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November 22, 2016

President-elect Trumps energy U-turn

President-elect Donald Trumps stunning electoral victory and Republican control of both houses of Congress has set the
stage for a radical reversal of Americas energy policies. This reversal is being driven primarily by two factors:

Most of Obamas signature energy policies were implemented via executive order, which means that the new
president could reverse many of them without seeking approval from Congress
While Trump differs with many Congressional Republicans on trade, deficit spending and foreign policy, they are
on the same page when it comes to energy

The Trump administrations agenda likely includes approval of the Keystone pipeline, undoing many regulations regarding
fossil fuel production, cancellation of the Paris Agreement and lower fuel efficiency standards for automobiles.
All things being equal and notwithstanding concerns over the longer term effect on the environment, the combined impact
of less regulation and potentially lower business taxes (another Trump promise) will improve the bottom lines of many
U.S. corporations.
Unfortunately, Trumps energy U-turn comes at a time when costs for many Canadian companies are set to rise due to
the implementation of carbon-control regulations. This could place many Canadian businesses at a competitive
disadvantage vis--vis their U.S counterparts. This disadvantage could be further reinforced by Trumps intentions to
reduce corporate taxes as well.

Trumps energy advisors are very pro-fossil fuels

Not surprisingly, all of Trumps energy advisors are strong proponents of fossil fuels. His advisors include the following:

Harold Hamm is the billionaire chief executive and majority owner of Continental Resources, a leading U.S.
shale-oil producer. He has been mentioned as a possible Energy Secretary.

Kevin Cramer is a North Dakota congressman and noted climate-change skeptic. He is a strong advocate for the
oil and gas industry.

Robert Grady is a venture capitalist who worked in the Bush Senior administration. He has been floated as a
contender to head the Energy or the Interior Department.

Myron Ebell heads the Environmental Protection Agency (EPA) transition team. He feels that any warming
caused by greenhouse gases (GHG) is no more than modest and could even be beneficial. He is fiercely opposed
to the Paris Climate Agreement and previously worked for the Competitive Enterprise Institute.1 It is safe to
assume that, under his leadership, the EPA will be much more accommodating towards fossil fuel producers.

Donald Trump Could Put Climate Change on Course for Danger Zone, The New York Times, November 10, 2016.

The Keystone pipeline is back in play
Trump is strongly in favour of developing energy infrastructure. For starters, he supports the Keystone pipeline project. After
seven years of regulatory delays, President Obama rejected the project in November 2015. Trumpwho will have the power
to approve this and other projects without needing congressional authorizationhas invited TransCanada to resubmit its
application. If completed, the 1,197-mile pipeline would deliver 830,000 barrels of bitumen per day to Nebraska, where it
could then flow to the Midwest and onward to the gulf coast.
He is also in favour of the 1,100-mile Dakota Access pipeline, which would carry oil from North Dakota to Illinois. The
Obama administration requested a temporary halt to construction after Native American groups claimed the pipeline
would damage important cultural sites and threaten their primary source of drinking water. This pipeline has been the
focus of a months-long confrontation between police and protesters.
If approved, the two pipelines will lower costs for oil companies in certain regions that have often had to rely on more
expensive rail shipments when existing pipelines operate at full capacity.

Rollback of regulations on fossil fuel production

In sharp contrast to Obama, Trump is a strong advocate of increasing oil, gas and mining production on federal lands.
Among other things, he wishes to lift the Interior Departments moratorium on new federal coal leases. He also supports
permitting offshore drilling in the Atlantic Ocean and other regions where it is currently prohibited. Finally, he is looking to roll
back regulations that set strict limits on water and air pollution in the energy sector.2 Given that many of these regulations
were implemented by executive order, Trump could undo many of them unilaterally with the stroke of a pen.
It is important to note that while weaker regulations could significantly reduce operating costs, the ability and/or willingness of
fossil fuel companies to ramp up oil and gas production depends much more on energy prices. However, if regulations are
relaxed and taxes cut, the U.S. oil sector would be much better positioned to rapidly expand production should prices rise
significantly for any number of reasons, including an OPEC deal to cut production and/or a global economic upswing.
As for the coal sector, contrary to Trumps claims, its declining market share is not due to overly strict federal regulations, but
rather to growing competition from cheap natural gas. Ironically, Trumps pro-fossil fuel energy policy could further boost the
supply of cheap natural gas and hasten coals decline. This will be the first year in which natural gas accounts for a larger
share of electricity production compared with coal (33% vs. 32%). Largely as a result of this advance by natural gas, U.S.
carbon dioxide emissions have fallen to their lowest level in 25 years.3 Natural gas emits roughly half the CO2 coal does.

U.S. likely to pull out of Paris Climate Agreement

President-elect Trump has pledged to withdraw from the Paris Climate Agreement under which nearly 200 nations have
committed to lower carbon emissions. He has also promised to cancel billions in payments to the UN climate-change fund
created to help poorer nations address climate change and, instead, redirect funds to American infrastructure projects.
When it comes to withdrawing from this agreement, Trump has three options. First, he can cancel it via executive order.
Second, he can submit the agreement to the Republican-held Senate where it will almost certainly be voted down. Third, the
United States can simply ignore its commitments to reduce emissions.
Without the full participation of the United States, the worlds second largest GHG polluter after China, some analysts warn
that countries could see little reason to follow through on their Paris pledges, especially if U.S. funding to help poorer
countries transition to more expensive cleaner energy sources is cut. However, other experts maintain that, regardless of
what the United States does, countries such as China and India have little choice but to pursue their efforts to reduce
alarmingly high levels of pollution. Doing nothing would threaten their political and economic stability.


Trump Choosing Leaders to Roll Back Environmental, Energy Policies, Associated Press, November 14, 2016.
U.S. Department of National Energy

Dismantling the Clean Power Plan
The Clean Power Plan is at the centre of Obamas climate agenda. It calls for the electricity sector to reduce GHG emissions
to 32% below 2005 levels by 2030. Given that coal-fired plants are by far the worst GHG emitters, they would be the ones
most negatively impacted by the plan. Under the plan, each state has to come up with its own plan for cutting emissions.
Implementation of the law is currently delayed pending the outcome of the legal challenge brought forth by 28 states and
more than 100 companies. If the Federal Appeals Court upholds the Clean Power Plan, the case will probably be taken
before the Supreme Court, where it will likely be considered by a right-leaning majority bench of judges once Trump fills the
seat left vacant by the recent death of Justice Antonin Scalia. Trump could also order the EPA to issue new rules setting
much less stringent controls on GHG emissions. Finally, under leadership chosen by Trump, the EPA could simply decide
not to enforce the Clean Power Plan.4
The Republicans could also very well attempt to pass a bill in Congress to strip the EPA of its authority to unilaterally
regulate carbon dioxide emissions. This would prevent any future president from following in Obamas footsteps of regulating
GHG emissions via executive order. Instead, all future attempts at such regulation would require congressional approval.
The odds of the Republicans being able to pass such a bill will be discussed in greater detail below.

Trumps impact on renewable energy

While the Trump administration will be much less supportive of renewable energy than its predecessor, federal solar and
wind tax credits are unlikely to be repealed due to their bipartisan support. Indeed, the 30% tax credit was first signed into
law under Republican President George W. Bush in 2005 and extended for another five years by a Republican-controlled
congress last December. Moreover, some of the biggest tax incentives for renewable energy do not come from the federal
government but rather from states such as California and New York.

Trumps impact on the transportation sector

Under the current law, consumers can claim a $7,500 credit for the purchase of an electric car. There have been reports,
however, that the Trump administration could eliminate the credit. If so, the impact of the decision would be mitigated by the
fact that the provision is to be phased out for a manufacturer once it sells over 200,000 electric vehicles. Tesla is expected to
be the first to reach this threshold in early 2018, followed by General Motors, Nissan and Ford about a year or so later. Still,
removing the credit could put a damper on electric vehicle sales at a time when gas prices are low and electric cars are still
more expensive on average than their gasoline-fuelled counterparts. However, regardless of the credit, the price of batteries,
the most expensive component of electric vehicles, is projected to continue to decline steadily.5
Even more significant is the strong possibility that gasoline fuel-efficiency targets could be revised downwards by the Trump
administration. The current target implemented by Obama aims for cars to reach 54.5 miles per gallon in 2025, compared
with about 36 miles per gallon now. Automakers have seized on the change in government to argue for lower targets.
Trump could undo both the electric vehicle tax credit and fuel efficiency targets via executive order.


Donald Trump Wants to Dismantle Obama's Climate Rules. Can Anyone Stop Him?, Vox, November 10, 2016.
Teslas Future in Trumps World, Bloomberg, November 11, 2016.

How easily will Trump and the Republican Party be able to pass bills?
For the first time since 2007, Republicans will soon have control of both the executive and legislative branches of
government. The Republicans will have 51 seats in the Senate against 48 for the Democrats. As for the House, the
Republicans will have 239 seats against 219 for the Democrats. While this constitutes a slim majority, particularly in the
Senate, it still leaves Republicans well positioned to pass major legislation that enjoys wide support within their party. For
legislation to be made into law, it must be approved by the two houses of Congress and signed by the President.
Traditionally, the minority party in the Senate has resorted to filibustering in order to obstruct legislation. Filibustering is a
process whereby the opponents of a measure require the other side to obtain a supermajority of 60 votes to pass
a bill in the Senate. However, over the past decade or so, the power to filibuster has been steadily eroded. As a
result, various types of bills have been passed by simple majority vote. Here are two recent examples:

In November 2013, the Democrats (when they controlled the Senate) voted to amend the rules and allow a
simple majority to approve court and federal agency appointments.

In December 2009, Obamacare was passed via a procedure called reconciliation, which prevented it from being
filibustered in the Senate.

While a reconciliation bill can only be used in matters related to spending and taxation, the Republicans could
attempt to fold environmental measures into legislation focused primarily on other things. Such a move could be
used to pass a law preventing the EPA from unilaterally regulating carbon emissions. It is important to note, also, that
some of the 25 Democratic Senators up for re-election in 2018 might be tempted to vote with the Republicans on certain
energy bills, particularly if they are from Republican-leaning states.

Canadas energy policy runs into an unexpected Trump headwind

The Liberal government had just finished congratulating itself for putting the last touches on its environmental policy when it
was caught off guard by Trumps surprise victory. Last month, it announced the imposition of a tax on carbon emissions
beginning in 2018. The tax will start at $10 per ton and rise $10 annually until it reaches $50 by 2022.It will be up to each
province to implement a carbon tax or set up a cap-and-trade system.
Canada is in the awkward position of tightening environmental regulations just as the United States is poised to move in the
opposite direction. This has raised fears that more stringent environmental regulations will place some of Canadas
businesses at a competitive disadvantage vis--vis their American counterparts. This new business landscape will be
particularly challenging for Ontario and its struggling manufacturing sector given that electricity rates in the
province are already among the highest in Canada. Greater and greater automation of the industrial process means
that access to affordable electricity will become an increasingly important indicator of a countrys competitiveness.

Finally some good energy-related news for Trudeau

The revival of the Keystone XL pipeline project would be an unexpected political gift to Trudeau. It would, at least in the short
term, eliminate the need for Trudeau to spend precious political capital trying to win approval for building pipelines to either
coast in the face of intense public opposition from Quebec, British Columbia and many native communities.
Over the longer term, however, completion of the Keystone pipeline would still not solve the major problem facing Canadas
oil sector, namely, its overdependence on the U.S. market. Building a Canadian pipeline to either the Pacific or Atlantic coast
would allow Canadian oil producers to sell their oil at international prices and have direct access to Asian markets, where
demand for oil is growing fastest.

Energy is one of the sectors where Trump and the Republican Party will have the most immediate and profound impact for
two reasons. First, President-elect Trump will have the power to undo many of Obamas executive orders. Second, Trump
and Congressional Republicans are virtually in complete agreement when it comes to energy policy.
Lower energy costs in the United States has raised fears that many Canadian companies will find themselves at a
competitive disadvantage vis--vis their American counterparts. This disadvantage could be exacerbated by Trumps
intentions to reduce corporate taxes. The resulting economic landscape could force the Liberal Party to soften the financial
impact of its environmental policy.
Angelo Katsoras

Montreal Office

Toronto Office

Stfane Marion

Marc Pinsonneault

Warren Lovely

Chief Economist & Strategist

Senior Economist

MD, Public Sector Research and Strategy

Paul-Andr Pinsonnault

Matthieu Arseneau

Senior Fixed Income Economist

Senior Economist

Krishen Rangasamy

Angelo Katsoras

Senior Economist

Geopolitical Analyst

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