for the renewable energy sector due to higher financing costs.”
Yields on the 10-year Treasury note, a widely used benchmark throughout the global economy, were sitting at around 3.6% in mid-September when the Fed began cutting rates, but had risen to 4.36% the week before the election. Yields shot up again last week after Trump’s win, which confirmed the market’s suspicion that his inflationary plans will be realized. Today they’re around 4.43% and rising.
“Interest rates are moving higher in much the same way they did when he won in 2016,” aid Skanda Amarnath, executive director of Employ America told me. “There’s a Trump trade people do — the dollar gets stronger, interest rates are higher.” These policies may be “more stimulative to the economy on some level,” and in turn, “maybe this means the Fed is more cautious about lowering interest rates.”
The market certainly seems to think Trump will run the economy hot. Expectations for where the federal funds rate could end up by the end of 2025 have risen from 3% in September to about 3.8%, Gautam Jain, a senior research scholar at Columbia University’s Center on Global Energy Policy. Several analysts have scaled back their forecasts for the number of future Federal Reserve rate cuts next after the Fed lowered rates by another quarter percentage point last week. Yields on two-year Treasury notes, which are considered to be highly sensitive to expectations of Federal Reserve action, have risen from 3.55% in mid-September to 4.34% today, the highest level since July.
And sustained high rates mean sustained high costs for renewable energy companies. Jain had previously estimated that a 2 percentage point drop in the cost of debt would lower offshore wind costs by as much as $10 per megawatt-hour and utility-scale solar by as much as $12 per megawatt-hour, which would help make them more competitive even in the absence of federal subsidies. If the cost of capital stays high, that potential boost goes away.
“For renewables, they are more capital intensive, so they are more impacted” by rising rates, Jain told me. “The headwind will hurt them more.”
Bipartisan budget watchdogs have been skeptical of Trump’s policies, typically projecting larger deficit increases than would have arisen from the policy agenda of Democratic nominee Kamala Harris. That said, not everyone is worried.
The hedge-fund investor Scott Bessent, widely tipped to be Trump’s pick for Treasury Secretary, has been promoting a “3-3-3” plan — deficits reduced to 3% of gross domestic product from around 7% currently by the end of Trump’s term; annual growth kicked up to 3% from around 2.8% today; and oil production increased by 3 million barrels, all of which could allow the Federal Reserve to bring down rates.
Trump “understands financial markets and the bond markets. He would not want deficits to get out of control,” Stephen Miran, a fellow at the Manhattan Institute and former Trump Treasury official told me. “There's a lot of focus to rein that in.”
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Current conditions: The Philippines is bracing for another major storm, the fifth in under a month • Warnings are in place for Guam as Tropical Storm Man-Yi approaches • It is about 60 degrees Fahrenheit and sunny in Washington, D.C., where Congress is back in session.
A Dutch court has overturned a 2021 ruling that ordered oil giant Shell to significantly curb its greenhouse gas emissions. The decision is a “big set back for efforts to use the courts to compel companies to transition faster,” wrote Tom Wilson, an energy correspondent with the Financial Times. The original ruling, issued by a lower court in a case brought by Friends of the Earth and 17,000 Dutch citizens, said Shell had to reduce its emissions by 45% by 2030 compared to 2019 levels. The landmark decision marked the first time a court ordered a private company to align its efforts with the goals of the Paris Agreement. But Shell appealed, arguing that it was already working to reduce its emissions (aiming for a 15-20% reduction by 2030 compared to 2016), that it can’t be held responsible for how customers use its products, and that such rules should be made by governments, not courts. “The Dutch court case may serve as a bellwether, with potential ripple effects on future decisions across the region,” saidBloomberg. The case could go to the Dutch Supreme Court, but it would likely take years to play out.
It’s day two of the COP29 climate summit in Baku. Yesterday began with “more than nine hours of backroom bickering over what should be on the agenda,” The Associated Pressreported. But even so, there has been some noteworthy progress:
COP figureheads are giving forceful keynote speeches in an attempt to set the tone for the summit at the outset. “The sound you hear is the ticking clock,” said UN Secretary General António Guterres. “We are in the final countdown to limit global temperature rise to 1.5 degrees Celsius. And time is not on our side.” He called 2024 a “masterclass in climate destruction,” and urged countries to deliver on their promise to move away from fossil fuels, accelerate the energy transition, and put forward bold NDCs in line with the Paris Agreement. And he said “developing countries must not leave Baku empty-handed. A [climate finance] deal is a must.”
Ahead of Guterres’ speech, Azerbaijani President Ilham Aliyev slammed Western critics of his country’s fossil fuel industry. As Reutersput it, “the airing of these opposing views on the main stage underscore the challenge at the heart of the climate negotiations: many Western states remain dependent on fossil fuels while at the same time seeking to pressure others who produce them into shifting to greener energy sources.”
President-elect Donald Trump tapped former Long Island Congressman and New York Republican gubernatorial candidate Lee Zeldin as head of the Environmental Protection Agency. In his four terms in Congress as the representative from New York’s easternmost congressional district on Long Island, Zeldin did not cut any particular profile on climate, environment, or energy issues, and was best known for his hawkish foreign policy position, reported Heatmap’s Matthew Zeitlin. To the extent Zeldin has defined himself on the environment beyond standard-issue Republican opposition to restrictions on fossil fuels and car purchasing, it’s been in the context of issues specific to his coastal Long Island constituency. During his 2018 congressional campaign, he pointed to his membership in the “shellfish and national estuary caucuses,” as well as federal programs for estuaries and his opposition to expanded offshore drilling exploration at an event hosted by the League of Conservation Voters. Throughout his surprisingly close run against Kathy Hochul for New York’s governor’s mansion in 2022, Zeldin assailed New York’s ban on fracking and criticized New York’s planned phase-out of sales of internal combustion engine vehicles by 2035, as well as the proposal to institute congestion pricing in Lower Manhattan.
The Biden administration today finalized a rule that sets a fee for excessive methane emissions for major oil and gas producers. Fossil fuel operations are the largest industrial source of methane emissions in the U.S., and the Environmental Protection Agency estimates this rule would prevent 1.2 million metric tons of methane emissions through 2035. The new fees start at $900 per metric ton of methane emitted this year, increasing to $1,200 next year, and $1,500 thereafter. The rule is paired with incentives for companies that fix their leaky infrastructure, and mandated under the Inflation Reduction Act, which CNN reported could make it harder for the incoming Trump administration to revoke.
“Are we facing new headwinds? Absolutely. But we won’t revert back to the energy system of the 1950s. No way.” –U.S. climate envoy John Podesta on the challenges facing the energy transition under a Trump administration.
When then-President-Elect Donald Trump nominated then-Oklahoma Attorney General Scott Pruitt to lead the Environmental Protection Agency in 2016, everyone right, left, and center knew exactly what that meant: The top law enforcement officer from one of the nation’s most conservative states and largest oil and gas producers would take aim at environmental rules implemented by the previous administration — rules he had often sued to overturn — and pave the way to increased fossil fuel production.
Trump’s pick this time around, former Long Island Congressman and New York Republican gubernatorial candidate Lee Zeldin, is more distinguished by his personal closeness to and support for the President-Reelect than he is by anything to do with the environment.
“It is an honor to join President Trump’s Cabinet as EPA Administrator. We will restore US energy dominance, revitalize our auto industry to bring back American jobs, and make the US the global leader of AI,” Zeldin wrote on X soon after the New York Post broke the story. He added for good measure: “We will do so while protecting access to clean air and water.”
So, who is Lee Zeldin? In his four terms in Congress as the representative from New York’s easternmost congressional district on Long Island, Zeldin did not cut any particular profile on climate, environment, or energy issues, and was best known for his hawkish foreign policy position. His surprisingly close run against Kathy Hochul for New York’s governor’s mansion in 2022 was largely defined by crime, public safety, and the effect of Covid-19 restrictions on the state’s economic recovery.
To the extent Zeldin has defined himself on the environment beyond standard-issue Republican opposition to restrictions on fossil fuels and car purchasing, it’s been in the context of issues specific to his coastal Long Island constituency. During his 2018 congressional campaign, he pointed to his membership in the “shellfish and national estuary caucuses,” as well as federal programs for estuaries and his opposition to expanded offshore drilling exploration at an event hosted by the League of Conservation Voters.
Throughout his gubernatorial run, Zeldin assailed New York’s ban on fracking, which had been implemented by Hochul’s predecessor, Andrew Cuomo. He also criticized New York’s planned phase-out of sales of internal combustion engine vehicles by 2035, as well as the proposal to institute congestion pricing in Lower Manhattan (an effort that died but may be brought back to life as part of Hochul’s scheme to protect Democratic congressional candidates on Long Island).
Cosmetics heir Ronald Lauder spent millions supporting Zeldin’s gubernatorial run, which The New York Timessuggested was motivated in part by the billionaire’s opposition to a cable from an offshore wind project that was planned to land in Wainscott, in the Hamptons, where Lauder has a home. The project, South Fork Wind, has been delivering power to New York since March of this year. Trump’s opposition to wind and offshore wind energy specifically has been a hallmark of his climate and energy policies.
“Congratulations! By saving the whales, you and @realDonaldTrump will establish a legacy for which Americans will feel grateful, decades and centuries into the future,” Michael Shellenberger, the anti-offshore-wind activist, wrote on X.
Of all the eerie paradoxes of climate change, one of the most unsettling has got to be Christmas shopping in wildfire smoke.
This weekend, ice skaters seeking early holiday cheer in New York’s Bryant Park did so not to the usual scent of honey-roasted nuts but to the reek of brush fires burning in New Jersey, Brooklyn, and the Bronx. When workers hoisted the Rockefeller Center Christmas tree into place on Saturday, they did so in a strange golden wash of sunlight defused through smoke. In Queens, I received an air quality warning while deleting early Black Friday emails from my phone.
The driest October in New York history turned the region into a tinderbox that has produced a whopping 600 fires in the past month. After one erupted in Prospect Park on Friday, the city banned outdoor grilling and told nearby residents to keep their windows closed. An 18-year-old New York State Parks employee died over the weekend while clearing dry underbrush to help fight the 3,000-acre Jennings Creek Fire in the Hudson Valley. And when rain finally did arrive Sunday evening, it marked the first measurable precipitation in the tri-state area since late September — but the 0.18 inches wasn’t enough to alleviate the 6- to 7-inch deficit that has built up over the past two months, city officials have asked New Yorkers “not to flush unnecessarily.”
New Yorkers will be piqued to learn their experience isn’t singular. The U.S. Drought Monitor’s most recent report found that as of the first week of November, every state except Alaska was experiencing “moderate drought” conditions or worse — the greatest number since the Monitor’s record-keeping began.
Brian Fuchs, a climatologist at the National Drought Mitigation Center, which runs the Monitor, told me it’s understandable to wonder where all the rain has suddenly gone. “Three months ago, we only had a little over 21% of the country in drought, and in three months, that’s jumped to just under 52%,” he said.
Much of the country has been warmer than usual since the start of fall, with some areas 10 to 15 degrees Fahrenheit above average “consistently,” Fuchs went on. “I’m in Nebraska, so typically in the fall, I’m thinking, ‘Oh, it’s going to be cool in the morning, I’ll grab a jacket, and maybe some nice sun in the afternoon will warm it up, and then it’s cool in the evenings.’ And a lot of the country has not had that. They’ve really had an extended summer.” Those increased temperatures have also meant increased moisture loss, which is what triggers a formal drought designation.
But while 2024 is on track to be the hottest year on record, the United States is not, in fact, in one giant drought. Rather, “there are different factors” driving several droughts happening simultaneously, Fuchs explained. “It’s not all tied to the same mechanism.”
In the Northeast, for example, the drought is linked to eastward-tracking storms dissipating before they reach the region, as well as activity in the tropics during late September and October, which robbed the atmosphere of moisture and contributed to “a stronger upper high-pressure area dominant over the Ohio Valley, Midwest, Great Lakes,” Paul Pastelok, a senior meteorologist at AccuWeather, wrote to me in an email on Friday. That high-pressure area has acted “like a block to prevent any significant precipitation for weeks in these areas.” It’s also why drought experts expect “potential improvement” in the coming weeks.
There are severe drought conditions across the Southeast, too, which may be a surprise if flooding from Hurricane Helene is still top of mind. But much of that water quickly ran off into streams, rivers, and the ocean, and “since then, there has not been a lot of rain in this area, and the top soil has dried out,” Pastelok said. Other areas experiencing drought include the Southwest, where a mild summer monsoon season has extended emergency declarations, and the central and northern Plains, which have been dry since early September and where drought conditions are expected to last through at least the early winter. Reservoirs in California, meanwhile, are in “great shape” after last winter’s snows; still, due to “months without rain in many areas, the topsoil has dried out, resulting in an abnormal dryness level — a lower category of drought,” Pastelok said.
Brett Anderson, another senior meteorologist at AccuWeather, pointed out that drought is a natural part of the climate cycle, and reassured me, “This is not unprecedented.” He added that there is “no real trend in U.S. drought severity over the past 25 years.”
That doesn’t mean these droughts don’t bear signs of climate change. Fuchs noted that “rapid swings from very wet conditions to very dry conditions, right on top of each other,” is a pattern associated with global warming, and one that can be seen both in the post-Helene dry spell in the Southwest and the deluge last week that broke up a drought in Oklahoma and Missouri, which are having some of their wettest Novembers on record. Anderson also noted that the unusual warmth in many parts of the U.S. has led to “much higher evaporation rates compared to normal,” which also feeds the development of droughts.
As for New York City — again under a red flag warning, this time through Tuesday — there is no rain in the forecast through at least next weekend. If you were looking for a beautiful bluebird day to go ice skating (and can ignore that it’s almost 70 degrees out), then now’s your chance.