Even as the global economic outlook is looking better in 2024, countries continue to struggle with 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 longer run. 

High government spending needs in an election year with challenging financing conditions against an elevated interest rate backdrop 

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

Public finances risks are acute this year as over 80 economies and economic areas are holding elections, amid increased support for high government spending. 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 deficit outturns in other years by 0.3 percentage points of GDP on average. 

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

Growing opposition to certain environmental and climate policies as issues are politicised

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. While citizens in various countries strongly view climate change as a real risk requiring government action, 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, although more (38%) respondents disagree.

In the US, indigenous peoples are protesting against climate projects, not because they are against renewable energy, 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 bushfires. 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 renewable energy 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. The country 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 less public funds dedicated to the green movement could slow the pace of energy transition globally, and pose a stumbling block to climate action.

Election outcomes and geopolitics pose an overhang on renewable energy and green technologies

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

On the other hand, while Trump’s policy plans around climate are not clear, the US exited from 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 on 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 21 Dec 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.

The green transition is likely to be delayed, but not reversed; stay the course for the longer-term, but expect near term volatility 

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 longer 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 should also not be forgotten, such as companies focused on energy efficiency and smart grid infrastructure, as well as those producing metals and minerals required for the energy transition.