Trump is *the* climate tipping point

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Well, this sucks.

It’s taken some time to scrape my brain off the floor since November 6, when Donald Trump was declared the winner of the US presidential election.  His victory is undoubtedly a blow to global efforts to mitigate climate change and head off escalating weather extremes. 

Plenty has been written on this aspect of his triumph elsewhere (shameless plug: check out my take on what it means for US climate resilience over at Climate Proof).  But here at Unpacking Climate Risk, we care about climate-related financial risk – so let’s dig into what the once and future president means for this theme. 

Later this week, I’ll publish something on whether his election heralds a rout of the climate hawks from financial regulation. Today, I want to talk about why his win is the best representation of that most contested of concepts – the climate tipping point.

Tony and I have gone round and round on this topic, and I’d argue the semantic debate over the term – in the realm of financial risk – is far from resolved.  

In physical science world, a “climate tipping point” (CTP) has a settled definition:  a global average temperature threshold that, if breached, could lead to irreversible and abrupt changes to the Earth’s systems. 

In finance world, things get a little messy.  One school of thought is that a CTP refers to the economic and financial consequences of these Earth system changes.  The problem here, as Tony has argued, is that even though the temperature thresholds that unleash such changes could be (indeed, are likely to be) crossed in our lifetimes, the timescales over which their effects would be felt economically and financially are centuries, if not millennia, in length.  Ergo, CTPs have no relevance to the climate-related financial risk debate.

Another school of thought broadens the definition of CTP to encompass all climate-related events that have the potential to produce non-linear financial impacts.  I’ve made the case before that this approach makes CTPs far more investor relevant, but also multiplies their number exponentially, and makes what “counts” as a CTP somewhat fuzzy.

Under this second definition, Trump’s election could certainly represent a CTP – and a big one at that.  

The immediate consequences of his election appear to be a heightening of climate transition risks.  In the days following his election, clean energy stocks have dropped , likely in response to his “drill, baby, drill” policy on oil and gas and the potential for a Republican trifecta to remove subsidies and incentives for renewables.  For example, as of the time of writing, the iShares Global Clean Energy ETF (ICLN) is down 11% from November 6. While we usually think about transition risk as a threat to climate-polluting enterprises, this week has been a good reminder that the transition will not be linear, and that backtracking on the road to a zero-carbon future comes brings its own kind of pain.

How enduring this kind of sell-off proves to be remains to be seen.  Markets are working off of campaign slogans and electioneering rather than hard policy right now, after all.  At the macro level, however, the climate transition consequences of the Trump CTP could be more long lasting. 

Specifically, his victory makes it likely we move to a new kind of climate risk regime altogether. The Intergovernmental Panel on Climate Change (IPCC) produced a suite of climate change scenarios in 2021, called the Shared Socioeconomic Pathways (SSPs).  These are qualitative descriptions of potential social and economic shifts that could explain specific temperature outcomes.  In other words, they try to answer the question: “If the global average temperature is at X°C by 2100, what factors likely led us here?”

Trump’s election makes it likely we have shifted from one SSP to another.  Brian Smoliak, a climate entrepreneur and co-founder of weather intelligence company Weathervane Labs, put it best in an email to me last week:

“The election results seem to fit a narrative shifting from SSP2 (“Middle of the Road”) to SSP3 (“Regional Rivalry”), which is characterized by increasing challenges for both mitigation and adaptation. If we want to continue accelerating decarbonization and building adaptive capacity, we should update our mental models as the post-election fog dissipates.”

As the name suggests, SSP3 “Regional Rivalry” imagines a world rife with “resurgent nationalism, concerns about competitiveness and security, and regional conflicts” that together “push countries to increasingly focus on domestic or, at most, regional issues.”  Sounds pretty Trumpian to me!  According to SSP3, it’s also a recipe for a 2.1°C world by 2050, and a 2.8°C - 4.6°C world by 2100.

Now I’m not going to pretend that the world has perfectly tracked with SSP2 these past four years (analogous to a 2.1°C - 3.5°C world by 2100).  The Russia-Ukraine war made the world more divided and fossil fuel dependent without the help of Trump in the White House.

However, the incoming president’s foreign and domestic policies (tariffs, isolationalism, trade war with China) would certainly accelerate the rush to autarky around the world, and that’s bad news for the climate transition.  While it is likely to proceed apace in parts of the world, namely the European Union and China, it could slow or even reverse in the US and those parts of the developing world depending on US investment to power their own adoption of renewables.

This balkanization of climate progress is likely to lead to a diverging of asset prices based on geography and different nations’ degree of self-sufficiency.  But funnily enough, I believe it could increase climate policy risk premiums in the US, too.  Here’s a thought: say US heavy industries, freed from environmental regulations under the Trump administration, get “dirtier”.  They may find it harder to compete in export markets against “cleaner” rivals in Japan and even China as importers continue to value low-carbon, climate-friendly products.  Such a dynamic could be exaggerated by the rise of carbon border adjustment mechanisms, (climate tariffs by another name) which impose costs on importers who buy climate-polluting goods.

And if you really want to go down the rabbit hole, you can go so far as to imagine Trump’s deregulatory and pro-fossil fuel agenda leading US energy companies to overextend themselves on oil and gas and neglect diversifying plays into renewables – leaving them more vulnerable to a correction, whether catalyzed by waning fossil fuel demand overseas or a showdown with OPEC.  Sure, financial assets linked to these carbon hogs could soar in the short term, but the bigger they are, the harder they fall.

On the physical risk front, Trump 2.0 may also represent a tipping point, the consequences of which could manifest fairly soon.  If his administration guts federal agencies that help cities and states recover from natural disasters – like this year’s Hurricane Helene – then localities could be starved of much-needed capital in the event of a catastrophe.  This, in turn, could freeze up the municipal debt trade and crush local economies.  Real estate markets could tank, and even big corporates could run into trouble if important physical assets or supply chains are affected and the feds don’t rush in with financial aid.

These physical and transition consequences of the Trump election would certainly be “abrupt”, as CTP impacts are meant to be.  “Irreversible”?  Perhaps.  Much depends on how long he is able to, or chooses to, wield virtually untrammeled power, and how deep his planned reforms of the US administrative state go. 

Readers may quibble whether a single election in a single country could produce the kinds of non-linear impacts that CTP advocates talk about.  I, however, don’t think there’s anything to be gained by underestimating the upward spike in climate-related financial risk the Trump presidency represents. 

Buckle up.