The current US-China trade war is just a warm-up act for a much bigger geopolitical fight looming in years to come. Climate change will pit nations against nations, developed countries against less developed countries, and could lead to much bigger ‘trade’ spats.
Asset allocation between countries will depend not just on where the worst impact of climate change falls (Russia, Australia, India): the race for new technology needed to mitigate rising temperatures will be a critical variable. The US currently lags Europe and China in the shift towards renewables, but it may have a bigger role to play in developing carbon capture.
Where governments in individual countries are lagging in cutting emissions, tariffs could be a necessity as part of a wider, global shift to carbon rationing. Note, carbon tariffs would be very different from green taxes. Tariffs will be a sanction for countries that fail to meet agreed carbon targets.
For the moment, the fight against climate change could be strangely, almost perversely, positive for risk assets. The shift to investment in renewables is putting significant pressure on the fossil fuels industry. The energy index for the S&P 500 may continue to underperform. But the rise of solar and wind is driving energy costs lower too. Energy deflation will be a big positive for economic growth in the short, even medium-term. Inflation will stay remain subdued, even as the unemployment rate slips to new secular lows.
