China-US Dispute On Clean Energy: Economic and Geopolitical Stakes

Jean Vilbert is an academic in the La Follette School of Public Affairs and a Resident Fellow at the Latin American, Caribbean and Iberian Studies Program (University of Wisconsin).

A recent report from the International Energy Agency shows that in 2020, renewable electricity production increased at its fastest pace in decades, mostly due to China’s efforts. The substantial additions in solar and wind power may have surprised some observers and could suggest China’s increasing awareness of their global reputation in issues such as environmental protection. Over the last decade, China expanded its renewable energy sector with exceptional speed, making it clear that this is a strategic part of the country’s industrial policy. This prompts the question of how the U.S. should respond to this movement. The answer is that there are strong economic and geopolitical reasons for the U.S. to compete in the transition to alternative energy sources.

Given the speed of China’s development, a slow reaction from the U.S. may allow China to take the lead in critical industries, like photovoltaics and wind power. This is critical from the U.S. perspective for multiple reasons, such as the interest of American workers. In its march to become a competitive player in global markets of high technology, China is openly seeking to capture the jobs of the future.

The U.S. Energy Information Administration estimates that by 2050, the world will use 50% more energy than it does today. On one hand, the increasing demand for clean energy can be seen as an opportunity for countries to shift their resource allocation and adjust their labor markets, accruing both environmental and economic benefits. On the other, countries that delay the green transition may be left behind.

Another major economic issue relates to how fiscal instruments have been used to strengthen environmental commitments. Canada, the European Union, Iceland, Norway, and Switzerland already have a value-added tax on fossil fuels, and specialists have proposed it should be extended to imports. Countries that insist on keeping their production lines reliant on fossil fuels might be taken aback sooner than later. Rumors of an EU “border carbon adjustment mechanism,” which would tax imports from countries with less strict emission standards, likely contributed to the Chinese Communist Party’s (CCP) pledge to reach carbon neutrality by 2060.

Likewise, nations that expect to keep the same level of economic integration should be worried about losing access to markets. The EU recently adopted a new policy: “No Paris Agreement, no trade agreement,” barring access to the world’s second-largest economy. With some degree of irony, in the past, economic interests were considered the biggest hurdle when it came to addressing environmental concerns. Nowadays, economic pressure may be a game-changer in favor of environmental protection. When the U.S. withdrew from the Paris Agreement, the EU did suggest a “carbon tax” on U.S. imports.

Even if economic reasons were not enough, matters of geopolitical stance should put forward the green transition. There is little doubt that energy is a crucial input to countries’ well-being, and given that the use of fossil fuels has already started to take its toll, it is not surprising that the underproduction of renewables has become a pressing problem. Access to sources of energy that can be sustained in the long run will be crucial in the future as a matter of national security.

Historically, energy security used to be associated with oil stocks and fossil fuel reserves; however, in recent years, a more nuanced understanding emphasizes the importance of the diversification of the energy system, its flexibility, and resilience. This explains why power-seeking, now via competition between states for access to non–fuel sources, has become a centerpiece of the intermestic policy, which deals with issues that are both international and domestic.

But there is more than that. A side-effect of this framework is that countries intending to become project developers of renewables need to design the future and promptly shift their investments towards clean technology (Shen and Power 2016). Being a project developer matters because of the first-mover advantage, and because commercial and diplomatic relations that follow technological development aim not only at economic interests but also geopolitical ones.

Unsurprisingly, China sees the breakthrough in renewables as a “historic opportunity” for the country to assume the top spot as the next global leader. Instead of trying to beat the U.S. at its own game, China is redirecting efforts toward critical emerging sectors where it perceives its Western rival as not yet dominant. The CCP clearly assumes the U.S. is lagging in clean energy development.

This brings forth an assumption: the control of pivotal technologies yields soft power. The prestige and leverage of a nation in the global order now rests in its capacity to manage problems such as climate change, energy security, and sustainable growth. Indeed, influence in the global order stems from a wide range of elements that include the capability to exercise international leverage through interdependencies, political and economic diplomacy, the use of technological sophistication, global connectivity, plus networks, involvement in multilateral institutions, overall foreign policy, strategic actions (e.g., foreign aid), and cultural influence.

Energy is an extremely impactful factor in many of these categories. Besides energy security, the resources employed in the production, the model of distribution, the components of the generation mix, bilateral trade flows (energy import and export), and transfers of technology go far beyond the economic sphere, amassing subtle forms of authority. The geopolitical stakes are huge, to such an extent that the dispute on renewables may produce geopolitical dividends once produced by the Space Race.

History repeats itself. Back in time, the Soviet Union led the game by launching Sputnik, the first artificial Earth satellite. Now, China may be taking the lead in the energy race. Enjoying the favorable circumstances, provided by the catastrophic Trump Administration’s agenda in the environmental area, China (not long ago the world’s “climate villain” for its massive use of coal) has positioned itself as a frontrunner on climate change .

This matters because the environmental equation is today a key political item for international reputation and diplomacy, one that China is using to complement other venues from which it seizes soft powers, such as “One Belt, One Road”, the colossal network of railways, energy pipelines, highways, and marine routes, which promises to break the bottleneck in Asian connectivity and project the renminbi, the Chinese currency. The conjunction of these well-thought-out policies may greatly expand China’s influence in the global order.

In its turn, the resigned leadership of the U.S. and its tendency to flip-flop policy between isolationism and engagement has damaged the country’s international leverage, and invited China to fill the vacuum. Former President Trump’s resistance to tackle common problems like global warming weakened the U.S. ability to call other nations to work on global threats, such as terrorism and pandemics. Overruling this policy should be a top priority for the Biden Administration.

As a course of action, the U.S. government may increase subsidies for clean energy, emulating the Chinese model; however, this choice is not beyond criticism. In China, the growing clean energy public debt reached $42 billion in 2019, raising concerns over financial sustainability. An attractive alternative is to follow the European model and enact a value-added tax on fossil fuels, incentivizing the upgrade to renewables and driving the retirement of older power plants. While it relies on the market to surrogate fossil fuels with green sources, it also signals the end of the oil era and affirms that the U.S. as a nation is committed to a clean energy transition and the environment. This should do the job.

Whenever the path may be realized, the shift to renewables is much more than a technological dispute. Energy has a central role in the structure, consolidation, and survival of states, such that stances of economic and geopolitical power are definitely at stake. If the U.S. hopes to protect its economic interests and reassert its position in the global order, now is the time and the energy transition is the stage.

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