While cooperation would yield obvious benefits, the climate is emerging as a key strategic issue where competition could drive emissions lower in a race to be the leader in the green economy.
It is a busy time for global climate cooperation. Following U.S. climate envoy John Kerry’s visit to China last week, where leaders vowed to cooperate and commit to “concrete actions” to reduce emissions, attention now turns to President Biden’s “Leaders Summit on Climate” scheduled for Earth Day on April 22. The administration is hopeful that the virtual summit, which will involve up to 40 leaders of major economies, will “increase the chances for meaningful outcomes on global climate action at COP26”, scheduled for November in Glasgow.
With this backdrop of global climate cooperation, we will focus on how the U.S and China will engage on this issue and the investment implications. Sustainability and clean energy are secular megatrends, and the U.S.-China relationship in the context of climate change will significantly impact the landscape and markets for sustainable investing in the years ahead.
Hope for cooperation
No comprehensive global climate agreement will be effective without the participation of the world’s two largest emitters of greenhouse gases, and recent developments have rekindled hope for cooperation. Following two days of meetings between climate envoys, China and the U.S. pledged to work together to combat climate change despite rising tensions. The alignment between the two countries sends a strong signal to the rest of the world and raises hopes for a reinvigorated multilateral process on climate action.
In addition, President Biden is expected to unveil ambitious targets for reducing emissions ahead of the summit, with estimates of a 50% reduction from 2005 levels by 2030, nearly double the 26%-28% pledged by the Obama administration. The U.S. rejoined the Paris Agreement this year, and the Biden administration has allocated nearly $500 billion of its $2.25 trillion infrastructure proposal to tackle climate change. Last September, President Xi announced that China would aim to reach carbon neutrality by 2060. It will also aim to have renewable energy account for 25% of energy consumption and reach peak carbon emissions before 2030.
A coordinated global effort at addressing climate change appears to be coalescing. However, the picture is still far from clear in the context of U.S.-China tensions. With the specter of heightened U.S.-China tensions for the foreseeable future, global climate action may be driven as much by competition as cooperation.
Competition to save the planet
While the benefits from cooperation are obvious, as the climate and green economy emerge as new strategic flashpoints, could tensions drive competition that ends up yielding even better results? Much like our view that technology tensions could be a net positive because higher R&D spending and state investment can outweigh the negative consequences, climate change is emerging as a key strategic issue where competition could drive positive outcomes.
Irrespective of joint pledges, both countries are prioritizing a strategic role in the green economy and eager to be seen as leaders in efforts to reduce emissions. In other words, it is now in the self-interest of each country to engage in a race to the top of the commanding heights of the green economy, rather than a race to the bottom as fossil fuel-dependent polluters. In this vein China is leading the charge in green transformation, and environmental policies increasingly align with their economic and political interests in three ways:
- As laid out in the recent 14th Five Year Plan, energy security and self-sufficiency are priorities. Lacking domestic oil and gas supplies, China may not be able to reduce its dependence on imported fuels, but through massive investment in renewables, China sees an opportunity to achieve energy self-sufficiency, or as The Economist puts it: becoming an “electrostate” instead of a “petrostate.”
- Beyond self-sufficiency goals, China aims to be the critical manufacturing node of next-generation energy and green economy products, including electric vehicles and batteries, rare-earth minerals and wind turbine components.
- There are political benefits from being a leader in the green economy. Domestically, this shift satisfies the population’s increasing demands for cleaner air, water, and soil. Internationally, it enhances China’s reputation and puts it in place to be a climate leader. Emphasizing this point, the International Renewable Energy Agency has suggested that a combination of China’s capabilities in renewables, nuclear, and next-generation manufacturing could allow its companies to supply electricity to a large number of countries in a new form of energy diplomacy. This might prove as important to Chinese power in the 21st century as the protection of sea lanes was to American power in the 20th.
The current U.S. administration has many similar goals and clearly sees this as an area of emerging strategic competition. The Biden administration laid out plans that include a pledge towards net-zero emissions by 2050, 100% carbon-free electricity generation by 2035, and making U.S. agriculture the world’s first carbon-neutral agricultural sector. Recognizing the future importance of the green economy, the U.S. wants to avoid dependence on China for battery production, renewables, and underlying commodities.
China now produces more than 70% of the world’s solar modules and nearly half of wind turbines. It dominates the supply chain for lithium-ion batteries, controlling 77% of cell capacity and 60% of component manufacturing, according to Bloomberg. This has led to concerns about the U.S. falling behind in key future technologies and senior officials are stressing the need for further investment.
Lastly, clean energy finance, an area where China also currently leads, is emerging as a higher priority in the Biden administration.
While cooperation would yield obvious benefits, competition can:
- Stimulate future investment in renewables to capture market share and reduce asymmetric reliance
- Drive emissions lower in efforts to take the mantle of climate leadership
- Increase R&D in next-generation energy in the pursuit of energy independence and global influence
- Boost the amount of capital available for green projects as both countries vie for global influence and leadership in green finance.
The alignment of environmentally friendly policies with national self-interest, and the emerging competition in clean energy, manufacturing, finance, and influence, could stimulate further efforts that make meeting global climate goals more likely than cooperation alone.
What does it mean for investors?
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