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Environment

Can the US and China Cooperate over Climate and Clean Energy?

May 28 , 2012

One of the few bright spots in recent international negotiations to replace the expiring 1997 Kyoto Protocol on curbing global greenhouse gas (GHG) emissions has been the framework agreement concluded at the 17th Conference of the Parties (COP17) that took place in Durban, South Africa in December 2011.  In addition to extending the Kyoto Protocol, COP17 produced the Durban Platform for Enhanced Action as the foundation for a prospective and comprehensive climate change agreement in 2015.  However, the Durban Platform is most notable for securing the tentative inclusion of the United States and China – the world’s two biggest GHG emitters – who were not signatories to the Kyoto Protocol.  The Durban Platform may indicate that closer bilateral trade and economic ties between China and the US is fostering their cooperation on a number of global issues, including climate change.

International trade and capital relationships between the two countries certainly reflect their increasing close economic ties.  Around 17% of imports to the US, totalling $323 billion, are from its largest trading partner China. US foreign direct investment in China is $50 billion annually, whereas China investment in the US is $790 million per year.

As the world’s two largest economies, China and the US are also impacting the global environment, especially climate.  Since 1950, the US has been responsible for approximately 29% of energy-related carbon dioxide emissions, and China for about 8%. However, in 2007 China surpassed the US as the world’s top annual emitter of GHGs. The two countries are now responsible for 40% of global annual GHG emissions.

Thus, it is possible that closer economic ties between the US and China are also fostering bilateral cooperation on climate change and other global environmental problems. Increased cooperation between the US and China could in turn contribute to the success of multilateral negotiations.  As a result, the Durban Platform may signal that it is in the mutual interests of China and the US to take the lead in global cooperation over controlling climate change.

However, cooperation between the US and China is less evident in the case the promotion of clean energy.  Here, more parochial national economic interests seem to dominate the incentives arising from bilateral economic ties.

For example, the Obama Administration recently announced tariffs of 31% and higher on solar panels imported from China.  These tariffs are in addition to the existing US duties of 2.9% to 4.7% on Chinese solar panels, which were imposed in March 2012 due to Chinese subsidies to their panel industry.  The reasons cited for the new tariffs is that Chinese solar panels are accused of being “dumped” – i.e. sold at below fair-market value – in the United States.

Certainly, Chinese solar panel imports have had a huge impact on the US market.  The US solar industry, which includes manufacturing, installation and services, employs around 100,000 people.  But it is panel manufacturing that cannot compete with Chinese imports, which last year amounted to $3.1 billion and now accounts for half of the US market.  In addition, some US solar panel manufacturers have transferred their operations to China, to take advantage of the lower costs and subsidies there.

This current confrontation over trade in solar panels arises from major differences in the Chinese and US approaches to clean energy development.

China views expansion of clean energy as a sound long-term industrial and export promotion policy.   It aims to be the world market leader in solar panels, water heating and batteries, wind turbines, fuel-efficient cars, high-speed rail, biofuels, and other clean energy industries.  For a number of years, China has targeted development of these industries through combining pricing incentives, research and development subsidies, advanced production technology and economies of scale.  This strategy is based on first supplying China’s huge domestic market for clean energy as a springboard for exporting cheap manufactures to the rest of the world.  For example, China is both the global leader in cumulative installed capacity and in exports of solar water heating.  In 2010, China surpassed the US in terms of cumulative installed capacity of wind power, and is pushing hard to be a leading exporter to the rest of the world. Solar panel manufacturing is now following a similar pattern.

In contrast, the US takes, at best, a piecemeal approach to promoting clean energy.  There is no long-term US strategy for energy, let alone for clean energy development.  The 2008-9 stimulus package enacted by the Obama Administration included a number of short-lived incentives to spur energy efficiency and renewable energy expansion, some of which are still in place.  But a long-term industrial policy for promoting clean energy through R&D subsidies and price incentives remains politically controversial.  Instead, state and even local governments enact a variety of regulations and incentives, and private industry is left to respond to market forces.  Given this policy climate, restricting Chinese solar panel imports that compete with US manufactures is seen as both politically popular and economically expedient.

However, protecting domestic clean energy manufacturing is no substitute for a long-term clean energy policy for the United States. For one, it may be counter-productive.  By raising substantially the costs of solar panels, the US tariffs on Chinese imports could increase dramatically the expense of installing solar energy nationally and curtail employment.

But most importantly, the solar panel trade dispute could lead to similar confrontations with China over other clean energy imports, such as wind turbines, solar batteries and biofuels.  If clean energy trade disputes lead to worsening bilateral economic relations, then China and the US may have less incentive to pursue other mutual interests, such as reducing GHG emissions.  It would be highly ironic, if not tragic, if a trade disagreement over clean energy undermines the fragile beginnings of US and China cooperation over global climate change.

Edward B. Barbier is the John S. Bugas Professor of Economics, University of Wyoming.  Two of his latest books are Scarcity and Frontiers: How Economies Have Developed Through Natural Resource Exploitation and (with Anil Markandya) A New Blueprint for a Green Economy.

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