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After Oil: U.S.-China Split Will Hurt Clean Energy

After Oil: U.S.-China Split Will Hurt Clean Energy

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Beijing was driving the growth of renewables — then Trump’s trade war and the coronavirus hit.

This is the first column in a series on how the coronavirus epidemic has affected the global shift to sustainable energy.

The search for silver linings to the coronavirus pandemic has come up woefully short. But one hopeful — and much talked of — prospect is that the disruption will accelerate the global shift to a more sustainable energy future.

There is a compelling logic to link Covid-19 and its geopolitical makeover to a change in energy fortunes — for good or for ill. Energy and geopolitics have always been intertwined. Before the pandemic, there was a growing body of work looking at how the energy transition, primarily away from fossil fuels and toward renewables, was going to reorder global politics. Less recognized, however, is that the street goes two ways: geopolitics will also shape the energy transition.

The ways in which Covid-19 has restructured the geopolitical landscape are therefore relevant to the future of energy. Unsurprisingly, the most consequential bilateral relationship for the transition is between the world’s two largest economies, the U.S. and China. There’s been much discussion of how Chinese state policy and subsidies can accelerate or slow the shift, but less about how the state of affairs between Washington and Beijing can affect whether and how the world ultimately moves to a more sustainable energy mix.

The rapidly deteriorating U.S.-China relationship should be a cause of major concern. This linkage between energy and great power relations was evident well before the pandemic. The trade war between Washington and Beijing took a toll on the economies of both countries, but the impact on China was more significant. Trade tensions curbed business investment and factory activity in China, helping tamp Chinese economic growth to its lowest rate in nearly 30 years.

This decline in economic growth sent shivers through the Communist Party. It led the government to enact a series of fiscal and monetary policy measures that collectively signaled that Beijing placed on a far higher value on economic growth than on its green transition. Fiscal stimulus provided a boost to infrastructure projects, while investment in renewable energy fell. Overall investment in renewables dropped from a high of $143 billion in 2017 — far greater than any other country — to $91 billion in 2018, and to $83 billion in 2019.

While presiding over a meeting of the national energy committee in Beijing in October 2019, Premier Li Keqiang emphasized the importance of coal in China’s energy mix, in what appeared to be a significant departure on the country’s past efforts to limit it. The message seemed clear: Stabilizing the Chinese economy was Task No. 1; other priorities such as climate change would need to be tempered accordingly.

The downward spiral of U.S.-China relations — intensified by the Covid-19 crisis, Beijing’s crackdown in Hong Kong, military exercises by both countries in the South China Sea, and U.S. sanctions on senior Communist Party officials over human rights abuses in Xinjiang — is the backdrop against which the energy transition will unfold.

We might think about two broad models for the global shift: a top-down transition and a bottom-up one. Rocky U.S.-Chinese relations, however, create obstacles for both.

A top-down transition would be driven by governments, working in tandem to meet internationally agreed commitments to lower carbon emissions. This model could involve a global climate agreement like the Paris accords reached in 2015, with adherence monitored voluntarily, or maybe something more binding along the lines of Kyoto protocol of 1997.

The success of the top-down approach would rest heavily on two things. The first would be the willingness and ability of governments to enact aggressive policies to change behaviors, create incentives for innovation and meet targets. The second would be the ability of large numbers of countries to come together, agree that addressing the climate is an urgent global priority and hammer out a mechanism that is viewed as fair and contains adequate accountability.

We know from the Paris accord experience that such a vision — at least of the less stringent variety — is possible. But we also know that close U.S.-China collaboration is essential to such an outcome. In the U.S.-China Joint Announcement on Climate Change of 2014, President Barack Obama and Chinese President Xi Jinping committed to specific targets and pledged advanced cooperation on technology innovation and other initiatives to promote the energy transition.

This joint accord infused momentum into the subsequent Paris negotiations and helped ensure their success. It is almost impossible to imagine the success of any such similar agreement — particularly one more ambitious and far-reaching than Paris, as will be needed — in the context of a continuing U.S.-China rivalry.

A bottom-up energy transition would look different: It would be powered more by markets, innovation, consumer preferences and the free flow of technologies and ideas. Governments would have a role to play, yet coordination between them would be less essential to a successful outcome.

Here, again, intense U.S.-China competition or even conflict would hamstring such a transition. We see how the Covid-19 crisis is intensifying existing nationalist tendencies, leading to the imposition of trade barriers and stoking protectionism in the global economy. As evidenced by Democratic presidential nominee Joe Biden’s proposed plan to invigorate the American economy, the emphasis of either a second Trump term or a new Biden administration will be on supporting domestic industry and ensuring that U.S. supply chains are not overly reliant on other countries (namely China).

The economic retrenchment that both China and the U.S. had begun even before the pandemic has now accelerated, with little prospect for a reverse. While talk of the “end of globalization” is overblown, the world is headed for a slowdown, or some reverse pedaling for sure.

Adding to these inevitably greater constraints on the flow of technologies are mounting restrictions on travel, immigration and scientific and other collaboration. In this environment, we should not assume that a breakthrough in a vital energy technology — such as batteries — would be widely shared instead of leveraged for geopolitical advantage. These trends make it difficult to envision how a bottom-up shift in global energy production could succeed.

It can be easy to conclude, then, that such strained relations between Washington and Beijing will sink the prospects for a successful global energy transition. However many the differences between Trump and Biden, neither will significantly retreat from a confrontational posture with Beijing.

But for those less inclined to despair, there are several ways in which the energy transition could escape becoming a casualty of this confrontation.

First, multilateralism of a sort could be revived, reopening the door to the top-down model of transition. A future Trump or Biden administration could recognize the need to carve out energy and climate as a special island of cooperation in an otherwise contentious bilateral relationship with China. This would be hard, in terms of domestic politics and other stresses, but it would be in both nations’ interests to attempt it.

Alternatively, a U.S. administration interested in reinvigorating multilateralism in climate diplomacy could take a different approach. It could seek to infuse climate into every international institution with which Beijing will need to have relations in order to continue to expand its economy and its influence internationally.

Second, the possibility of a bottom-up transition could be somewhat preserved if Washington and Beijing agreed to exempt climate-related technologies and research from tariffs and other barriers likely to be a central feature of the bilateral relationship in coming years. If other countries could be persuaded to do the same, such a move could be a major achievement in an otherwise more protectionist global environment.

Getting such an agreement would demand some successful diplomacy at the outset, but would then allow for the free flow of climate technologies and other exchanges needed for the energy transition without too much additional coordination between the Washington and Beijing.

There are many other ways in which the geopolitical landscape will affect the energy transition. But those wanting to elevate the move to more sustainable fuels on the national agenda don’t have the luxury of thinking only about climate accords and domestic policies. Managing great power politics — and rivalry — must also be considered part of the challenge.

Source : bloomberg
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Anand Gupta Editor - EQ Int'l Media Network