Climate Cooperation With China Can Power the World – Sustainably – The Diplomat

Not so long ago, the foundation for a global climate accord at Paris was laid by the landmark 2014 agreement between the world’s two largest emitters – China and the United States – jointly pledging reductions of domestic greenhouse gases. Soon after, the U.S. abdicated leadership on climate by withdrawing from Paris and emissions experienced a resurgence in China (slowed but not reversed by the COVID-19 pandemic). Meanwhile, the costs of climate inaction – from devastating fires in California to extreme flooding along the Yangtze River – have gone global. As the world cautiously welcomes the United States back to the climate table under the Biden administration, there is a pressing need for renewed broad-based buy-in to the Paris Agreement and to address the large amounts of international finance in energy required for low-carbon development outside these major emitters.

European and Chinese leaders have made more diplomatic progress in recent years, conducting several high-level meetings in 2020 with climate at the forefront  – following which President Xi Jinping announced China’s aim to achieve carbon neutrality before 2060, close to the EU’s mid-century carbon neutrality political commitment. The recently concluded EU-China investment agreement stands to increase cross-border energy investments. Both China and the EU are also unilaterally strengthening their 2030 Paris targets in advance of this year’s U.N. meeting in Glasgow.

China’s efforts in the absence of the United States have elicited both skepticism and praise, but the international community is very nearly aligned in their criticism of China’s overseas investments under the Belt and Road Initiative (BRI), whose deals could potentially lock in high-carbon growth in countries across Asia and Africa for decades. The EU called on China to end its overseas coal financing and U.S. President Joe Biden has called for a “united front of nations to hold China accountable to high environmental standards” in the BRI. Yet, few actionable proposals exist – beyond “out-competing” China in providing development finance – and none meet the global need for low-cost clean power, which reaches $2.2 trillion by 2030 according to the International Energy Agency. Rather than conditioning energy and economic security in developing nations on a proxy competition among Beijing, Brussels, and Washington, industrialized countries should establish a suite of efforts to work with, not undermine, China in providing clean power to the world.

In building the world’s largest power grid, China’s energy firms have developed significant technological capabilities in electric power generation and transmission that they are now exporting to the developing world – a trend that has accelerated under the BRI. As many observers have catalogued, these projects are largely fossil fuel-based, leading to worrisome predictions that many more countries will become as coal-dependent as China. Observers have also raised concerns about community stakeholder involvement in project selection, though the fear surrounding predatory debt obligations to China’s state-owned banks seems to be largely over-stated. At a time when over 120 global financial institutions have made commitments to stop or limit coal financing, China’s policy and commercial banks are some of the last remaining cross-border financiers of new coal power plants.

The other two major public financiers of coal, Japan and South Korea, have recently signaled their intention to pull out. Facing intense international criticism, the Japanese government issued a policy in July 2020 stating that it will “in principle” stop financing overseas coal plants in countries without decarbonization plans. Later that month, a number of South Korean legislators introduced a bill that would prohibit government-owned entities from financing overseas coal projects. Failing to align foreign activities with domestic climate promises are beginning to generate real reputational risks.

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Nevertheless, much criticism of the BRI is either directly or indirectly strategic in nature. Comparisons of the BRI to the post-World War II Marshall Plan flow from a narrative that China is engaged in undermining a range of international institutions. Environmental and geopolitical fears unite in labeling China a bad actor abroad. Conflating these two issues, however, risks alienating China from necessary cooperation on climate change and, more importantly, ignores the positive role China could play in building climate-friendly energy infrastructure for communities in need. Instead of complaining about dirty investments, industrialized countries should engage in bilateral and multilateral efforts to help countries choose a better path.

Often ignored in this discourse is that coal remains the most attractive option in many developing countries for both political and economic reasons. Coal benefits established industries (particularly, monopolies) either directed by governments or with close government ties. By contrast, much renewable energy development is undertaken by independent power producers. Politically powerful regions where both elites and workers are dependent on continued fossil fuel extraction inevitably see their livelihoods threatened by transition policies. And to energy planners, familiarity with coal power projects and perceived risks of renewable energy perpetuate a status quo bias. These lead to discriminatory policies such as Indonesia’s renewable energy tariffs, which cap new power purchase rates for wind and solar projects at 85 percent of local average power costs, essentially giving coal a leg up.

Industrialized countries can help accelerate the transition away from fossil fuels by scaling up assistance efforts to match the level of incumbency faced in various countries. While both the EU and the United States are positioning themselves to eliminate their remaining overseas coal support, their public and multilateral development bank finance is a dwindling source of global energy investments. They can do more by working alongside China to build modern, sustainable energy infrastructures for rapidly growing economies.

A package of efforts is required, with the goals of addressing social transition issues such as support and retraining for fossil communities; encouraging incumbents, not just new entrants, to diversify energy holdings; and helping restructure fossil debt to encourage future climate-friendly investments while mitigating the financial impacts of stranded assets. Two elements of an overseas climate finance strategy stand out: primary or top-up financial support for renewable energy and technical assistance to grids and regulators.

To address direct costs and internalize indirect environmental damages, industrialized countries can commit to closing financial gaps to turn projects from fossil to non-fossil. To make this work, it must maintain or improve the grid’s reliability to support growing economies and be open to co-financing with other lenders, such as the Asian Infrastructure Investment Bank (AIIB) and China Development Bank. The U.S. can reposition existing finance through the Export-Import Bank, the Development Finance Corporation, and the Millennium Challenge Corporation, while pushing for new appropriations from Congress. Doubling down and broadening participation of philanthropic efforts such as the Southeast Asia Renewable Energy Transition Partnership would cast an even wider net of potential partners.

In tandem, engaging in extended exchanges on energy planning, procurement, operation, and markets under increasing amounts of renewable energy – such as GIZ’s work in Vietnam, the European Bank for Reconstruction and Development’s activities in Kazakhstan, and the United States’ Greening the Grid platform – can help alleviate concerns about new technologies and stimulate thinking in partner countries on tackling incumbency. These efforts could be expanded to more countries and, crucially, include Chinese participation from the outset.

The role for China is clear. It is in China’s long-term interest to play a proactive role instead of facing growing international isolation, host country public opposition, and an uncertain coal pipeline. The major disruptions in coal mega-project development as a result of the COVID-19 pandemic are a wake-up call for China to pivot to renewable energy projects, which are smaller, nimbler, and support greater host country employment recovery opportunities. China’s state-owned commercial and development banks and energy firms should position themselves for the market of the future, not the past.

Michael R. Davidson is an assistant professor joint between the School of Global Policy and Strategy and the Department of Mechanical and Aerospace Engineering at the University of California San Diego.

Yiting Wang is a senior strategist at the Sunrise Project, where she develops and coordinates a global effort to align China’s Belt and Road Initiative with the Paris Agreement goals.