← Shift Key with Robinson Meyer
Shift Key with Robinson Meyer
A New Grand Theory of Why Decarbonization Is So Hard
01:15:46
Rob and Jesse talk with Jessica Green, author of the forthcoming book, ‘Existential Politics.’
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- [00:00]
A
You are listening to Shift Key Heat Maps weekly podcast about decarbonization and the shift away from fossil fuels. On this week's show, we're talking with one of our favorite theorists of global climate politics and policy. We're talking about her new book, which preaches a philosophy of radical pragmatism. We're talking about what fossil fuel companies really want, and we're talking about why asset ownership might be the best way to understand the climate problem. All of that and what it means for the climate policy of the future. It's all coming up in a very meaty conversation right after this. You might know about heatmap for our award winning journalism covering the clean energy transition. And you may know about heatmap for this podcast, but do you know that we also have a data platform called heatmap Pro? Heatmap Pro is this special platform full of data and insights on political risk that energy developers can't get anywhere else. In heatmap Pro, we track contested renewable projects all around the country and county level restrictions in ordinances. Then we bring in additional data sources and proprietary polling, all to forecast the risk of local opposition to your project. We generate a political risk score for every county in the country. To learn more about using Heat Map Pro for your community affairs strategy, visit heatmap News Pro. That's heatmap News Pro. Hi, I'm Robin Simayer, the founding executive editor of Heat Map News.
- [01:32]
B
And I'm Jesse Jenkins, a professor of energy systems engineering at Princeton University.
- [01:36]
A
And you are listening to Shift Key Heat Maps weekly podcast about decarbonization and the shift away from fossil fuels. On this week's show, we're zooming out, we're taking a step back. We are thinking about climate change in a whole new way. And we are going to talk to someone who Jesse and I both have talked to and sought out her expertise in the past, and who is going to share with us what I would call the third great philosophy or the third great paradigm for thinking about climate change and decarbonization. So here's what I mean by that. You know, historically, if you've thought about climate change, or if you've sought out books or articles or podcasts about climate change, they tend to take two views on the topic. The first is what I would call the tragic view of climate change. This, I think, is more associated with environmentalism. It's more associated with a more spiritual way perhaps of viewing the world. And it says that man in the great middle of the 20th century sense his reach has gone Too far, he has become too wealthy, he's become too prosperous, he consumes too much, he's exceeded the planet's carrying capacity. And climate change, global warming is his almost divine retribution for this state, that the very thing that has made humanity so wealthy and prosperous, that being fossil fuels, is now destroying the planet in which he lives. It is gradually undermining society and technical civilization itself. And only by consuming less, only by learning to live in greater balance, can humanity return to a more stable equilibrium, a healthier state. So that's one way of understanding climate change, and it has a kind of tragic, hubristic sense to it. There's another way of understanding climate change, which I think you're far more likely to see in the economic literature. And in that view, climate change is a free rider problem and a collective action problem. And so the challenge of climate change in this view is that countries all have to come together and they all have to agree not to emit fossil fuels. And there's various policies that they can imagine that would get you to do that, carbon prices or carbon clubs or kind of carbon tariffs. But they all come back to this view that for every unit of fossil fuels you burn, you get more gdp. And so the problem of climate change is getting everyone to agree not to burn fossil fuels and to instead invest and build out what were at the time, especially in the mid-90s, seen as expensive and less immediately productive or GDP enhancing technologies. And I think there was some awareness that we would eventually get back to the place we were now, but that this was, in the short term, at least, a technocratic collective action problem. Our guest today argues for a new paradigm for understanding climate change. It's one that she isn't alone in arguing. And in fact, I think you'll hear that it's a view that in some ways represents the view we advocate here on Shift Key. It is focused more on questions of asset management, on finance, on how the need to get a stable return from the assets that you own and operate dictates domestic and global politics at the highest level. So our guest today is Jessica Green. She's a professor of political science at the University of Toronto and she's the author of a forthcoming book from Princeton University Press called the Existential Politics of Climate Change. She argues that basically this all out war or war by other means between different asset owner operators gives rise to existential politics. And that is the state we find ourselves in here in decarbonization. We're happy to welcome Jessica Green. Jessica Green, welcome to Shift Key thanks for having me.
- [05:49]
C
It's a delight to be here.
- [05:52]
A
So I want to start your book and the ideas you've been working on for a few years now, lay out what I would call an asset theory of everything, of climate politics, that assets are actually at the core and asset revaluation is actually at the core of what we care about in decarbonization and in the planet's struggle to decarbonize. So can you just describe this theory in its broadest terms for us at the beginning of the episode?
- [06:21]
C
Sure. Well, so not to go too far back, but basically this theory was born out of the frustration that political scientists and economists and social scientists thinking about climate change constantly described it as a collective action problem, the mother of all collective action problems. So the fundamental problem was that countries have to jointly commit to prevent free riding. And that's the way that we're going to get decarbonization or meaningful action on climate change. And yet we have now, coming up on COP30 in the winter, 30 years of evidence to show that this theory has not borne much in the way of decarbonization efforts. The theory that I lay out in the book is motivated by this reality. And it's first developed in a paper that I wrote with Jeff Colgan and Tom Hale. Shout out to them in a paper in International organization, which was really just for political scientists, in which we come up with this idea that there, that there were fossil asset owners and vulnerable assets owners. And so what the book does is really tries to expand on this and divide the world into three categories. Now, these are ideal types, so there's a lot of gray area in between. But fossil asset owners who are owners of basically assets that now power the economy. Green asset owners who are and will be the owners of renewable technologies and infrastructures required to power those technologies, and vulnerable asset owners who are the owners of properties, infrastructure and goods that are can potentially be destroyed or increasingly under threat because of the effects of climate change. And so what climate change and climate policy will do is revalue all of these assets. So fossil assets will become valueless, which many people have talked about through the lens of stranded assets. Green assets will become increasingly important. And vulnerable assets are somewhere in the middle of where people are fighting a rear guard action through adaptation to try and protect these assets. But the reality is that the conflict is that fossil asset owners are much more numerous and powerful than green asset owners. And so they've been running the show for 30 years. It started with a playbook of denialism, which we know about and then moved to sort of obstructionism and greenwashing, which is much more kind of politically mainstream now. And until we deal with the fundamental political economic conflicts that asset revaluation creates, we're not going to make much progress on decarbonization.
- [09:04]
B
So I really like this way of looking at the problem and actually wrote a paper on the carbon pricing political economy constraints on carbon pricing back in 2012, where I used the phrase of asset specificity as a way to think about this. How easy is it to redeploy a set of assets under a different policy regime? And this is a concept that comes out of transaction economics. You can see in management economics and marketing, things like that. Where you think about, I've invested all of this fixed capital in a particular financial relationship. I'm supplying parts, say to an automotive supplier, for example, and those assets are worth a lot less if I'm trying to sell those components to somebody else. You can use the same thinking around the politics and political economy, right? Where if you have a certain set of assets that are very valuable under the status quo policy regime and would be substantially devalued and not easily redeployed under a new policy regime, that's a good way to predict who's going to fight like hell to protect the status quo. Right. Versus those who can either easily redeploy their assets or who are indifferent or even benefit from a new policy regime. So I really like this sort of very rational, economics motivated thinking here. And I do think it has a lot of predictive value for describing the fights that we see. I think it might be helpful to break down a little bit the different types of assets that we're talking about just for give people. We're talking about oil in the ground, but we're also talking about capital, equipment invested in different ways, human capital. Right. Training and different skill sets, these kinds of things. So how do you think about the different categories of assets?
- [10:30]
C
100%. So yeah, it's mostly just because we've thought a lot less about the labor piece of it. Maybe we can circle back to that. But mostly I think about, yes, resource endowments and capital investment. So we're talking about oil rigs and all of pipeline infrastructure and all of the trucks and things that are needed, refineries that are needed to get oil out of the ground and to the distributor. And then on the green asset side, we're talking again about like, what are the technologies, the photovoltaic cells themselves, the nacelles, these things that constitute turbines. But Also all of the, obviously the raw inputs that you need to make those things. And so of course, you know, now it is the case that every, everything that is taken out of the ground is used, is powered by fossil fuels. Right. So ultimately you could argue that everything is a fossil asset, but some are more decarbonizable than others, which is what gives, I think the cue to policymakers is like that's where we have leverage, right. This is, is to really focus on these assets that are decarbonizable, that are not so specific. And the asset specificity is a real problem. And also, by the way, tells us why divestment is very limited. Right? Because you can sell off your fossil asset owners to someone else, but as then you'll just recreate that problem with another set of owners. Right. So ultimately this is really about phasing those out.
- [11:56]
A
Can I ask, do you see everyone as fitting into one of these three categories or are this a limited account of participants in climate policy? Because when I think of the assets that Americans have, it's like, you know, largely Google and Microsoft who I guess fall somewhere, they're energy users, they are big power grid market participants, but I'm not sure they clearly fall into a fossil or vulnerable or even green bucket.
- [12:24]
C
I think they do, empirically speaking. But for the purposes of political scientific analysis, what we're really interested in are organized interest groups. So to the extent that Google wants to make sure that it continues to have access to cheap energy to power its increasing use of AI, then yes, maybe they are a fossil asset owner. But yes, we're thinking mostly of those who have high asset specificity, high investments in these, in these particular sectors and are going to fight through the political system to maintain access to those things and to maintain the value of those assets.
- [13:01]
B
So one of the things I think is helpful in this asset framework is to think about the flow of assets or the sort of dynamism here.
- [13:08]
A
Right.
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B
Because these assets don't exist forever. Oil on the ground, sure, that's an enduring, on geologic scales kind of asset. But if you're talking about capital investments in pipelines or in power plants or even human capital, right. The aggregate skill base in the people who assemble internal combustion engine cars.
- [13:25]
A
Right.
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B
For example, they've invested a substantial amount of time in that. But those people over time retire or they can be retrained into other sectors and those power plants retire and those pipelines eventually retire, but all on different timescales. And I think those timescales often are also predictive of like how fast you can move the transition without triggering major backlash. Because I've dealt with utilities in a lot of different contexts, both as a policy advocate, trying to push them to do things as an analyst, as a research partner more recently. And you can see that like as long as the transition isn't too fast, where it starts to exceed the pace of depreciation, for example, of their current investments, they're fine with it because they're perfectly happy to redeploy their financial capital in wind and solar and batteries. They're still making money off of those, they're still making a regulated return in some cases, but they don't want to devalue or prematurely retire the assets they already have. And so there's this pace that is different in each sector that you can push on, but you can only push it so far before you start to, even for these decarbonizable sectors, you start to trigger backlash as well.
- [14:29]
C
Right, And I think that's absolutely true. And this is again why we see, I think that smart planning is hedging, right, because it is making those forward looking investments towards decarbonized technologies, but still trying to maintain as much value out of these assets before they fully depreciate. And so that's where government comes in. Right. Is like the market is not going to take care of this because they are going to have to take a hit if we are really serious about phasing out these fossil, fossil assets before the end of their lifespan. Right, because that is, yeah, absolutely, a financial loss for whoever is owning, whoever owns those.
- [15:05]
B
So what are some of the strategies that you think policymakers can take if they adopt this sort of asset theory mindset?
- [15:11]
C
So there's two pieces to this. One is to recognize the many flaws in the status quo approach, which sidesteps all of these questions of asset revaluation. I spent a lot of time explaining why managing tons of carbon dioxide in the atmosphere or GHGS in the atmosphere is not a helpful approach. There is a huge swath of the policy space and I know this may upset some of your listeners that are dedicated to things like greening the supply chain and voluntary net zero commitments and public private partnerships and improving the robustness of carbon offsets. And you know, I document extensively in the book why these things do not work. And so even though many of us think, oh, we're past that, like actually this is everywhere in climate policy. Everywhere. Anywhere you see net zero, anywhere you see the word net, you have some kind of offset, whether it's a carbon Offset ccs. This is really everywhere in climate policy. So I think that's step one and then step two is to really address both pieces of the equation of fossil and green asset owners. One is you have to build green asset owners, which is the thing you guys talk about so much in your podcast. How do we do industrial policy and create carrots to incentivize particularly these decarbonizable industries to flip. But the other piece, which is the one that nobody wants to talk about, is how do we constrain the material and political power of the fossil fuel fuel industry or fossil asset owners? And that is the big one. I try in my own pragmatist way to talk about the international institutions that are available to us to think about constraining them both in trade, but also in tax, investment, investment law. And I think those are ways that we can think more sort of productively about how to lessen this power asymmetry between fossil and green asset. Odd customers.
- [17:07]
A
I want to advocate for listeners who might work on net zero issues and kind of. Let's spin this out for a second. The reason why you're saying net zero kind of always suggests or always perhaps at inexorably leads to a managing tons approach is that if you're looking at trying to manage this as a. If you're looking at trying to basically keep existing production flows intact and keep existing asset values intact while ratcheting down emissions, you're just always going to be snipping at the edges or you're always going to be looking for places at the edges to make processes more efficient, but to not actually hit the underlying problem of asset values? Or is there maybe a good way to think about corporate net zero where you're like, you should be thinking about corporate net zero, but you should be thinking about it in terms of shifting as many of your fossil dependent production assets as possible to green or non emitting assets.
- [18:12]
C
Yeah. Okay, so this gets a little bit into the weeds of like that's what.
- [18:17]
A
This podcast is for, that's okay.
- [18:19]
C
And the politics of measurement. But so if we look specifically at net zero, so there's net zero at the national level, there's net zero at the firm level level at the national level. In theory, measurement is possible, but it's difficult. Right. Because you have to impute a lot of measurements, you may have a lot of fair amount of missing data, there may be incentives to massage the data, but in theory you could do sector by sector inventories of emissions at the firm level. Right. I'm sure. Everyone here is familiar with the Greenhouse Gas protocol, which was a subject of chunk of my first book, which allows firms to measure their greenhouse gas emissions according to scopes. And if you delve deeply into where scopes come from, what they really come from is life cycle analysis. When we make this widget, how much does it emit? And when we have an intervention in, let's say we tweak something to improve its efficiency, how does that intervention change the level of emissions? That idea was then adopted to create the scope 3 accounting. And so fundamentally people say, well, that's not the same as a carbon footprint because one is looking at a dynamic change in the production process while the other is looking at a sort of static production. So that's one problem with scope three. But the other problem is like what is scope three? How do you draw the boundaries? How do you report on it? How do you verify that information? So I use the example in the book of like Walmart's hundred thousand producers in China. Right. So if you're really going to measure the Scope 3 emissions of Walmart, you have to know what the emissions are of every single producer that is contributing to their supply chain. And that is a huge, huge task.
- [20:20]
B
And then for what benefit is the question I think at the end of the day. Right. Is it actually telling you?
- [20:25]
C
What is it actually telling you? And the way that I like to put it is if everyone's scope one and scope two emissions were regulated, there would be no scope three emissions.
- [20:35]
B
Yep.
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A
In other words, it's partially a historical thing because then what happens is the scopes get integrated into financial regulations. At least in the US under the Biden administration, the plan was to directly fold scope level accounting into financial regulations.
- [20:49]
B
Yeah, I don't want to drill into that a little bit because the justification, at least as I understand it, for including this sort of reporting in regulatory contexts, Right. For corporate reporting, is this idea of climate risk. Right. As it's broadly defined that you're, you know, the higher your, your scope 1, 2 and 3 emissions, supposedly the more exposed you are to future policy changes that might increase the cost of emissions. There's another aspect of it which is how exposed you are to related extreme weather conditions and other disasters. That's the vulnerable assets piece of it. That makes a lot more straightforward sense. And the whole insurance community is very focused on that for a good reason. But the reason for reporting your emissions is presumably that the higher your emissions footprint, the more potentially exposed you are to changes in policy. But that actually glosses over the actual asset specificity beneath that. I think that's your contention, right, which is like if I'm a shoe manufacturer in Thailand or something, and a big chunk of my emissions footprint is coming from coal plants that dominate the grid in my country, I have no way of really eliminating that other than moving the location of my facility to some other country with a cleaner grid. Right? So that's a pretty substantial, substantial exposure. Whereas if it's something that's like directly under my control, that I can easily switch out this for that in the future, then who cares if my emissions are high right now? If the policy changes, I'll just get rid of those emissions. So it really kinds of glosses that varying degrees of risk that are embedded in that accounting and doesn't make any attempt really to get at that.
- [22:17]
C
I want to go back to one thing you said, Rob, though, about incorporating scope 3 into the financial disclosure. That's just one example of where managing tons gets incorporated into national level regs. And that is the real issue, right, is that these things are just around and they accrue legitimacy and people think they work and then they become part of bigger policies. And we've seen that the very same story with the voluntary carbon market, right? Voluntary offsets are now compliance grade in both domestic and international policy. And we know there's huge, huge problems with them.
- [22:51]
A
I want to be really clear here. What we're talking about is that under the Biden administration, the sec, the securities and Exchange Commission, the premier equity regulator for the US Government and therefore for the world, integrated into its now discarded climate risk rule because of subsequent Trump administration action, but integrated scope analysis into its climate risk disclosure rules and basically was going to require companies to disclose their scope accounting.
- [23:19]
B
And that remains the case for very large companies active in California and for those in Europe, as I understand it as well. Right. So even though the federal SEC regulations are gone, still many companies that are doing this because of regulatory requirements and other jurisdictions they do business in, including California. I want to briefly defend the net zero concept. I understand how it can easily get you into this arithmetic, this managing tonnes mindset. The idea of netting is that you have to calculate the direct emissions, you have to calculate the removals and you net those out. But it is fundamentally what the science says we have to be focused on, which is that we have to get global emissions to net zero. The point where anthropogenic human caused emissions are exactly equaled out by human caused removals. That's when we stop digging ourselves a deeper hole from the Climate perspective and we can maybe start climbing back out again. So like as an end goal to focus our efforts towards that makes a lot of sense. But then when you sort of immediately fall into a, okay, so then the tools to get there is adding up and managing tons as opposed to restructuring the physical and asset based nature of our economy, you start to get out of line. And so like the Net Zero America study that I led, very much focused on net zero. But the whole focus of the study is what actually has to change in terms of physical infrastructure, capital deployment and human capital labor. Like those are the three lenses that we were looking at for that study in order to get to the end goal. And I think that's much more in keeping with the kind of mindset that you're talking about, Jess.
- [24:42]
C
A hundred percent. I'm not saying that Net zero is not a thing. If you look at the sort of the history of the scientific literature, which I've done, it is a concept of a world imbalance, right? So it's about terrestrial sources and sinks of emissions. And so you're precisely right. It's the process of translating that scientific concept into specific policies and implementation and way of assessing, evaluating, measuring those policies, which is where things begin to get distorted.
- [25:12]
A
So I want to like move on, but I also want to stress test this asset valuation theory of everything briefly. And I have two different kind of other folk theories of climate action that I want to pit against it. The first might be like the energy price theory of everything, which is the public cares a lot about energy prices. And that's because energy prices are a big input into quality of life and production. And efforts to constrain the fossil fuel supply invariably run into this challenge that they either force the public to pay more by running up fossil fuel prices, or they force the public to pay more kind of indirectly by forcing them to buy new assets and switch out their car for an EV and their home heater for electric heater, and maybe their home gas heater for a heat pump. And what's more, there's always this like experimental quality to industrial policy as climate action because we don't really know what a fully decarbonized world would look like. And so we don't know that we're going to nail it on the first try when we do climate policy. And so we're always a little bit asking the public to like roll with us when we do a big new climate policy. And indeed, let me just add, when energy prices go up, we see climate organizations which have pushed for Policy that would raise energy prices. But when energy prices really go up, like after the Ukraine war, we see groups like the Sunrise movement, and I understand why they're doing this politically switch to being like, these oil profiteers are robbing us and we have to do things to force down oil prices now. And energy prices. And a cleaner world would do that. It would lower energy prices. And so why is the asset valuation theory of everything explain what we see? Maybe more compellingly than just like, voters hate it when energy prices go up, and they hate it when you do things to constrain fossil fuel supply because they think that means the energy prices go up.
- [27:06]
C
Yeah, I mean, that's a great question. I'm not sure. I guess my answer would be that they're not mutually exclusive. Right. Like, I see energy prices as the sort of more proximate variable to the outcome. So, I mean, I'm sorry, this is like a super nerdy, but like, I guess another way to put it is they are a function of the contest between different types of asset owners.
- [27:30]
B
Yeah, that's always how I've thought about it as well, is that these two are not mutually exclusive lenses to look at the problem. And if you layer in the idea of collective action in this context, not the global collective action on climate, but the collective action, and how easy is it for different political constituencies to organize themselves into an effective political body? The industries are much better at that than just the general public. We can express our dissatisfaction with inflation or prices going up, and that has some political salience, particularly around an election. But generally speaking, it's diffuse costs and lots and lots of people that all have to get motivated by this topic. And so outside of really severe energy crises like we saw in Europe, it just generally doesn't rise to the as high a level of salience as it would for a company whose very kind of existence or existential stake depends on beating back some kind of policy change. And in fact, I think when we see energy prices as a proxy, like for the fight over climate policy, it's often because those very same interests are whipping up that public concern in a very concerted way. It doesn't just naturally happen that people understand that carbon pricing increases energy prices. Like people are going out there and pushing that as a political narrative and often demagoguing and attacking these particular policies as the cause of your pain. And if you look at where that's coming from, it's usually coming from these very same industrial interests who are trying to defend themselves. So it's like a Latent political constraint that can be activated, I guess, is how I think about it. But unless it's a crisis, tends to not be activated just naturally because it's hard for the public to focus on it because we got a lot of other things we care about and are spending our time on. Does that make sense?
- [29:10]
A
I guess the other way to kind of equalize it would be to see homeowners and voters themselves as asset owners, where you really only care about gasoline prices because you have a gas car and because you don't want to get rid of your gas car and it's expensive to do so. Right. Like there is a cycling motion. Right.
- [29:26]
B
That's why China subsidies to get people into EVs. Helps reduce their asset specificity, for example.
- [29:31]
C
Yeah, but that's inherently a sort of less powerful, less well organized group. I mean, I think Jesse's right. It acts as a sort of latent constraint on what policymakers are willing to do. But I think there's a lot more sort of elasticity and how far you can kind of push on that.
- [29:50]
B
Yeah, I think that's right. And the other thing that the energy cost piece does help, though, with, I think is it brings in the role of innovation in reducing the cost of transition.
- [30:00]
A
Right.
- [30:01]
B
Because if you have substitutes for fossil fuels or fossil consumption that are moderately similar in cost, then that energy price story doesn't play out. But if you're trying to force people to pay three times more for a substitute, then maybe it is relevant.
- [30:15]
A
Right.
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B
That's high enough cost that people are going to say, forget it. And so this is the lens that I think of around innovation is driving down the cost of substitutes so that this constraint can't be activated, that people aren't going to get pissed off about energy prices going up. And the other way to think about innovation is can you create ways that would reduce the asset specificity of fossil assets? And this is where maybe carbon capture, for example, plays a role. If theoretically one could make it work and it was reasonably cost effective to deploy, it would then mean that some fossil assets could persist and would not be existentially threatened by a policy change. Which is precisely why some people hate the idea of carbon capture. But from this lens would say, okay, that will make it easier to tackle climate change if companies believe that they can retain their profits while coexisting with future climate policy.
- [31:02]
A
The subtext of a lot of this is that if you kind of adopt this theory, you want interest rates to be as low as possible. In fact, like ZIRP Looks like the zero interest rates of the effect.
- [31:14]
B
Can't not talk about interest rates on.
- [31:16]
A
No, but I mean, this is what I mean. If you think that part of what's happening here is that asset devaluation needs to happen as quickly as possible in order to. Basically, the pace of asset devaluation sets a speed limit on the political acceptability of the transition. Then you want as low rates as possible so that, like, asset owners and managers can, like, churn through existing assets and replace them as quickly as they can. Is that wrong, do you think, Jess.
- [31:41]
B
If you have clean energy available, I guess, to invest in.
- [31:44]
C
Yeah, I mean, that's the key question. And my guess would be that would only accelerate slightly at the margins. Right. Because whatever, an electricity plant lasts pretty much as long as it lasts maybe a year or two on the end, less if it's cheaper to replace, but not that much.
- [32:01]
B
Yeah. And zero interest also gave us the shale boom, right?
- [32:06]
A
Yes. Although I'm a little doubtful about that story because we continued the shale boom right into the 2020s. And what slowed down when rates went up was that suddenly renewables and wind faced higher costs and so did the shale boom.
- [32:20]
C
Yeah. I mean, cheap money accelerates everything. Right. So to the extent that you haven't decarbonized, it's going to be a mixed bag.
- [32:29]
A
Okay, So I want to ask another question, which is, Jess, you praise in the book the Inflation Reduction act and the European Green Deal, and on the date we're recording this. And I would say that indeed the IRA and the European Green Deal reflect a political economic view of the problem, where one way to frame these policies is that we're trying to take industries that can be decarbonized, like the utility sector, like the auto industry, and convert them to being green asset owners rather than fossil asset owners, and to seeing the virtues of a more decarbonized economy versus defending a fossil and dirty economy. And yet at the moment, the IRA is being taken apart by the Trump administration. And I think one thing that we've seen is that even bipartisan industrial policies that sought to decarbonize or kind of convert parts of industries such as the industrial funding and the IIJ and the bipartisan infrastructure law has been yanked by the Trump administration. And though we don't yet know what's going to happen to the tax credits in the Inflation Reduction act, we have seen the Trump administration basically go at pulling apart these policies wherever they can. And so if policies like the IRA are the right way to tackle these problems, why have they failed to have an effect. Why have they proven so politically vulnerable?
- [33:50]
C
Well, okay. I mean, I think obviously climate policy is super polarized in the US And I think it will be interesting to see what parts are left standing, if any, in the ira, to see to what extent are Republicans really willing to cut their noses off despite their face, in the name of dismantling the ira, even if that means cutting off lots of money flowing to their congressional districts. I think that's going to be a much more compelling test than any of the politics of carbon pricing, where all of this sort of abstract discussion of per ton and output, pace pricing and benchmarks and all this very technocratic stuff was a political loser. And so this is actually has the potential to be a political winner. It's been shown in research to be a political winner, particularly when it's coupled with other social socioeconomic benefits. So nobody has a crystal ball.
- [34:44]
B
Yeah, we'll see how the experiment plays out over the next few months. Right.
- [34:48]
A
Part of I'm asking, I guess, is that are they tagging these policies exactly. Because they're actually would be effective at converting existing plants. And so like the fossil fuel industry or the Trump administration as its instantiation understands exactly what it's doing, in fact.
- [35:02]
C
Yeah, I mean, I think it's a probably both. And right. It's like, yes, Trump is drill, baby, drill, and he's very close to lots of people in the fossil fuel industry. But it's also just red meat for MAGA to just say, ah, we hate, this is a stupid set of policies and we hate government and we hate anything about the climate. And you know that too. So I think it's probably both.
- [35:22]
B
And I should say, I mean, the asset specificity theory was a big part of what framed the IRA development. And I think the political economy theory that is being tested right now in that, I mean that it was designed to subsidize the adoption of the new technologies in sectors that are shiftable from the fossil camp to the clean camp. Right. In the case of EV manufacturing, battery manufacturing, subsidizing adoption of heat pumps and solar and etc. Like it was really all meant to lower that cost of shifting from one set of assets to another, while of course avoiding the triggering of higher energy prices as well. But it was also meant to kind of lock in support by driving fixed capital investment in the new clean economy.
- [36:02]
A
Right.
- [36:02]
B
So once those factories open, once those new transmission lines open, once those wind farms open, they become assets specific to the current policy environment. Now, the thing that has made the outcome, I think very uncertain right now, beyond the polarization politically is just that we didn't have a lot of time to build those assets right between 2022 and now. And so there's a limited amount of total new investment that has actually materialized. And much of the debate is about investments that are planned and announced but at risk and have not actually materialized yet or ones that have started to but are not yet employing people across the town. And so if only we'd had, you know, two or four more years before this test came, I think the asset specificity case would have been stronger. Right. There've been more sunk investment on the clean side that would make the political case for repeal more challenging and more contested as well as is we'll see what happens. Right. There might be some sectors that survive for precisely this reason and there might be others that don't have enough strength yet.
- [36:59]
A
So your focus at the kind of conclusion of the book is that we should instead take a radical pragmatism approach and you focus especially on the role that the multilateral financial institutions could take. Let me actually just read the. I thought this was a wonderful paragraph. It was earlier in the book, but ironically global climate policy has stagnated because governments are too focused on global climate policy to get to the root of the climate crisis, states should turn to global rules that reorient the flow of capital and the global economy. So what would a global climate policy that focuses on those rules look like?
- [37:33]
C
Yeah, so I will preface this by saying multilateralism wasn't doing so hot when I finished the book in December 2024. And obviously things have gone precipitously downhill since then. So again, it really goes back to this question of rebalancing the power between green and fossil asset owners. And industrial policy at the domestic level can help build up these green asset owners. But as Jesse said, policy retrenchment is particularly dramatic at a time when we don't have enough asset specificity from the green asset side. But what we really haven't thought enough about is what happens to what we can do to constrain fossil like the continuation of the power and resources flowing to fossil asset owners. So I talk about two avenues for trying to constrain them. And these are pragmatic in the sense that they're not earth shattering. Like this is not a reimagining of the liberal international order that's already happening, but rather they are things that are underway that can really help us shift the mental model to thinking about how we constrain fossil asset owners and one is tax policy. I wrote a piece in Foreign Affairs a few years ago that says tax policy is climate policy. So to the extent that, you know, and we've seen some of this with the implementation of windfall taxes in the UK and on fossil fuel companies and elsewhere, when they just started making heaps and heaps and heaps of money post Ukrainian invasion, that they needed to pay back some of this essentially. But there's another sort of process underway which is deeply wonky. I spent a few months learning about international tax law, but there's a new set of rules which are unsurprisingly currently being trashed by the Trump administration that put in place, it was October 2021 that countries agreed through the OECD to implement a minimum corporate tax of 15%, which was revolutionary in the sense that countries were actually giving up one of their core sovereign functions, which is to administer taxes or levy taxes. And the agreement, it's not a treaty, but it's a set of rules where countries agree basically to put in place this minimum tax. And if they don't put in place this minimum tax, other countries can top up the number. So it's essential, and I'll explain in a minute what that means. But effectively what this top up provision means is that it's a self enforcing agreement. So let's say there's a firm in Germany that is based in the US and it's only being taxed at 8%, then any other member of this agreement can say, well, we are levying the additional 7% on this multinational to be in compliance with the set of model rules. So I make the argument that like, look, concentration of capital is a huge problem for inequality for a variety of pieces of the poly crisis that we are now dealing with. And that tax policy is really one way that we can start thinking about this. And even if that money doesn't go to green investments, even if it's just taken away from fossil asset owners and put into the general kitty, that that would be better than what is currently happening.
- [40:59]
A
Can you spin out the thinking there a little bit? Is that because fossil assets and fossil fuel companies are so prone to the kind of profitability pattern for them is they can go years without making money and then they suddenly have these big windfalls like we saw in 21 and 22. Is that the thinking here, that if you lop off the top of the windfalls, then fossil assets, assets get systematically devalued?
- [41:21]
C
Yeah, I mean it is a process of revaluing these assets to make them pay more taxes, which arguably offsets a bit of the subsidies that we give them. So to the extent that owning fossil assets continues to be profitable, you will have fossil asset owners fighting to maintain their value through obstructing climate policy. So anyway, and again, this is radical pragmatism. Like, it won't reverse the world order, but like, any way that you can chip away at the profitability of these assets is an improvement towards increasing, decreasing their power and increasing the relative power of green asset owners.
- [42:01]
A
When you first suggested, or when I first read your suggestion that we should use these multilateral development institutions or these multilateral financial institutions to tackle climate, I thought of an unsuccessful effort to, from the Biden administration, which was that at the beginning of the Biden administration, it basically limited the amount to which some of the global financial banks could finance fossil fuel investment. And what this wound up doing was basically pissing off everyone. It pissed off domestic fossil fuel companies, it pissed off the African states that were often the recipients of this finance because they said, hey, you're trying to keep clean, you're trying to keep cheap energy from us. And indeed, repealing and getting rid of those limits has been a very successful and popular international move that the Trump administration has done so far. And so how do you avoid accusations of green colonialism if you these multilateral development institutions. But it seems like in some ways you're thinking on a much more broader tax and spend basis.
- [43:01]
C
Yeah, I mean, I think that these are meant to be sort of universally applied. Right. So there are 140 countries that have signed onto these OECD model rules. There's a new UN tax treaty that's being negotiated which is going to. It's a very long way off and I think will be very polarizing, but again, has the potential to do this in a universal way. The stuff that I talk about in the book about investment policy through the investor state dispute settlement system, which essentially it's a set of provisions that protects foreign direct investment from lots of things, national appropriation, sort of undue regulatory burdens. Those are often bilateral agreements. And so countries can just say, we don't want to honor those provisions anymore. We don't want to have investment treaties with provisions that protect fossil fuel fossil asset owners.
- [43:56]
B
But doesn't that just reflect the same political power that constrains domestic politics? Like, how do you think about the politics of this whole multilateral setup and how we actually change these rules which would materially harm fossil companies?
- [44:10]
C
Again, there's been some movement on this, so the big, the biggest there is a multilateral treaty that sort of sets the tone for this called the Energy Charter Treaty. You guys probably have talked about it on the podcast, which was basically built to ensure the low cost provision of fossil fuels in the late 20th century. And there has been a huge movement to first reform that treaty. And now basically lots of countries, mostly in the EU are pulling out of that treaty. And so the nice thing about the politics of this is less complicated because it's less about making rules than unmaking them or just withdrawing from them. So yes, there will be countries, I think that are hangers on for sure. But again, you can chip away at this when you have bilateral like even unilateral support in some countries.
- [45:02]
B
So individual countries that are not that fossil producers or exporters could just simply stop providing these protections is what you're saying, right?
- [45:11]
C
Yeah.
- [45:12]
A
What would a domestic policy agenda that's focused on constraining the power of fossil fuel companies look like in the US or say in Canada where you have a new, more climate friendly Prime Minister than you know, we're going to have for the next three and a half years?
- [45:29]
C
This is where I'm a little bit out of my depth because most of my focus is on international institutions. But what we do know from a lot of political science research, as I mentioned before, is that you don't need to be a political scientist to know that carrots, not sticks, are in general much more politically popular. And that is at a time when we have a social safety net and public benefit, public goods that are waning here in Canada as well, those are things that people tend to be more supportive of. So I think that's really where we need to look. And in particular, like when we talk about green industrial policy in general, it's about making stuff and much less about the people who are going to make things and service them and maintain them. So I think when we talk about OECD countries, industrial policy in OECD countries where 70% of the jobs are in the service sector, we need to have an industrial policy for jobs. Yes, there are pockets of things about vocational training and climate core and things like that, but I don't think we have thought systematically about that in almost any country where green industrial policy has been priority.
- [46:45]
A
I have two crazy questions. The first is that I think one thing we saw with the ira, one thing we've seen with the IRA is, is that carrot focused policy can be just as prone, especially in its early years, just as prone to repeal as stick focused Policy. The difference is with stick focused policy, political actors are capable of ramping the salience way up, but with carrot focused policy, they just do it. And so I guess my question basically, isn't it possible that for as much as we've all disliked carbon pricing, in a domestic policy space, if you really want to go after and revalue these assets forced revaluation, there's no faster way to do it, especially in a revenue constrained environment like it seems like the US will soon be under than just smacking those fossil fuel producers with a carbon price and forcing them to pay.
- [47:45]
B
I mean if you put aside the politics of getting from here to there.
- [47:50]
C
But I mean this is the economist's constant response is, well, the reason carbon pricing doesn't work or it doesn't work as well as it should is because the price isn't high enough, but the price is never going to be high enough because of the politics. So I think yes, in an ideal world, yeah, we just tax the crap out of them, but that's just not going to happen. It's just it ain't going to happen.
- [48:12]
B
Or for a time being at least, I mean like Rob, I think you're picking up on like if the frontal assault version of the asset theory is everything argument would be yeah, you just go and devalue these assets, just go do it. But of course you can't win that war right now. And so I like to use this lens to think more about like what does the battlefield map look like at the moment? Where is the clean side strong, where are the fossil assets strong and where are they able to neutralize each other? Or where can you make a non frontal assault where you're actually focused on innovation now to lower the cost of the battle five or ten years from now. Right. It's just, it's a much more dynamic and fluid problem and you just sort of have to attack where the openings are.
- [48:51]
A
I think that in some ways what I'm picking up here and what it seems like we're reaching is actually quite relevant to the abundance versus antitrust argument that some listeners may be watching play out in other parts of the Twitter discourse, right? Where you know, the kind of argument from abundance supporters, from Ezra Klein, Derek Thompson, those kinds of people is that look, the government has to do things to successfully has to be capable of doing things if we want to accomplish progressive policy goals. And the argument from the antitrust or anti monopoly group is no, there are powerful forces in the economy that constrain the government's ability to do things and that directly don't want to see progressive policy succeed. And you have to directly take on those forces if you want to accomplish progressive goals in the economy. It seems like we a synthesis or idea that we're hitting here is look, there's no way to hit the oil companies like a carbon tax, but in fact you'll lose that war. You can't take on fossil fuel producers or enemies of climate policy without building up your productive forces in the green economy first. And so you need to pursue policies that build up productive forces in the green economy before you can have the battle royale that it seems like anti monopolists and the antitrust cohort want to see happen.
- [50:05]
C
I think in principle that logic makes a lot of sense in practice. You're building an army, right? Is essentially what you're saying. And is that army going to be big enough as long as the fossil asset owners are there?
- [50:18]
A
To me, that's if your point of view is that you can never get the carbon price to where it needs to be, then you're either have to do it with you build up an army of productive green asset owners or you go directly at the fossil asset owners. It seems like you have to do one of those things, right? Or what am I missing?
- [50:40]
C
What I've sort of proposed is a both and is like, yes, you use tax, trade and finance institutions both to build up your green army and your green assets. And that includes figuring out, we haven't talked about trade wars and tariffs and stuff, but it includes how you use global trade to facilitate the production and diffusion of green assets. So that's one piece. And you use existing multilateral institutions to chip away at the power of fossil asset owners. So I think it's a both and I think your question is what proportions do you need each in in order to get real movement?
- [51:22]
B
But I think this is the relentlessly pragmatic approach, right? Is you just keep mapping those. The relative strength of those forces and the opportunities to push one side forward or the other side back.
- [51:31]
A
Right?
- [51:32]
B
And that's the kind of relentlessness that you need to make progress on this horribly difficult issue. And sometimes you take two steps forward and one step back, sometimes you take one step forward and two steps back, but you're continuing to push on the opportunities that come forward.
- [51:47]
A
Can I ask a crazy question that we need to wrap up, which is so your book doesn't touch on petrostates, which makes sense, but in some ways they're the dark matter of this whole discussion because they produce more Than half of the world's oil. National oil companies produce more than half the world's oil. When people think about fossil fuel companies, often they think about Exxon and Shell and Chevron. They think of these international multinationals. But actually where most oil comes from are Saudi Aramco and the national oil companies. And what's more, the national oil companies, if you think about the UNFCCC process and the Paris agreement process and the problems there are, they have a direct veto and Saudi Arabia has famously, enthusiastically used this veto on any global climate policy. And so I do wonder, and this is a heretical thought, but as part of what we're building here, that there's a right place for an alliance or some kind of bargain between domestic fossil fuel producers and like domestic energy production of all kinds because it's a domestic fossil fuel producers right now furious at the national oil companies. And they're, by the way, they're furious with the Trump administration for going to OPEC and telling them to drill more. And so is there a world where you strike a bargain, you bring these private fossil fuel producers into the tent along with other forms of energy production, you try to pursue a decarbonized but stable energy price regime domestically. And you say the real enemy are these national oil companies who can exert their veto in global climate policy in a way that domestic energy companies never can.
- [53:24]
C
Woo, Getting crazy. So one answer would be nationally owned oil companies. So Canada has been described to me as three oil companies in a trench coat, right? So if you buy that, then the Saudi Aramcos of the world aren't that different from the investor owned oil companies of democratic states like, like Canada or the U.S. and so maybe you have the same problem. It just looks institutionally different because of the relationship between the government and the oil companies. So that's one interpretation. I think there is another in which, and I don't, yeah, I don't take it on in this book, but like, like, yeah, the fastest way to have the revaluation of assets is for the government to just eat the cost, right? Or part of the cost. And that is extremely unpalatable to many people for a variety of reasons. And like a lot of policies like it is, it would be efficient in some ways in terms of accelerating the energy transition, but politically it doesn't seem feasible. On the other hand, we are living in such a topsy turvy world at this moment that who knows what kind of strange bedfellows will come out of this. I think it would be smart for Carney to repeal the 100% tariff on EVs and open up a pipeline, as it were, between Canada and China for cheap and get the sort of supply chain rejiggered. But that's, you know, I don't see that forthcoming just because the politics of that are so unpleasant, unpalatable. And I think the same is true with the scenario you describe.
- [55:07]
B
Since we're talking about oil companies, one thing I wanted to observe, I think is important in the context of this story, is that there was a serious effort to try to try to push oil companies themselves to be transition companies, right? This idea that many of the European majors in particular adopted, like BP and Total others, that they would become integrated oil energy companies and not just oil and gas producers, and they would shift into building offshore wind or drilling for geothermal or producing biofuels or whatever. And I think, you know, in particular bp, who I had a closer window into their thinking through the carbon mitigation initiative that exists here, have existed for the past 25 years here at Princeton and is now coming to a close at the end of this year, there were executives in that company that really believed that vision and ultimately the shareholders of these companies would not permit that kind of posture or transition. Because what's in it for somebody who owns oil stock to see this company diversify? They don't need BP to exist in 20 years or 30 years, right? They can just take their money because it's not specific, it's transferable. They can just take their money out of oil equities and put it in clean energy equities as soon as it's more profitable for them to do so. And so the idea that we could get these oil companies to transition in order to like protect their long term, their long term viability as a company, it just doesn't actually work. The stock markets want them to focus on the thing that they're doing now and they want them to deliver short term dividends and returns. And they don't care if that means they shrink over time and go away or go bankrupt eventually. The national oil companies and the Saudi Arabia and other, the countries around them, they're a little different, right? Because Saudi Arabia can't go away. Right? Saudi Arabia's government needs a revenue source and it needs an economy and it needs a way to provide some for its people. And so in some ways they actually have a lot more incentive to manage this transition. Of course, they have incentive to protect their existing assets too. But to manage that gradual transition, then some of these oil and gas companies whose shareholders are perfectly fine to burn the company down over the next two years as long as they get their dividends out.
- [57:09]
C
Yeah, you would think that's the case. Again, like the logic of that argument makes a lot of sense, but the empirics don't really bear it out. Or maybe they do and we just haven't seen yet. Like maybe there's a come to Jesus moment for Saudi Aramco or Pemex or whatever, but we haven't seen it yet.
- [57:26]
B
I don't know.
- [57:28]
A
I feel like we're going to have to leave it there. Jessica Green, thank you so much for joining us on Shift Key. And we look forward to the release of your book Existential Politics, coming out later this year from Princeton University Press.
- [57:40]
C
Thank you so much. This was a lot of fun.
- [57:51]
A
And we're back every week here on ShiftKey. As you might know, we do a little segment we call upshift downshift, where we take one item of news from the wide ranging cosmos of climate and energy news out there in the world. If it's making us feel more upbeat about the energy transition, we call it an upshift. And if it's something that's happened in the past six months, we call it a downshift.
- [58:14]
B
Yeah, it's been a lot of downshift.
- [58:15]
A
Sorry about that. It's been a lot of downshift. It's not our fault.
- [58:17]
B
It's not our fault.
- [58:19]
A
It's not our fault. Well, Jesse, what do you have for us?
- [58:25]
B
Well, this is our first opportunity to talk about the big spat between Elon Musk and Donald Trump, which occurred Last Friday on 6 June, is a falling out that I think many of us expected at some point. You know, two men with egos that large have a hard time coexisting for long in an amicable way. But if you haven't read the Twitter and Truth Social back and forth or x.com and truth social back and forth, you should go do that. But I wanted to focus on what the implications of this spat might mean for the politics of the Inflation Reduction act and the Senate's efforts to craft their version of the one big beautiful bill, as Trump calls it, that the Republicans are working on. I think going into this administration, as Elon Musk aligned himself with Trump, there were a lot of people that felt that that was a good sign for the future of EV policy, that Trump and Musk being tight would mean that Musk would have greater influence to defend policies supporting electric vehicles, policies that are good for Tesla's bottom line and that ultimately he might save the tax credits or other policies supporting EVs from repeal. Now, however, as this spat unfolded, the heart of the matter for Musk has been the deficit impact of the budget bill. The fact that it would add something like $4 trillion to the deficit. He's called that disgusting. He's very concerned to his credit consistently about deficit impacts for whatever reason. But he basically said in his parting shot, whatever, keep the EV solar incentive cuts in the bill, even though you're not touching the oil and gas subsidies, he notes, but ditch the mountain of quote, disgusting pork in the bill. So where I read this is him basically saying, as he's actually said for quite some time, and we've commented on this in the past, he doesn't actually care about the EV tax credits for whatever reason. He thinks that, that either they're not necessary for Tesla's success or that if they hurt Tesla, they hurt all of his competitors. If losing those tax credits hurts Tesla, it hurts his competitors even more and leaves Tesla in a better off position at the end of the day. But he is not going to the mat to defend those credits. Instead he's sparring with Trump in order to get more spending cut from the bill and to reduce its impact on the deficit. And to the degree that he's successful as the richest man in the world and recent force in politics, his arguments and his cash could strengthen the political case of the budget hardliners, the anti spending hawks in the Senate who are also trying to trim down the bill and are probably the single biggest barrier at this moment to some of the more moderate senators. Measure efforts to lengthen the timelines for phase downs of certain tax credits, whether it's the EV credit or the clean electricity credits. So I read this as clarity that Musk is not going to defend these tax credits. In fact, he's happy to see them burn down. And his priority is to strengthen the folks who are fighting against any increases in the budgetary impact of this bill, which is going to make it very difficult for senators to extend IRA tax credits longer before they phase out.
- [61:17]
A
Yeah, it's interesting because I think there's been a question running all along which is, is Elon kind of stupid, ideological or both? And I think there's a lot of evidence that he's ideological right, and he's specifically ideological about the deficit. This is what like motivates him seemingly to support Trump. And you can imagine a nightmare scenario here, though it's not, not totally convinced. It's the one we're on. But I think you can imagine a nightmare scenario where basically Elon Forswears keeps talking about the deficit and the deficit expanding effort parts of this bill. He rejects the need for solar and EV and various other electricity tax credits. Enviros don't really want to compromise during Senate negotiations. And the whole IRA falls apart in the Senate because it's easier for the Senate just to throw out all the renewable parts even. It's easier for the Senate to throw out. Yeah, basically all the tax credits. Exactly. Now, I will say a few things, which is I have come to a more arcane understanding of what's happening here. Well, first of all, let's like note the greater irony that Elon keeps talking about the pork in the bill. Right. He talks about how there's all this pork, pork in the Republican tax bill. There really isn't a lot of pork in the Republican tax bill. Most of the spending comes from tax cuts that happened in the 2017 TCJA, the original set of tax of Trump tax cuts. They're just extending all those tax cuts further. They might lower some rates, but for the most part, this is an extension of tax cuts that have already happened and were set to expire. That's where most of the spending is. And the rest of the spending is from directly. Trump promised policies like no tax on tips. That.
- [62:57]
B
Which he campaigned on. Relevant.
- [62:58]
A
Which he campaigned on and which Elon supported. Right, exactly. Which Elon bankrolled a campaign to produce. And so when you look for pork in the bill, there's this kind of nonsensical thing where it's like either policies that already exist that Elon, we assume supported because he backed Trump or policies that Trump promised as part of his 2024 campaign that Elon explicitly backed. It was Elon who.
- [63:21]
B
Maybe it's the salt tax deduction that he's talking about.
- [63:24]
A
Maybe he really hates salt. Yeah, exactly. I don't think that.
- [63:27]
B
Yeah, that's what motivates him.
- [63:29]
A
I have come to a more, I would say, like obscure understanding. How would I put it? Like mystical and obscure and kind of opaque understanding of what exactly is happening with Elon. Because, you know, if you look at a timeline on August 5, 2021, before the inflation Reduction act passed, when it was still called build back better first year of Biden's term, that's when Biden holds this EV summit at the White House that has representatives from Ford, General Motors, Stellantis and the United Auto Workers. And not Elon, not anyone from Tesla and That night, Elon goes, oh, this is kind of weird. Like, maybe they should have invited me. And then after that, in the months after that, is when Elon really begins to shift. And there seems like there's kind of culture war dynamics with this too. But, like, setting that aside, by December 7, 2021, Elon says about what is still called build back Better. He says basically he would delete, quote, unquote, the energy and EV provisions in the Biden reconciliation bill. And he says, the federal budget deficit is insane. I would just get rid of this whole bill. By the time the IRA passes, Elon has already opposed the subsidies. And so then in 2024, when he begins to support Trump, he's been on the record for two years opposing these EV subsidies. And I do wonder if he had not. And what then happens is reporters repeatedly ask him, and you'll see Trump say this too. Reporters repeatedly asked him, like, what about all the subsidies that Tesla benefits from? And he is like, oh, we don't need the subsidies. You know, Tesla might get hurt a little bit in the short term, but in the long term, our values and autonomy. So I'm not worried about us. It's like other automakers that aren't haven't caught up to us yet that are going to get hurt more. And like, we write at heat Map pieces of analysis basically saying this why, like, getting rid of the subsidies could lock in a Tesla monopoly. I do think that then there are two other events that really matter to, like, analyzing this whole split. And the first one is that through all of the early Trump administration, Elon is both basically disconnected from the leadership of his companies. And also there's a lot of coverage that these subsidies are not actually going away. We write stories that are like, 21 House Republicans say they want to stick with the clean energy subsidies because the assumption was that the House Republican caucus would retain most of the subsidies regardless of what Elon says. And it's not until late May that the Elon Trump split really begins to happen. And that is also after, number one, Elon has gone back and visited Tesla. And he's understood how important the modern set of subsidies are to Tesla's business. And he's understood it is not only the subsidies that we should be talking about, it's the entire set of tailpipe regulations from California and from the EPA and from the Department of Transportation that create this web of, like, credit buying and selling, plus tax credits that really provides a huge buffer to Tesla's bottom line. And the Trump administration targeted that entire Web of policies, Right. It's gone after the California ZEV provisions, it's gone after the, both the EPA and the NHTSA provisions. We're going to talk more about that in a second. Or the DOT provisions. And then the House passes a bill that actually trashes these tax credits in a way that maybe Elon didn't expect. And so when you go from April 1, 2025, or let's say Liberation Day to June 1, 2025, not only the subsidy picture, but the whole incentive and bottom line picture for Tesla looks totally different than you might have thought it would like at the beginning of the second quarter. And I do wonder if Elon has then been more involved in his companies now and has also watched this, what he thought he could just punt it about fall apart. And this has also informed. Anyway, that's my like, yeah, it's possible.
- [67:20]
B
That, you know, the bluff was called and now he's like, oh yeah, he actually want this. But, but to be fair, like you could have seen all of this coming. Trump also campaigned on getting rid of all of these regulations. He campaigned on getting rid of the ira. And so maybe Elon just didn't realize it. But like this attack on the bottom line at Tesla has been there the whole time. It's always on the precipice of actually happening. We'll probably never know what's going on inside his head. But Rob, I think you've got a shift that's kind of related so over to you.
- [67:46]
A
Exactly. I too have a downshift for the week. So last week, last Thursday, the Senate Commerce Committee, in the middle of basically the Elon Trump meltdown, which is why this didn't get a lot of attention, released a new text of the Trump mega bill. And this text actually made a change to one of the country's longest standing pieces of air regulation and fuel efficiency rules in a way that has not been noticed at all. So since 1975, the US has regulated the fuel efficiency of new vehicles sold in the United States with a law called the Corporate Average Fuel Economy Standards. It was first passed, as you might guess from the year in the wake of the Arab oil embargo. It kind of bit for a few years. It lapsed into not really being important through the 80s and 90s and fuel economy in the US really didn't get much better. And then in the mid 2000s, after the big oil shock of the mid aughts, Congress on a bipartisan basis strengthened the rules. And since the mid aughts, the corporate average fuel economy Standards or the CAFE standards have continuously improved US Fuel mileage to the degree where last year the new cars and light trucks sold in the US achieved a real world fuel economy of 27.1 miles per gallon, which is an all time high. And we think they're going to hit another record in 2024. But the Trump administration, which has basically attacked tailpipe pollution standards from like every angle. You know, the EPA has a similar version of these rules, although it's allows car makers much more freedom. It has attacked those rules, it's tried to undo them, Congress has tried to repeal them. This new Senate reconciliation text, what it does is it goes into this 50 year old law passed by the Department of Transport, passed by Congress, and it says, look, historically what has happened is if you were an automaker and you didn't hit these standards, you had to pay a fine and the fine was calculated by basically the number of cars that went over the standards for every tenth of a mile they went over the standards times $5. And these fines could be very large, they could be in the hundreds of millions of dollars. And the most recent company to be hit by the fine was Stellantis, paid something on the order of $426 million in penalties for cars sold for model year 2018-2020, last year and the year before. This Senate reconciliation bill goes into that longstanding law and changes the $5amount to zero. So any fine calculated under the CAFE law, which has been on the books again for 20 years to 50 years depending on how you count things, is now automatically multiplied by zero. Automakers will never have to pay a fine for selling too many gas guzzlers. Right. They're trying to repeal the CAFE rules basically in a way that is permitted under the Byrd rules, which are the set of Senate procedures governing what you can bring up in Senate reconciliation bills. That Senate reconciliation bills have to affect revenue or spending. They can't have more than a quote, merely incidental, unquote effect on the federal budget. And it seems like basically by zeroing out the fines, they think they can soft repeal these laws. I think it still stands to see, because the reason these fines exist isn't actually to have a budgetary impact, it's to enforce compliance with the laws. So maybe this provision won't actually survive a birdbath, but if it does, it would undo one of America's two long standing ways of regulating fuel economy from new cars and light trucks sold here. Now, I want to add one more thing too, which is I have seen some people on social media say that this is actually a really good thing because since the mid aughts these rules, the CAFE standards have basically allowed carmakers to meet laxer standards if they sold larger vehicles because of something called footprinting rules that Congress somewhat put in the law. Somewhat were then created as a regulatory creation. But basically Congress said, look, if you sell trucks, the government, the Department of Transportation or nhtsa, the National Highways Traffic Safety Administration, which really makes the rules when it writes these CAFE standards, it has to take into effect that like larger cars are harder to make fuel efficient than smaller cars. And you have to respect that in the rules. And NHTSA then went and created these footprinting guidelines. And some people think, and I think there's some evidence to support this, that basically this has pushed carmakers to stop selling sedans and to sell more larger truck style sport utility vehicles. Now I have some problems with this theory because I think it overlooks, number one, that consumer tastes have favored larger and larger vehicles over time. I think it overlooks the fact that other car markets have seen car bloat in the same way. But I'm open to the idea that car bloat has been a creation of these rules. I think that this is the worst possible way to solve it though, because between the CAFE standards going away, which is one way the US regulates fuel economy and new cars, and the environmental protection agencies greenhouse gas standards going away, which is the other way the US Government regulates air pollution in new cars, there's going to be no more regulation for fuel economy. And so if you're like, oh my gosh, carmakers have really taken advantage of these rules and now they're selling all these truck like cars to consumers and it's actually made cars less efficient overall. You're going to hate the new world where automakers do not face any regulations whatsoever for the fuel economy of cars they sell. Now maybe it'll all work out in the end and maybe there's some world that survives where the legal basis EPA greenhouse gas regulation stand and the NHTSA CAFE rules go away. And because the EPA rules allow for more trading between different types of vehicles, this is. Okay, so this is another thing, basically. Oh my gosh, don't turn off the podcast. Keep listening. Because under the CAFE rules, you can't trade credits, you can't trade pollution credits as much between cars and light trucks, but into the EPA rules because they're fully a creation of regulatory law and did not involve input from Congress. You can freely trade credits. There's a lot more credit trading in the EPA rules, while in the NHTSA rules, the CAFE standards, it's like there's only so many credits that you can get from selling a lot of, say, hybrids if you also sell a lot of polluting vehicles. And back in the teens, this was a problem for Toyota, which, if you think about it, sells a lot of Priuses, but also sells a lot of Tacomas and big trucks. Anyway, there is a kind of ideal world you can envision here where the greenhouse gas EPA standards stick around and the US Is able to create a very flexible standard for fuel economy, for regulating fuel economy and new vehicles. But the NHTSA CAFE standards just go away. But I don't think we live in that world. I think we live in bad world, where what's going to happen is.
- [74:34]
B
You don't think we live in an ideal world?
- [74:36]
A
Rob? No, I think what's going to happen is bad world where all of the rules go away and automakers can sell anything they want and there's effectively no regulation for selling gas guzzlers in the US Anymore. And we very, very quickly get back to a world of the Hummer H4. I think that that's coming our way.
- [74:54]
B
The Hummer's luck now, Rob.
- [74:56]
A
That's true. And it's very heavy. Well, that does it for this week's episode of Shiftkey. Thank you so much for listening to Shiftkey. If you like this episode, remember to like us or subscribe to us or rate us on whatever podcast app you use, whether that's Apple Podcasts, the normal one, Spotify, the other normal one, heatmap News, the cool one, because it means that you're a Heatmap subscriber, which you all should be. Or Deezer, the weird French one, whichever podcast app you use. Or Overcast, by the way, the nerd one, whichever podcast app you use. And we'll be back next week with another episode of Shift Key, which is, by the way, if you've forgotten, a production of Heatmap News. Our editors are Gillian Goodman and Nico Orchella. Multimedia editing and audio engineering is by Jacob Lambert and by Nick Woodbury. Our music, as always, is by the inestimable Adam Komalow. Thank you so much for listening, and see you next week.