Independence Days

• We take our eyes off the “central bank fever” for a bit and look into the long-term effect of the US energy independence.
• New lessons from the “UK lab”?

COP27 was disappointing. No additional emission reduction ambition has come up. The agreement on providing financial help to developing nations towards their transition is big on principles but light of actual commitments and dependent on yet another future deal. This semi-failure in Sharm-el-Sheikh could reflect a generic “transition fatigue” while governments are dealing with the pressing issues of the inflation shock and energy security. The outcome of the US mid-term elections means that policy paralysis will likely define the remainder of Joe Biden’s mandate. His Inflation Reduction Act – in reality a Green Transition Act – could well be his last “big package”.

The re-emergence of a domestic oil and gas industry has made the US energetically independent. This produces significant economic benefits and will play in the hands of those who resist the transition in the US. Yet, the US is in a comfortable position to push ahead on decarbonisation. The potential for renewables is massive in the US, and while the EU needs to fund its transition while dealing with the brutal deterioration in the terms of trade triggered by the rise in energy costs, the US is not facing the same external shock while it can leverage its large O&G income stream to fund investment towards renewables. Resources to deal with climate change are scarce everywhere, but they are less scarce in the US.  Politics can get in the way, but maybe paradoxically we see the US energy independence as a potential asset for decarbonisation. The “will” may be debated, but the “way” is certainly there.

We also look at the UK’s backloaded fiscal plan. Although it can’t commit the government which will come out of the next general elections, it will still create a benchmark which will limit the capacity of Labour to stray far from fiscal rectitude. Yet, the British political configuration – returning to a classical confrontation between middle of the road centre-right and centre-left which can be conducive to policy continuity - is becoming a rarity in Europe where the push of populist parties is not over. This is a limit to any lesson we would want to draw from the “UK lab”.