U.S.-China friction and the competition for global climate leadership

Strategic Insight 003/2023

Jackson Ewing

28 February 2023

U.S.-China friction and the competition for global climate leadership

U.S.-China relations are at their lowest point since the Taiwan Strait crisis of the mid-1990s. The recent balloon spying kerfuffle deflated cautious ambitions for thawing relations. As Washington singles out Chinese leaders over the need for a “rules-based international order” filled with responsible stakeholders, Beijing accuses American leaders of a “cold war mentality” based on alliances built to curtail China’s growth. This state of mutual animus bodes poorly for cooperation on global problems. For addressing climate change – where the U.S. and China are indispensable – current frictions loom large.

Previous instances of U.S.-China climate cooperation had consequential impacts. After years of mutual scapegoating that hamstrung global climate negotiations, the two countries surprisingly reached three bilateral agreements from 2014-2016. These substantive, quid pro quo, pacts were instrumental for crafting and ratifying the Paris Agreement; providing the rudder for international climate diplomacy in the years since. More recently the two sides agreed to extend climate cooperation at the 2021 climate summit in Glasgow. But they needed to rekindle this cooperation at the 2022 summit in Sharm El-Sheik after it was scuttled in the wake of U.S. House Speaker Pelosi’s Taiwan visit. Core practitioners remain involved on both sides, most importantly climate envoys John Kerry and Xie Zhenhua, who lead cooperative efforts stretching back more than a decade.

However, direct U.S.-China climate diplomacy – while worth dogged pursuit – is neither durable nor dependable. It is also no longer the most critical element of the countries’ relationship for addressing climate change. Rather, the U.S. and China represent increasingly powerful poles in the competition to build global infrastructure. Outcomes from this competition are critical for driving, or failing to drive, low-carbon transitions in the large developing countries around the world that are quickly becoming the linchpin for addressing future global climate change.

Driving low-carbon transitions around the world

The largest 15 developing global greenhouse emitters after China and India—countries like Indonesia, South Africa, and Vietnam—are home to one-fifth of global population and are poised to drive the next great wave of economic and emissions growth. A second emerging group of 15 countries like Ethiopia, the Philippines, and the Democratic Republic of Congo—home to another billion people—see populations and economies growing and urbanising so rapidly that they may be unrecognisable in a generation. Investment decisions in these countries over the next decade will determine whether low-carbon pathways out of poverty and climate vulnerability are possible for millions, and whether the next global surge in emissions can be prevented.

China sees in these trends economic and geopolitical opportunities. Since launching the Belt and Road Initiative (BRI) in 2013, China has dispersed about $1 trillion in loans and other finance to development projects in roughly 150 countries. In the process it has become the world’s largest creditor, providing roughly $9 in debt for every $1 in aid to low- and middle-income countries (LMICs) (the U.S. ratio is roughly the inverse). Much of this Chinese loan volume has underwritten sorely needed energy infrastructure, which in-turn gives the BRI an outsized climate impact.

During the latter half of the 2010s, China’s ‘policy banks’ were providing more than $43.2 billion in energy financing annually – nearly triple the average annual energy lending of the World Bank and all the Western-backed multi-lateral development banks combined. While some of this financing targeted extraction and transmission, 80% went to power plants, nearly all of which were coal (66%) and hydroelectric (27%). By the end of the decade, Chinese companies and financiers were involved in nearly 1 out of 5 of all coal-fired power stations under development outside of China – with activities ranging from financing, underwriting, and insuring to ownership and operations.

While these halcyon days of energy lending may be over or on pause for now – particularly for coal – China’s extensive engagement in the developing world in search of overlapping commercial, diplomatic, and security interests persists. BRI investment strategies see Chinese actors from relevant ministries and agencies, banks, insurance providers, and state-owned project implementers all working together in a semi-integrated fashion. They offer infrastructure packages that cater to the desires of recipient country stakeholders, avoid burdensome contingencies, and get off the ground quickly. As a result, China has become the central source of external development finance throughout much of the developing world, even as many BRI projects drive environmental decline, debt dependencies, and corruption and graft.

United States seeks to grow its development footprint

The U.S. is playing catch-up on development finance and commercial influence after decades of prioritising security, especially in its Pacific strategy. Recent U.S. aircraft carrier and destroyer visits to Singapore are the latest evidence that, as former Pentagon official Van Jackson puts it, the U.S. problematically sees military commitments as “the oxygen that makes everything else in Asia possible.” Such a security focus can provide a backstop of support that enables states from Asia to Africa to Latin America to not fall fully under China’s geopolitical sway. While laudable, this outcome is insufficient. With China as the dominant economic force in developing markets around the world, and these markets entertaining emissions-intensive development pathways that puts global climate targets out of reach, the U.S. needs to redouble efforts to provide high-quality, low-carbon options.

There are signs that the Biden administration agrees. The G7 Partnership for Global Infrastructure and Investment (PGII) is a U.S.-led effort overtly seeking to compete with China’s BRI through providing sustainable, just, high-quality infrastructure. U.S. leadership in Just Energy Transition Partnerships (JETPs) in South Africa and Indonesia (the third JETP in Vietnam is European-led), similarly signal U.S. determination to counter China through transformational and country-specific energy investment packages. The U.S.’s Energy Transitions Accelerator platform, launched in late-2022 and currently untested, seeks a new private sector entry point into developing economies at the intersection of climate finance and carbon markets.

The toughest work remains. The U.S. and the multilateral development banks over which it holds sway must thread the difficult needle of keeping labour and environmental standards high while streamlining investment processes to meet development needs quickly and in climate-smart ways. At the same time the U.S. needs to increase the risk appetite for deploying capital through its Development Finance Corporation and force similar actions at the World Bank – where evidence suggests less conservative approaches could lead to hundreds of billions of dollars more lending. This would mean more public money to countries and sectors facing large debt ratios, high costs of capital, and difficulties in attracting private sector investment. It would mean catering to the development needs of recipient countries with economically and socially viable alternatives to fossil-driven growth. It would mean adopting attractive elements of China’s outbound investment strategies while avoiding their pitfalls. While difficult, such actions could foster virtuous competition among the United States, China, and other actors to provide investments that improve lives, reduce emissions, and strengthen relationships throughout the developing world.

Dr. Jackson Ewing is a Senior Fellow at the Duke University Nicholas Institute of Energy, Environment & Sustainability. His work focuses on international climate finance, energy transitions, environmental markets, and climate diplomacy and geopolitics. He works closely with actors in government, the private sector, civil society, and international organizations.

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