 Biden administration has its work cut out with new aggressive emissions reduction target: At last week’s climate summit, the US pledged to cut greenhouse gas (GHG) emissions 50-52% relative to 2005 levels by 2030, a step up from the Obama-era target of a 26-28% reduction by 2025. This puts the US largely on par with the EU’s climate ambitions, signifying the US’ return to the global climate table after the four year hiatus.

 Far from this trajectory without bipartisan support for climate policies: Based on existing government policies, the Energy Information Administration (EIA) and International Energy Agency (IEA) currently peg the US to only reduce energy-related CO2 emissions by 11% and 17% by 2030, respectively, well below the 44% needed under the new Paris agreement target (relative to 2019 pre-COVID levels). We also ran our own emissions forecasts based on a few key drivers important for the next decade focusing on the power and transport sectors. We found that a 30-35% emissions reduction by 2030 is achievable if the US retires most of its coal generation, picks up the pace of renewable capacity expansions, and grows electric vehicle (EV) penetration to 1/3 of the passenger car market by 2030.

 Projecting out US emissions underscores the key drivers of decarbonization… The power sector will remain the largest driver of decarbonization in the next 10 years as it did in the prior decade, but elimination of coal generation is more impactful than doubling the pace of renewable capacity growth though both are needed to achieve Biden’s goal of 100% clean power by 2035. The transport sector, the largest emissions source today, is more difficult to decarbonize given the inertia of the existing fleet. Even assuming EVs reach 50% of annual sales and a 35% increase in fuel efficiency in new ICE car models would only result in a ~20% reduction in transport emissions by 2030. This hits home the reality that all solutions are needed for the US to achieve these ambitious targets, including nuclear power, bioenergy, carbon capture, and land conservation in the medium term and technological innovations in the long run.

 …and where regulation is most needed and likely headed: A national clean energy standard would have the most impact on 2030 emissions though such regulation requires congressional approval, leaving most likely state governments to bridge the gap. Federal tax credits and a direct-pay structure (pending infrastructure bill approval) would go a long way to incentivize renewable development, EV adoption, even carbon capture, and more states would need to adopt a Low Carbon Fuel Standard (LCFS) framework in order to decarbonize the transport sector. However, without meaningful energy efficiency incentives and electric transmission investments – factors we believe are underappreciated by investors – the decarbonization pathway will be much more difficult.

 Holistic approach to decarbonization themes: With the sustainability movement permeating the world, it’s not a matter of if but how the US will execute on its climate pledges. Analyst estimates do not seem to be fully reflecting these market dynamics (understandably so given the regulatory and financing uncertainty), making government policies critical catalysts to de-risk the pathway. Across themes, energy efficiency, electric transmission, and utilities that are growing their renewable mix are attractively valued opportunities relative to the size of the opportunity.