Will China Become a Leader in Clean Energy?

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Penn's Jacques deLisle, NYU's Ann Lee and UCLA's Alex Wang discuss China's changing role in clean energy production.

Donald Trump targeted China and India when he announced earlier this month that the U.S. was pulling out of the December 2015 Paris Agreement on climate change. Trump talked about how uneven the playing field was, and that the U.S. would bear the brunt of the costs of combating climate change while China and India could continue to build coal-fired power plants and go slow on curbing greenhouse gas emissions. Yet, China happens to be a signatory to the Paris Accord, and is making huge investments in clean energy — in fact, double what the U.S. is investing in that space. It also is poised to create and develop a whole new market for energy-related infrastructure with its “One Belt, One Road” project. Alongside, individual U.S. states such as California that have their own clean energy plans are exploring partnerships in China to advance their programs.

The upshot is that China could emerge as a global leader in not just combating climate change, but also as a low-cost producer of clean air technology, according to Ann Lee, a China expert and adjunct professor of economics and finance at New York University, and author of a forthcoming book titled, Will China’s Economy Collapse?

The U.S. withdrawal from the Paris Agreement “is allowing China to step into this leadership role without having to bear the full cost of leadership,” said Jacques deLisle, a University of Pennsylvania law and political science professor, and director of the University’s Center for East Asian Studies. In other words, the new climate-change power stakes will give China more elbow room to proceed with its economic agenda without necessarily putting in place the market reforms that the U.S. has long insisted upon.

In any event, China’s leaders have a self-interest above all else to champion clean energy because of the high costs it has paid and continues to pay for the pollution caused during its economic boom, said Alex Wang, professor of law at UCLA.

Lee, deLisle and Wang discussed the implications for China of the U.S. withdrawal from the Paris Agreement on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

An edited transcript of the conversation follows.

Knowledge@Wharton: Let’s start with the comments from President Trump singling out China and India. What was your reaction, Jaques, to that?

Jacques deLisle: It’s not surprising that he singled out China and India. He wanted to portray the Paris Agreement as being something that put an unfair burden on the U.S., and the best places to point for that, if you want to make that rather specious argument, [are] China and India. China passed the U.S. as the number-one emitter of greenhouse gases about a decade ago, and so any global solution will have China and the U.S. first and foremost and India not too far behind.

We have a long tradition in this whole process of trying to deal with climate change of differentiated responsibilities, in some sense putting less strict limits on developing countries than on developed ones. So it was an old card to play.

“We’re back to fighting a battle that we thought we had already fought and won, which is getting the major emitters on board with some kind of reduction plan.” –Jacques deLisle

But that is the reason for pointing to China and India. They are big polluters, and as developing countries they get a little bit more slack than the most developed countries do, particularly as to the date when peak emissions were supposed to be hit. China was set for 2030, and it’s almost certainly going to beat that goal, but that’s obviously behind what the U.S. and other developed countries were supposed to do in the short run in terms of curbing [emissions]. Now, per capita we [in the U.S.] are still putting out way more [than other countries].

U.S. Role in China’s Pollution

Ann Lee: I think [Trump’s comment] was aimed at a domestic audience. Trump actually understood why China is such a large emitter. You only have to look back at a very short period in history. How did China become such a big manufacturing and polluting environment? It was because lots of CEOs in the U.S. decided to outsource their manufacturing to China, and then re-import all of those products to the U.S. So it was actually a lot of U.S. products pushing their pollution over to China. If you had to trace where the original polluters were, it was really coming from U.S. sources.

So it is unfair to say that it was China doing it in isolation here. Frankly, China is trying to do as much as it can to try to cut back its emissions. It is impossible to say that you can just flip a switch and cut all of those emissions overnight. China is a massive country; it’s going to take a very long time to switch out all of the coal power plants into nuclear, which is what it is trying to do right now. Nuclear is a much cleaner source of energy. Wind and solar at this point in time just cannot replace coal; they’re simply not powerful enough.

Even though China has built hundreds of wind turbines, it still has to solve the problem of how to connect all of those wind turbines to the electrical grid. But once they solve that problem, there is no stopping China from building thousands of these and stepping up its transition to alternative energy.

Alex Wang: We should also remind ourselves that one of the things that Trump said in his statements is simply not true, which is that China will have to do nothing for 13 years. This has been a standard Republican [Party] line, referring to the fact that China in the Paris pledge said it will try to peak emissions by 2030, 13 years from now. [Republican Senate majority leader] Mitch McConnell and others have said that this means China will do nothing, and it will just continue to emit for thirteen years.

But China has already in earnest for the last decade been working on improving energy efficiency and carbon efficiency in the economy, and the investment that will be involved in peaking by 2030 is tremendous. [China] has been talking recently about a $360-billion investment in clean energy between now and 2020. For it to transform its energy economy, which is now [more than] 60% coal, to one where you are peaking emissions and relying more on natural gas, nuclear, wind, solar and hydro, it requires a tremendous transformation of the economy. That will require a tremendous amount of work in the next 13 years.

Making Room for a New Leader

Knowledge@Wharton: Ann, where does this put China in terms of the Paris accord? Does it put it at or near the top of leading the pack in terms of what it would like to try to do, and changes it would like to make around the globe?

Lee: Yes, absolutely. Actually, according to the Heinrich Boll Foundation, a German think tank, China already invests far more in alternative energy and in clean energy than the U.S. with at least double the U.S. investment, and surpasses Germany and other countries. China is already in the leading role in terms of R&D and investments in green energy. The Paris Agreement provides even more economic incentive for China to continue developing these areas, and China understands the need for environmental protection, given the serious consequences [pollution] is having on its population.

China is moving decisively in this area, and is being pushed into this role. [With] the U.S. stepping away from it, there’s this vacuum, and a lot of folks are looking to China to play a leadership role. The Paris Agreement says that developed countries are supposed to help subsidize developing countries like India. India has no problem asking for these kinds of handouts. If India has subsidies for clean energy, it could easily buy clean energy from China, which has become somewhat of a low-cost producer in many areas such as solar power.

Whenever China masters some technology it ends up becoming the lowest-cost producer. So, as China continues to invest in nuclear and other areas of alternative energy, it could easily sell its technologies to other developing countries. This would again put China in an economic leadership role in this area.

DeLisle: There is clearly a lot of money going into this in China. As Alex mentioned, a $360-billion target was announced at the beginning of this year, and that’s only by 2020. [It will have to invest] more to get to peak carbon before 2030. China will be a very big player in two ways. One, it continues to build a lot of energy capacity, and much of the effort is going into non-carbon renewable energy. [Two,] China is a major manufacturing source for [products] like solar panels, and it is investing in that kind of capacity.

“Many people thought of China only a few years ago as just a place of cheap labor, and suddenly now it’s a place known for technology and innovation, and soon it will be a leader in climate change issues.” –Ann Lee

China also is in the middle of a long-term push for an innovation economy, which means R&D and tech and certainly green energy are part of that. There’s a political side to this, too. As with the Trump withdrawal from the Trans-Pacific Partnership, so too with the Paris Climate accord, in a sense it is allowing China to step into this leadership role without having to bear the full cost of leadership. If the U.S. were still fully engaged, there would be more pressure on China to be more concrete [in its actions], and to bear a specific burden. But now China gets to step into the rhetorical vacuum.

So [China’s president] Xi Jinping can go to [the World Economic Forum in] Davos and say, “We are in favor of economic globalization,” and not get the pushback he ordinarily would have gotten on opening up the Chinese economy, as market reforms are still needed. We are going to see that on climate change too, now. The European Union now has a reason to stand up there with China and embrace in a general way this notion of dealing with climate change.

[Also], in some sense China does not have to bear as much heat on the tough details because right now we’re back to fighting a battle that we thought we had already fought and won, which is getting the major emitters on board with some kind of reduction plan that hopefully will keep [the global temperature increase to] around 2 degrees Celsius.

Knowledge@Wharton: Two questions for you, Alex. One is on the future for China and its economy. President Xi is seemingly taking quite a step forward as a world leader, and it would seem that China will have a greater opportunity than earlier to build relations with the European Union countries.

Wang: Right. These have been a great couple of weeks for Chinese leaders, including with the Paris Agreement announcement by Trump. [Many actions of] the U.S. government give Xi opportunities to step forward and say the right things on the global stage.

On this question of Chinese leadership on climate change, some context is important. What do we mean by leadership exactly? I can think of at least three ways that China could be a leader, and not all of them are a positive story.

On the positive side, in clean energy investment, China has clearly already become a leader. Its renewable power capacity now exceeds the total energy capacity in Japan, and it has doubled the total capacity in Germany. But China is the largest emitter of carbon emissions now. When it will actually become a low-carbon economy is something far in the future, and so leadership in that regard is still some ways off.

There is an unknown and a third area of leadership, which is, how will China interact with the rest of the world? Not just with the EU, but also with other developing countries who would like to see themselves become leading emerging economies like China has over the last decade. In this area China could go in one of two ways. It could essentially start exporting all of the old lines — fossil fuel energy, coal power plants, steel and cement — and use that to become the economic engine in these other places. Or it could go in the direction of a greener development model. What China chooses to do and how it implements its policy in that regard will truly determine whether it is a climate leader.

Individual States and China

Knowledge@Wharton: If the U.S. as a country is not going to step forward on climate change, we may see some states in the U.S. make that move. Could we see a burgeoning relationship in this area between individual U.S. states and other countries, whether that be China or countries in the EU?

Lee: Yes, it is certainly possible that [some U.S.] states will want to reach out to China and perhaps purchase technology made in China to help them transition into a cleaner economy, given that China is one of the leaders in driving down the cost of solar and other types of clean energy.

If you go see what China has done, solar panels now can also go inside buildings, and not just on top of buildings. It has been able to perfect much of this technology and is using it in creative ways. For instance, instead of using streetlights, glassy sidewalks that have solar panels light up the sidewalk, and that provides the light at night. All of these ideas can be copied throughout the U.S. if the states and cities so choose.

“There are ways of mitigating it and perhaps undoing a lot of the damage that could be done policy-wise. It is much harder to undo the symbolic damage, and that is real.” –Jacques deLisle

But I don’t think Chinese leaders will see the relationship as important as maybe U.S. states will, given that China probably doesn’t see this as helping its geopolitics as much. But from an economic standpoint, it certainly has huge potential.

Wang: A lot of it is a signaling effect for Governor [Jerry] Brown of California, who [visited China earlier in June,] and other governors on the west coast, and even increasingly some on the east coast who will say, “We are still doing our part for helping the U.S. to collectively achieve the climate change goals set forth in Paris.” That’s partly just a genuine commitment to these changes. So why do you go to China? Well, it’s like saying that Trump is all on his own here. The U.S. federal government has gone one way but that doesn’t mean that U.S. business and U.S. states [will go the same way].

China probably gets a little bit out of it, to the extent that the idea is to gain something in terms of the stature of Xi Jinping compared to Trump. It’s got a bit of a payoff but I don’t think it’s going to drive a whole lot.

Real Change in China

Knowledge@Wharton: Considering the Chinese economy as a whole, how big is its push on solar and wind energy, and how big could it be in the next decade?

DeLisle: It depends on how you unpack that. We’re talking of a $360 billion investment plan by 2020, and more of that going forward. But you’ve still got an economy that is 60% plus dependent on coal for power generation. So it can grow a whole lot and be very large but it’s not per se a big part of the Chinese economy. What drives it is the broader goal of having China move forward in more high-tech industries.

But a lot of what drives it is simply self-interest. China is getting clobbered by the consequences of things that are also related to climate change. Chinese populations are heavily concentrated in coastal cities, and they will be affected by rising sea levels. Much of the pollution that is choking Chinese cities is from coal-fired power plants. So there are these reasons that are deeply rooted in self-interest. What slows it down is just the sheer magnitude of the problem, the size of the energy demand and just the momentum behind the Chinese economy, which has been built on a fairly polluting basis, including the kinds of pollutants that contribute to climate change.

Wang: Chinese leaders are well aware that the traditional way of fossil-fuel, heavy-energy consuming development has created a serious drag on the economy. They have been studying the economic costs of pollution in China for 20 years now, and they are well aware that it is creating all sorts of problems in terms of health, destruction of natural resources, and economic loss. Also, China is at its ecological limit. If you’ve been to Beijing on a bad air day, you know this is true, right? The leaders wake up to this every day.

Part of the clean energy move is one to create these so-called strategic emerging industries in China. But they also realize they simply can’t go in this direction much further, and that they have to change. I agree with Jacques that this is very much framed in terms of domestic interests. They have to go this way, and they believe that they can make a lot of money and extend this so-called economic miracle further by going in this direction.

Knowledge@Wharton: Ann, based on your book, what is the expectation for this as a piece for the Chinese economy to move forward?

Lee: With technology changing as rapidly as it is and the scale and implementation also changing rapidly and getting much larger, it could be a significant part of the economy in the not too distant future. Many people thought of China only a few years ago as just a place of cheap labor, and suddenly now it’s a place known for technology and innovation, and soon it will be a leader in climate change issues.

The market could easily reach into the trillions, because China is already pouring a massive amount of money into its “One Belt, One Road” strategy, which is basically recreating the Silk Road trades between China and Europe, as well as extending it to Southeast Asia and Africa. All along the way, it could also push its clean technology out to countries that haven’t even come into the modern economy, such as those in Central Asia. This could really be transformative, and it could create a lot of extra demand for China in these new industries. What we see now could be just peanuts [compared] to what [it] will be in the next five to 10 years.

“Chinese leaders are well aware that the traditional way of fossil-fuel, heavy-energy consuming development has created a serious drag on the economy.” –Alex Wang

DeLisle: China has an ability to shape some of what goes on, particularly in emerging economies, and how clean or dirty they are going to be. So we are all watching this ‘One Belt, One Road’ phrase that has been kicking around for some time now, and it is the buzzword for anything economic policy related in China these days. Now we are getting more details on the amount of capital they are ready to put into infrastructure. (China is expected to invest more than $900 billion in the One Belt, One Road project, according to a recent Wall Street Journal report.)

There is a lot of skepticism about how big of an impact the One Belt, One Road project will have, and about how to unpack the geopolitics of trying to solidify relations with these countries versus trying to lock in energy resources including fossil fuels, which is obviously not a good model. Also, how much will it try to bring these countries along economically in a way that will help create market opportunities for Chinese producers and Chinese companies that can go in and do a bunch of infrastructure work, which is really the core to this in many ways. A lot of it is in transportation-type networks, but there will be an energy component if this does succeed in spurring economic development.

Relying on Other Actors

Wang: One thing that should be troubling to Americans here is how different the visions about the future are between what China is planning to do with green development and what Trump is doing withdrawing from the Paris Agreement. One person said to me last week that the withdrawal from the Paris Agreement is like Trump trying to destroy Netflix to bring back Blockbuster Video.

China is trying to develop industries of the future that are not occupied by other players, and Trump is trying to retreat. This is why Governor Brown [visited] China — they have a similar vision of the future that we can stake out, [such as in] clean energy and other types of energy. Even Pittsburgh got a lot of attention last week [when it announced plans to go 100% renewable]. Pittsburgh is not banking its future on bringing back steel, [but] thinking forward to advanced industries like China is. Anyone who has gone through this process is thinking in a different way about the future. So on that higher level, we should be very troubled by this vision that the U.S. withdrawal from the Paris Agreement represents.

Knowledge@Wharton: It also makes you wonder, Alex, about the state of these industries in the U.S. What kind of hit will they take over the next several years considering the fact that the U.S. has decided that it does not want to be in the Paris Agreement?

Wang: It is not going to be as bad as we think. When the federal government exits these industries, there is a lot of money it can invest in research and in supporting industries of the future. The best hope is that states like California [and other] states in the Northeast who have committed to dealing with climate change [will fulfill their] state-level commitments, and hopefully even exceed what otherwise would have been the case with federal support. But we’re going to have to rely on other actors, such as states stepping up with industry, to develop these industries.

DeLisle: Just picking up on the last point Alex made, of course a lot of companies have dedicated themselves to hitting certain clean targets and that is going to create demand as well. So it’s states, it’s the corporate sector, and it’s the fact that some companies based in the U.S. are producing … clean energy technology and products, and not just for U.S. markets but for global ones.

I share Alex’s sense that this is potentially really, really bad, but there are ways of mitigating it and perhaps undoing a lot of the damage that could be done policy-wise. It is much harder to undo the symbolic damage, and that is real.

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