This article first appeared in Wealth, The Edge Malaysia Weekly on August 26, 2024 - September 1, 2024

Even as the global economic outlook improves in 2024, countries continue to struggle with the baggage of high debts and deficits after the Covid-19 pandemic.

Government finances are acute this year as over 80 economies and economic areas are holding elections. Election years are usually associated with higher government spending. Coupled with high interest rates, the pressure to spend on structural challenges is becoming more pressing. 

Against such a backdrop, there is growing opposition to certain environmental and climate policies, with the degree differing across countries. If politicisation of climate change at the level of electoral politics increases, consensus and action at the intergovernmental level could become more difficult.

Despite setbacks in some parts of the world, the green transition is a structural change that will continue to gain momentum in the long run.

Even as the global economic outlook is improving, governments continue to struggle with the legacy of high debt and deficits after the Covid-19 pandemic.

Empirical evidence shows that government spending tends to be looser during election years, reflecting a “political budget cycle”. Estimates show that deficit outturns in election years are higher than those in other years by 0.3 percentage points of gross domestic product on average.

Looking ahead, financing conditions, along with elevated interest rates, remain challenging, while spending pressures to address structural challenges are becoming more pressing.

There is growing opposition to certain environmental and climate policies, with the degree of backlash differing across countries. Results from the 2024 Global Prediction survey conducted by Ipsos reflect heightened public concern over the increasing frequency and severity of climate events. The survey also shows that citizens in various countries strongly view climate change as a real risk requiring government action. But when it comes to paying for such policies, 30% of respondents agreed that they would pay more of their income in taxes to help prevent climate change, while 38% disagreed.

In the US, indigenous peoples are protesting against climate projects, not because they are against renewable energy (RE), but because such facilities could affect their ancestral lands, which are of great importance to their tribes.

Meanwhile, farmers in Canberra, Australia, staged a protest against the construction of high-voltage overhead power lines late last year, concerned that these projects would scar their land, inhibit farming and create a fire hazard in areas prone to bush fires. An alternative is to build these power lines underground, but this would increase costs and lengthen construction times, making power more expensive. Setbacks to Australia’s plans to build 10,000km of power lines by 2050 to connect RE projects to the grid will make it more difficult for the country to reach its emissions reduction target of 43% from 2005 levels by 2030.

Australia is the world’s biggest exporter of thermal and coking coal, and one of the leading global carbon emitters per capita.

Ensuring that the green energy transition leaves no one behind is a delicate balancing act. If politicisation of climate change at the level of electoral politics increases, this could make consensus and action at the intergovernmental level difficult. Any deals reached may also be watered down so as to obtain buy-in from relevant stakeholders. Patchier implementation, slower adoption of legislation and fewer public funds dedicated to the green movement could slow the pace of energy transition globally and pose a stumbling block to climate action.

Within the US, the climate agenda has been a divisive topic deeply intertwined with party politics. President Joe Biden has been actively pushing for the green transition, both domestically and internationally, with the landmark 2022 Inflation Reduction Act (IRA) being a key thrust.

On the other hand, while Donald Trump’s policy plans around climate are not clear, the US exited the historic 2015 Paris Climate Agreement under his leadership. His administration rolled back more than 100 environmental rules from 2016 to 2020; these rollbacks were estimated to contribute a third of America’s 2019 greenhouse gas emissions to the atmosphere by 2035. Hence, there are investor concerns about the impact of a Trump presidency on the IRA, but this also depends on whether the Republican party can gain control of the Senate and maintain a majority in the House of Representatives — all three of which are required for major change.

Regardless of a Democrat or Republican victory in the year-end elections, the world has entered the age of deglobalisation, and both parties are likely to support further trade restrictions against other countries to protect technologies critical to American economic and national security. However, how this will manifest will be nuanced, depending on the leader and his administration.

Other countries, on their part, may respond to additional tariffs or export controls on their goods by implementing export bans on minerals and related technology that underpin America’s green transition. For instance, on Dec 21, 2023, China announced an export ban on rare earth extraction and separation technologies. China has a near monopoly over the processing of some rare earth elements, which are used in defence and clean energy technologies.

Despite near-term setbacks in some parts of the world, the green transition is a structural change that will only continue to gain momentum in the long run. Although sentiment for certain stocks may be weak in the near term, it is believed that clean energy and electric vehicles are here to stay.

Established companies that are already profitable and have significant competitive advantages in their industries may stand out. Enablers of the transition, such as companies focused on energy efficiency and smart grid infrastructure, as well as those producing metals and minerals required for the energy transition, should also not be forgotten.

Michael Lai is executive director of wealth advisory (wealth management) at OCBC Bank (M) Bhd

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