During Q2 2023, the impacts of the war in Ukraine and global geopolitical unrest continued to impact global energy markets, but commodity prices fell as markets adjusted to new trade arrangements and alliances redirected energy supplies. U.S. LNG to Europe and the diversion of Russian oil shipments to China and India have been critical factors in this dynamic. Tensions between the West and China and Russia, as well as a realignment of alliances amongst Middle East and BRIC (Brazil, Russia, India and China) nations also impacted energy markets and will continue to do so into Q3.
U.S. climate and regulatory policy also remain a highly consequential issue, as climate change policies continue to be a dominant factor in both domestic and international policy. On the domestic front, the administration continues to promulgate regulations and issue administrative orders addressing climate change, greenhouse gas emissions reductions and climate-related disclosures, while the Republican-controlled House of Representatives seeks to to claw back those actions through oversight and legislation. The rollout of Inflation Reduction Act grant and loan programs related to climate change and decarbonization also continues to put significant stress on federal agencies like the Department of Energy as they seek to administer new programs and issue needed guidance.
Globally, climate diplomacy is playing an increasingly important role in geopolitics as Europe begins rolling out its Carbon Border Adjustment Mechanism, which will make products imported into Europe meet a carbon standard or subject to taxation. Meanwhile, the U.S. and China continued to negotiate over climate policies and commitments prior to the COP28 climate change conference to be held in Dubai later this year.
Energy and climate finance will no doubt be a major topic of discussion at COP28, as financial institutions assess how to pay for the trillions of dollars need to meet the climate commitments that governments and institutions have made. In Q2 2023, there was a growing realization that in order to preserve energy reliability, funding will be needed to decarbonize fossil energy projects, which is opposed by many climate activists. There is also increasing momentum to utilize near-zero carbon emissions nuclear power as a way to meet energy demand in a carbon-constrained market, with a recognition that doing so will require new and efficient regulations for small modular nuclear reactors (SMRs).
The potential for a comprehensive permitting reform package passing later in the year increased, amid momentum from the passage and enactment of the Fiscal Responsibility Act (FRA) in Q2, as part of the broader deal to raise the debt ceiling. The FRA made minor reforms to the National Environmental Policy Act (NEPA), declared the contentious Mountain Valley Pipeline to be ratified and approved, and directed a study of interregional transfer capability between neighboring transmission regions. With renewable energy proponents having hoped for actual transmission siting reform, and with many items remaining on the wish list for supporters of fossil energy, momentum appears to be in place for additional permitting reform that might move forward later in the year through a vehicle for must-pass legislation, with a medium likelihood of occurrence and a high potential impact.
