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Jan 14 2011
Behind China-US Energy Cooperation: Green Protectionism and Its Prospects

 The China-US relationship has been getting “energized” in recent years. Developments like the soaring energy prices and the rise to prominence of the climate change issue call for effective international energy and climate cooperation. China and the United States, the two most important players covering about 40% of world energy consumption and CO2 emissions, have put energy cooperation as a priority. Up to now the progress has been quite satisfactory. The initial cooperation was undertaken under the framework of China-US SED established in 2006 or S&ED since 2009, the two governments signed the Framework for Ten Year Cooperation on Energy and Environment in June 2008, which was upgraded to prioritize the goal of climate change one year later. The cooperation was even carried further in the second S&ED in May 2010, in which half of the 26 agreements reached were about energy and climate, from clean energy co-development, nuclear energy technology sharing to energy efficiency improvement. This momentum is very encouraging considering that the global climate cooperation is actually slowing after the 2009 Copenhagen Conference. However, there is never a shortage of difficulties in a dynamic cooperation, one of which is the rise of green protectionism, “the defining feature,termed by some, of the international market in the next ten years.

Green protectionism and its evolution

 Green protectionism is in effect a type of industrial protectionism in the name of environment or climate protection. It is not a fresh phenomenon, but its focus is changing to some extent from living animals in the last two decades to energy resources because of the climate change issue. The purpose is to win strategic advantages in the future new energy industries or not to lose competitiveness in the present carbon-intensive industries, which the author would call the “new” and “old” energy-related green protectionism, respectively.

 Old and new green protectionism often co-exist, but we did see a shift of focus recently. In the past, the former was the major concern hindering China-US energy cooperation. A typical example was that the US threatened to impose unilateral trade sanctions, especially the so-called “carbon tariffs”, on energy-intensive products imported from those developing countries that would not adopt CO2 mitigation policies “comparable” to that of the US. The Waxman-Markley bill passed in June 2009 by the US House of Representatives and most other proposed legislations in recent years all contained such provisions, regarding China as the major target. The legitimate reason for this is to prevent carbon leakage, i.e., the energy-intensive industries will “race to the bottom”, moving to those countries without carbon controls and therefore render the proposed US policies obsolete. But there still exist technical and legal difficulties that are so great that unilateral trade measures would hardly be able to satisfy the non-discrimination requirement under the WTO, not to say the breach of the “common but differentiated responsibilities” principle under the UNFCCC. Despite this, China still feels huge threat of another trade barrier.

 Unexpectedly, this concern of China faded this year, if not disappeared, but was soon replaced by another. If the old friction resulted from the US dissatisfaction over China’s refusal to share the same burden of reducing the use of fossil fuels, this new trend is just about the opposite. This time the US is complaining that the Chinese government is providing too much support to new energy industries. But the US industries and government consider that Chinese support is favoring local enterprises too much, or the “new” green protectionism in this author’s term. During the second S&ED in May 2010, the US side raised its general concern about China’s “indigenous innovation” and government procurement policies. Laura D’Andrea Tyson, former Chair of the US President’s Council of Economic Advisers during the Clinton administration, called for Washington to get tough with countries that force US companies to outsource. This issue has stood out since the middle of 2009 when the National Development and Reform Commission (NDRC) of China and seven other authorities co-issued a circular, calling for purchasing Chinese domestic products for government spending. In this regard, China did feel embarrassed as this document was initiated to curb the prevailing discrimination against local products in the government procurement activities. Certainly, China is not perfect in the design of its new energy policies, e.g., the 2005 NDRC Circular required the use of wind power equipments containing more than 70% of local content, which is at odds with international trade rules, was just cancelled early this year.

Implications and prospects

The developments reveal the evolution of the two countries’ domestic energy politics, i.e., the retreat of the US and advance of China. This trend could continue in the future. In the past several years, the US federal government has shown very ambitious aspirations, and therefore put more pressure on other countries, like the threat of trade sanctions. This can be traced back to the end of the Bush administration, when the jump in energy prices (energy security situation), international “pull” (peer pressure) and domestic “push” (rising awareness) accumulated to a historically high level. The full victory of the Democratic Party in the congressional election in the next half of 2006 provided a political drive to tackle the energy issue, while Barack Obama’s taking power added another fresh impetus for a real change to happen since he promised to bring “changes” to American people and the world, while defining energy as one of his top priorities. The new administration was determined to enact a comprehensive climate and energy legislation with a national cap-and-trade system so as to limit US CO2 emissions and regain US leadership in global climate cooperation, including bringing emerging powers into the system. However, this process was interrupted by the financial crisis, the double-digit unemployment and the competition on other issues like healthcare and financial regulation. The highly expected cap-and-trade system failed to be established before the Copenhagen Conference. Environmentalists were further disappointed by Obama’s State of the Union address in early 2010 that silently neglected the climate and new energy ambition. Not long ago, the Senate formally announced that the efforts to cap the US CO2 emissions would be suspended. The US will not attempt another round of climate legislation if, as widely expected, the Democratic Party is not able to win the coming congressional elections. The Environment Protection Agency could step in to regulate the greenhouse gases under the Clean Air Act but it is only a piecemeal solution. Correspondingly, the old green protectionism defending its energy-intensive industries weakened. In brief, the world is expected to continue its pursuit of global energy and climate cooperation without US participation. New energy investments face great uncertainties.

Unlike the US, China is steadily moving forward. And like the US, China’s energy policy development is also mainly shaped by mounting environment and climate pressure domestically and from abroad. China has enjoyed nearly double-digit annual growth in the last 30 years and accumulated nearly 30% of the global foreign reserves but at the cost of huge and unsustainable environment and resource deficits. China’s economy in terms of GDP is only about 8% of the world total, but covers 20% of the world energy consumption and CO2 emissions. All these constraints pressed China to improve energy efficiency and develop new energy. The year 2005 was a landmark when China set the binding goal of 20% energy efficiency improvement in its 11th Five Year Plan. China also increased support for new energy development. According to the latest report of the UNEP, China surpassed the US for the first time in 2009 to be the country that invested most in renewable energy like wind, solar, etc. With the global climate change issue in the limelight, China faces unprecedented international pressure to assume responsibilities beyond its development stage and capabilities. Along with the past approach, China further voluntarily announced the goal of improving the CO2 efficiency by 40-45% by 2020 based on the level of 2005 before the 2009 Copenhagen Conference. This commitment is expected be written into the 12th Five Year Plan as a binding goal as well, which means very strict implementation will be guaranteed. Beyond that, China is also finishing its medium-to-long-term energy plans by 2020 and 2050, respectively, so as to build up a three-level, comprehensive energy strategy and policy framework. The financial crisis did slow down China’s energy efficiency drive; but comparatively, with a more unified and efficient public decision-making system than the US, it is much easier for China to carry out its long-term reform. Not surprisingly, an uncertain US is feeling uneasy about their future competitiveness in the new energy industries.

The way out?

The rise of green protectionism reflects the competition between China and the US on energy and the concern of both sides. This could intensify existing bilateral trade frictions. More broadly, this is part of the anti-globalization trend in western countries since the 1990s.

One apparent way to tackle this issue is to regulate competition under established international trade and investment rules. As suggested by some, WTO members could consider following the example of the Information Technology Agreement of 1997 and reaching an agreement on climate-friendly products as the early fruit of the Doha Round of talks.

The more fundamental way to relieve green protectionism lies in promoting a more solid and sustainable energy cooperation between the two sides. While China is determined to further its energy reform, the US should also have its domestic policy ready, providing clear and consistent incentives for clean energy investment. This could in turn strengthen China’s determination and promote positive spill-over to the world as well.

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