Energy is emerging as one of the defining issues ahead of the US presidential and congressional elections on November 6. At a time when drought is reducing ethanol output, the two main presidential candidates have sharply different strategies for reconciling energy with climate protection and low-carbon growth.

Barack Obama (Democrat) is promoting an ‘all of the above’ strategy to boost renewable energy and energy efficiency, as well as mobilise domestic oil and gas. By contrast, Mitt Romney (Republican) wants to remove EPA regulation of carbon dioxide, drop incentives for wind and focus almost exclusively on expanding exploitation of coal, oil and gas reserves. This stand-off is strikingly different from the 2008 Presidential race when both candidates, Barack Obama and John McCain (Republican), recognised climate change as a strategic threat and backed the introduction of ‘cap and trade’ to drive low-carbon growth. Four years on, cap and trade is a distant prospect (see Tables 1 and 2, below). We believe three factors explain this shift:

The shale revolution: The rapid growth in shale gas and oil production has temporarily broken the link between energy security and climate action. Henry Hub gas prices peaked in July 2008, just before the last Presidential election, and have fallen c80 per cent since, in sharp contrast to prices in the UK (Chart 1). With abundant shale, the energy imperative to deploy renewables and efficiency has been reduced.

The economic downturn: The economy continues to deliver subpar growth. This has relegated climate in the public mind, and focused attention on jobs. Mr Obama is positioning clean energy as a source of jobs and innovation, while Mr Romney points to the potential of shale and offshore drilling.

Cultural polarisation: The scientific consensus on the reality of global warming has deepened significantly over the past year, highlighted by the recent results of the Berkeley Earth project which concluded that the earth’s surface temperature had risen and that human activities are “almost entirely the cause.” But polarisation in American society on climate change remains profound. Indeed, behavioural research suggests that “public divisions over climate change stem not from the public’s incomprehension of science but from a distinctive conflict of interest,” with attitudes driven more by an individual’s world view than scientific evidence. This makes it hard to build the cross-party compromises required for long-term action on climate and clean tech.

Emissions falling, but climate concern also down

Taken together, economic slowdown, along with more shale gas, renewables and efficiency, means that US greenhouse gas (GHG) emissions are 8.6 per cent below 2005 levels – potentially on track for the Obama Administration’s objective of a 17 per cent cut by 2020. But with the failure to pass comprehensive climate and clean energy policy in 2010, there is no guarantee that this objective will be met – and this in itself is far below the international benchmark goal for industrialised countries of 25-40 per cent GHG cuts from 1990 levels by 2020.

Furthermore, according to the most recent opinion survey from Yale University taken in March this year, the proportion of Americans ‘alarmed’ or ‘concerned’ about global warming stands at 40 per cent, well below the peak of 51 per cent in late 2008, with 45 per cent stating that it was ‘not an important issue’ in deciding how to vote in the Presidential elections’. This poll does not take account of the record summer temperatures and drought conditions prevailing across 63 per cent of the ‘Lower 48’ states, but it’s unclear what connections voters would make with climate change.

Yet this erosion of climate concern should not be confused with a lack of support for action to promote ‘green growth:’ the same survey found that a full 58 per cent of those polled believed that action to protect the environment “improves economic growth and provides new jobs” compared with only 17 per cent against. With America’s fiscal situation one of the top political issues, 60 per cent said that they would be more likely to vote for a candidate who reduced federal income tax and made up the revenue via fossil fuel taxes.

Crunch issues and wild cards

Critically, the Presidential election is just one of three federal polls on November 6: the entire House of Representatives is also up for election along with a third of the Senate. This is important as key policy proposals need filibuster proof support in both Houses as well as Presidential backing. We believe the climate and clean tech dimension of the elections will turn on three key issues, with one wild card after the vote.

– Tax credits for wind power: The Production Tax Credit for wind will expire at the end of the year. We estimate that failure to extend the PTC would reduce the wind market from 10.5GW this year to 3GW in 2013. On August 2, the Senate Finance Committee – consisting of both Democrats and Republicans – approved a bill that would extend the wind PTC and renewable energy Investment Tax Credit by one year until December 13 2013 as part of a package of tax extenders. The proposal also recommends changing the eligibility criteria for offshore wind so that projects receive the PTC as long as they have begun construction by the end of 2013; currently projects must be completed by year-end to qualify. We believe that an extension is unlikely ahead of the November election, but the PTC remains a rare example where bipartisan support can be achieved and so approval either in the lame duck period or early in 2013 looks reasonable, in our view. However, if this just a one-year extension then it would provide insufficient regulatory visibility to stimulate many new projects.

– Ethanol mandates and corn: With the US drought driving corn prices up c28 per cent since 15 June, the Obama Administration is under pressure from home and abroad to suspend its renewable fuel standard (RFS). The RFS mandates 13.2 billion gallons of ethanol this year; last year, ethanol consumed 40 per cent of US corn. Ethanol production has already responded to high corn prices and has fallen to a two-year low since early June, reducing corn consumption by c12 per cent. Flexibility built into the RFS also lowers the economic impacts of reduced corn output. Nevertheless, one study has estimated that a RFS waiver would cut corn prices by 7.4 per cent. The electoral importance of ethanol in key farming states makes it unlikely that either candidate would support RFS suspension ahead of the November vote. Thereafter, the recent repetition of food price spikes could accelerate US efforts to reduce the ethanol share in biofuel production.

– Carbon regulation & the EPA: Ending the Environmental Protection Agency’s authority to regulate GHGs is a key Republican priority in energy policy. In the absence of cap and trade, this would remove a major remaining tool for low-carbon action. In April 2011, an attempt to pass similar legislation won 50 votes, but failed to gain the 60 votes need to avoid a filibuster; President Obama had also pledged to veto the legislation. Given the high hurdle to pass the Senate, we believe that this measure to end the EPA’s authority is also unlikely to succeed after the 2012 elections.

– Carbon pricing & fiscal reform: One ‘wild card’ idea that is gaining traction in bipartisan efforts to close the US fiscal gap is the use of a carbon tax to raise revenues. A carbon tax has been supported by a range of think-tanks across the political spectrum including the American Enterprise Institute, the Centre for American Progress, and the Economic Policy Institute.5 A new study from Brookings finds that a tax set at $US15 per tonne would raise $US80 billion pa at the outset; if it rose by 4 per cent a year, it would raise $US310 billion by 2050, cutting GHGs by 34 per cent. Introducing a carbon tax would clearly face substantial obstacles – but if placed in the context of overall fiscal rebalancing could win favour in our view.

This is an edited extract of HSBC Global Research’s “US election preview,” published August 16, 2012. Reproduced with permission.