Climate Tech and the Upcoming Election Cycle

Hello VoLo Earth community,

We hope this finds some (or most) of you in a summer moment of additional leisure and reading time. As indicated in the headline, the recent twists and turns of the approaching election cycle have many discussing what potential implications this November's results may have on the energy transition, and how incumbent climate investors like VoLo Earth are positioning themselves. As with every major election cycle, rhetoric and promises tend to be more extreme than what actually ends up being implemented. Since we began writing this piece, the Director of Project 2025, one of the central points of climate-related election fears, announced that he is stepping down in reaction to pressures from the party (with various sources providing rationale for a potential dissolution of the project altogether). That being said, there is clearly a swell in opposition from certain political factions that is worth tracking and increasing our awareness around. The question is one we have heard often, and one we seek to address today with some insight into our internal discussions and positioning for multiple outcomes this November. 

If you are part of our LP community or have just been a follower of our newsletters, you know we strategically avoid investing into businesses overly-dependent on carbon credits or financial and go-to-market models centralizing around subsidies. Also keep in mind, a considerable amount of Fund I capital was deployed prior to passage of more recent policy initiatives discussed below. We have always stayed disciplined to an apolitical and bipartisan foundation to start from.

This foundation supports the argument that the energy transition is already largely driven by bipartisan efforts. Today, we will explore the evidence supporting this view, what obscures this truth, and where we find both risk and optimism.

Any potential change to the status quo is not binary on the presidential election and also highly dependent on what happens in the House and Senate. Furthermore, we continue to experience bipartisan tailwinds supporting climate friendly policy. Climate is quickly becoming more and more depoliticized. There is a significant overlap between the priorities of the Bipartisan Infrastructure Law (BIL) and the Inflation Reduction Act (IRA). The flow of real IRA dollars shows that fundamentals are rising to the surface, and outcomes will not be monolithic, but will likely derive from the success of individual projects or companies, rather than the influence of individual politicians.

Where is the risk? And how big is that risk, really?

The IRA, and specifically the potential political headwinds, dominates this conversation. What we hear far less about, however, is the equally influential and robust Bipartisan Infrastructure Law (BIL), a $1.2T program focused on revamping American infrastructure. The BIL entails three core categories: 1) Transportation, 2) Climate, Energy, and the Environment, and 3) Broadband.

The BIL’s 459 page guidebook details numerous overlaps in priorities with the IRA, including electric vehicle charging networks, grid modernization, and renewable energy infrastructure such as wind and solar projects

Stimulation of economic growth and job creation includes the expansion of domestic manufacturing of solar panels and batteries, promoting carbon capture and storage technologies, and enhancing national security by reducing dependence on foreign energy sources. Throughout, the BIL highlights the bipartisan priorities which guide the energy transition: domestic manufacturing, workforce development, national security, economic dominance, and minimizing reliance on China. 

Considering the likelihood that the BIL will endure political cycles more robustly than the IRA, we can examine where these programs diverge and overlap to assess rollback risks.

Both integrate the energy transition within different, broader agendas; the BIL in the context of general increases in energy production and infrastructure revamping, and the IRA within social policy and healthcare reform. The core differences are that the IRA more explicitly frames the above priorities (ie domestic manufacturing) within the context of climate change, and more frequently couples priorities with specific incentives like federal tax credits or subsidies. While the BIL does include ranging federal incentives, the pathway is deemphasized in the policy language and marketing. 

With this understanding, we can begin to narrow the scope of risk by focusing on two core points of divergence: 1) the narrative framing each program and 2) the incentive-driven components of the IRA agenda. These differences shape how each program is perceived and implemented, influencing their stability and impact.

With these in mind, the crux of identifying the risk is tracking the capital flows. 

Bloomberg reveals that almost four times more federal IRA funding is going to Republican districts, including nine of the top ten districts for climate tech investments.

Of the 51 projects in the country that top the $1B mark, 43 are in red districts. To us, this is not surprising. Texas and Iowa now rank among California as the top solar and wind producers, while geothermal energy is viewed as a tremendously valuable aspect of the future economy to states like Oklahoma (as mentioned in last month’s newsletter). The examples abound. While politicians may hang their hats on the boogie man stealing everyone’s gas stoves, the reality of repealing these bipartisan backed investments into red state economies would be a considerable task.

This means at the end of the day, fundamentals will win. 

 With high overlap between BIL and IRA priorities, outcomes will likely derive from the success of individual projects more than individual politicians.  

Rollbacks (or accelerants) that do happen will occur on an “issue-by-issue, incentive-by-incentive basis, and different incentives are going to stack up differently between Democrats and Republicans” (as summarized by Jamie Wickett of Hogan Lovells). 

Put differently, just because there may be rhetorical opposition by politicians does not mean that the projects and funding will be denied (particularly as dollars and jobs start entering local economies). The hundreds of projects encompassed in the above graphics are expected to generate 195,000 jobs, plus, as Bloomberg described, economic multiplier effects for local businesses, tax bases and infrastructure. 

This is emphasized by the growth of IRA investments into Republican districts post-IRA passage:

So even if certain demographics consider climate change less of a threat than others do, that does not mean that they are not also considered an opportunity. Even if the BIL assumes more of an “all of the above” approach to energy independence (with a mix that includes fossil fuels, exemplified by Manchin and Barssaso’s Energy Permitting Reform Act), the best solutions will still win. 

At VoLo Earth, we are deeply convinced that there are many examples in which they can. We talked about this a little bit last month - manufactured technologies beat commodities on costs and speed. This is new. And it will only become more true with scale, particularly as we move towards low-cost, abundant sources of energy and more distributed models of delivering this power.

Joe and Kareem, two of VoLo Earth’s Founding Managing Partners (who most of you readers know!) have operated in the energy transition for 25 years, through a labyrinth of policy changes. They were there to see Bush sign the Energy Policy Act of 2005 and collaborated across party lines towards a continued rise of renewables, despite public fear. Under Amory Lovins’ tutelage, the dedication to delivering energy services on sheer economic merit (and step-changes in that value delivery) which served as VoLo Earth’s founding insight was born. Amory Lovins is now a VoLo Earth advisor and these principles continue to shape our fund. The 10-year fund horizon of Venture Capital means that policy changes must be assumed from day one. 

Fundamentals can take time to become established and enable winning companies and technologies to boil to the surface. Certain alliances will shift in the short term alongside individual incentives. For example, mining companies may support politicians driving EV-related incentives because of the role of those minerals in batteries. Ford and Volkswagen may run into local union politics, and inevitable flip-flops in alignment, such as the historically combative relationship between Donald Trump and Elon Musk - and changes in both individuals' political party alignment, views on one another, or views on subsidies and EVs, evolve with time.

However, in the medium to long term (which is where VC has the opportunity to focus), fundamentals supersede fickle alliances. Alliances change quickly, fundamentals don’t. We are hopeful that, even in the most extreme outcome of a full IRA rollback, the resulting scrutiny imposed on the leading companies in any given technology sector can raise a standard, and even further strengthen the fundamentals. This would reduce execution and funding risk for categorical successors. 

Conclusion

Doing our job well means we are making the energy transition the apolitical, bipartisan ‘no-brainer’ that we see it as. 

Federal support is critical to the energy transition. This is unavoidable. However, we see this support earnestly on all sides of the aisle - while disguised or understood in different narratives, or varying in preferred technology areas or degrees of federal involvement. The variance does matter for certain companies, funds, and markets; technologies still coming down the cost curve and incentive-reliant distribution models will be slowed (and, for some companies in these categories some, fatally so), there are robust examples of overlap. 

We find hope in the breadth of overlap and the immutability of energy demands. While language and narrative may be different, the outcomes of the energy transition - energy independence, economic and workforce simulation, building for resilient American infrastructure and manufacturing - are powerful and persistent. 

Where bark meets bite, technology tends to move faster than the government. Where smart technologies and smart business models are deployed, energy transition projects already underway will beget further investment and development. This will influence the myriad policies beyond the IRA and BIL as well.  In the meantime, as individuals and inhabitants of this planet, we are grateful for the entities and institutions outside of venture capital who will continue moving the potentially more threatened areas down the cost curve.