Heated Atmosphere

More climate disasters than ever before battered the world in the summer of 2023.^[1] And yet, this is just a foretaste of what is to come. The world is set to significantly exceed the 1.5 degree-Celsius threshold that climate scientists consider as the key “defense line” to prevent the worst impacts of climate change, with global warming expected to increase by 2.5 to 2.9 degrees Celsius in this century.^[2]

The outlook is not all grim, however. As renewables are increasingly cost competitive and green technologies are the backbone of future industries, clean energy investments and deployment have surged.^[3] The energy crisis following Russia’s war against Ukraine has added to the momentum, highlighting the value of renewables as “freedom energies” that reduce dependencies on petrostates and vulnerability to the vagaries of oil and gas markets.^[4] Economic, geopolitical, and climate goals are thus increasingly aligned. Yet by prioritizing national economic and security interests rather than global climate needs, countries risk hampering progress to net zero and a positive-sum transition.
 

The competition for green energy leadership between China and the US could prompt a “race to the top,” spurring green investments, innovation, and international climate action.^[5] Yet the rising tensions between the two powers increasingly risk thwarting the global climate agenda by undermining cooperation and fragmenting the green energy market. Since China dominates across clean tech supply chains, policy-makers will need to square the imperative to reduce dependencies on Beijing with adequate cooperation to meet decarbonization goals.^[6]

In contrast to the common framing of climate as an “island of opportunity,”^[7] climate cooperation with China has been weak in substance in recent years and hinges on the broader state of geopolitics. China’s suspension of climate talks with the US following then-speaker of the US House of Representatives Nancy Pelosi’s visit to Taiwan in 2022 is a case in point. The recent resumption of talks and the joint statement on reviving climate cooperation sent an important signal before COP28 a few weeks later.^[8] However, the implementation of the agreement is uncertain, and more ambitious joint initiatives, such as on green trade rules, are unlikely.

The tensions between China and the US limit the room for climate cooperation that could drive the global green agenda. However, the bigger threat for international climate action is that this geopolitical rivalry erodes the rollout of green technologies, as access to them might be weaponized and trade barriers are fragmenting the clean tech market. From critical raw materials (CRMs) to manufacturing, China dominates the supply chains of green technologies; for example, it accounts for more than 80 percent in all the manufacturing stages of solar panels and up to 90 percent in CRM processing.^[9] Its clean tech stronghold provides Beijing with a head start in the industries of the future and economic and political leverage – which it has repeatedly been willing to use. Examples include export restrictions on graphite, a key mineral for electric vehicle (EV) batteries, to Sweden, stymieing the buildup of the battery industry there,^[10] or rare earths to Japan amid territorial disputes in 2010.^[11] The new graphite export controls, widely seen as a response to US restrictions on semiconductors, are the latest sign that green technologies will not be spared from the weaponization of trade ties, jeopardizing their global rollout.^[12]

The transatlantic partners have ramped up efforts to strengthen domestic manufacturing, underpinned by subsidies and trade restrictions. This is a response to widespread concern that the US and Europe rely on Beijing to reduce their fossil fuel dependencies as well as achieve their green energy targets.^[14] Policies such as the US Inflation Reduction Act (IRA) could accelerate the deployment of clean technologies and bring down prices in the long term.^[15] Promoting local manufacturing jobs could help strengthen public support for the climate agenda. Yet analysts warn that the focus on reshoring industries rather than leveraging trade and partnerships could risk, at least in the short- to midterm, higher prices for green technologies and a slower rollout in turn.^[16]

Given the scale of China’s dominance, imports from Beijing will remain critical to meet deployment targets for the foreseeable future. While Europe and the US are set to increase their manufacturing share in some sectors (Figure 7.1), the reliance on Beijing will remain particularly high with regard to CRMs. Governments and the private sector have intensified efforts to diversify supplies away from China and have announced several new initiatives such as the Minerals Security Partnership.^[17] Yet results so far have been limited, and investments by the US and its partners pale in comparison to China’s. China accounts for 70 percent of anticipated global investments in new CRM production capacity by 2030.^[18] Between 2018 and 2021, it invested twice as much in lithium assets as Australia, Canada, and the US combined.^[19] As Beijing is set to maintain or even expand its dominant position in CRM supply chains in the next few years, attempts to cut ties with China before having alternatives would be futile.^[20]

Selective engagement with Beijing will also remain relevant with regard to technology cooperation, as China’s green energy leadership is built not only on cost advantages, but also on its technological edge, for example in EV batteries. While Europe still welcomes Chinese investments in its EV battery sector,^[21] the US mood has seemingly turned against any form of collaboration. A recent example is the political pushback against Ford’s plans to license technology from the Chinese battery firm CATL.^[22] But in a situation where Chinese companies are way ahead of their competitors, cutting all ties with Beijing risks missing out on opportunities to leverage China’s strength and advance clean technologies.^[23]

The transatlantic partners should have strong incentives to develop a joint green agenda, given their shared aim to foster decarbonization while “de-risking” from China. Yet disagreements on industrial and trade policies have blocked progress, with the window of opportunity possibly closing soon.The transatlantic honeymoon following US President Joseph Biden’s election came with high hopes for EU-US climate cooperation, for example reflected in the announcement of a Transatlantic Green Technology Alliance at the EU-US Summit in June 2021. And transatlantic clean tech cooperation has great potential. The European and US green energy sectors are deeply integrated through trade, cross-border financing, and collaboration in research and development (R&D).^[24] As their relative strengths differ, both Europe and the US would gain from deeper collaboration and thus improve their competitive edge vis-à-vis China.^[25] Yet after more than two years, the Transatlantic Green Technology Alliance still largely exists only on paper, and significant R&D synergies remain untapped.^[26]

Rather than forging a joint green agenda, negotiations between the EU and the US have been overshadowed by persistent tensions over trade and subsidy rules. Domestic content requirements of the IRA clash with the EU’s insistence on international trade rules and have raised concerns among European countries about the repercussions for their industries, triggering subsidies in Europe in return.^[27] Talks on a critical minerals agreement are at an impasse, as are negotiations on a deal on sustainable steel and aluminum.^[28] The failure to reach a compromise shows the limits of the transatlantic partners’ ability to drive multilateral agreements on green trade more broadly.^[29] The lack of progress is all the more disappointing given the current warm transatlantic relations and the risk of a rising backlash against green policies on both sides of the Atlantic in light of upcoming elections.^[30]

The green industrial and trade policies of advanced economies furthermore risk fueling divides with poorer countries. Unable to compete with mounting clean tech subsidies and concerned about the external carbon pricing policies of wealthy states, resource-rich low-income countries (LICs) might resort to trade barriers on raw materials, which would further fragment green energy markets. The failure of high-income countries to scale up climate financing adds to the divides and slows climate action.

Several countries of the so-called Global South are rich in CRMs and have strong renewables potential. This makes them key actors on the path to net zero and provides strong growth opportunities. Yet because these countries often lack access to financing and technology, a lot of this potential remains untapped. Current investments in CRM-rich countries are heavily concentrated in mining, which only accounts for a minor share of the value chain. For EVs, for example, the extraction of cobalt, lithium, and nickel makes up only 
0.1 percent of it.^[32] To move up the value chain, CRM-rich countries are intensifying efforts to foster local processing and manufacturing. They are thereby increasingly resorting to export restrictions,^[33] seeing them as necessary to attract downstream investments and compete with the mounting subsidies of high-income countries in the green tech sector.^[34] Namibia’s export ban of unprocessed lithium and other minerals is a recent example.^[35]

To counter this trend and strengthen the resilience of CRM supply chains, high-income countries need to provide credible alternatives by scaling up investments, offering technology and knowledge transfer, and fostering local processing in LICs. Strong CRM partnerships are thereby a crucial component for the success of the transatlantic partners’ efforts to reduce dependencies on Beijing.^[37] Europe and the US should align their initiatives, integrate their political, economic, and development instruments, and promote the engagement of the private sector as well as regional and development banks.^[38]

The failure of advanced economies to mobilize investments in renewables in LICs and meet their 100 billion US dollar climate financing promise by 2020 adds to the frictions between high- and low-income countries. While COP28 saw some notable achievements, LICs voiced strong criticism about its failure to respond to the vast gap between their climate financing needs and the money provided.^[39] Investments in renewable energy reached new record highs in 2023, but are still far below what is required.^[40] Furthermore, investments are heavily clustered in China, accounting for around half of the amount in 2022, as well as in some high- and middle-income economies.^[41] Given the projected steep rise in emissions in countries such as India and Indonesia, international attention for supporting their energy transitions has recently risen.^[42] However, LICs are still largely off the radar (Figure 7.2). 

This deepens the regional disparities in renewable energy investment and undermines opportunities for green growth. Investments in African countries are still meagre, despite the strong renewable energy potential there. For example, the continent accounts for 60 percent of the world’s best solar resources, yet only 1 percent of installed capacity.^[43]

The calls of low-income countries for new financial instruments and reforms of the international financial system to mobilize climate investments are thus getting louder, and the need for resources is even more pressing, as poorer countries, often the most affected by climate change, have to spend an increasing share of their GDP on climate adaptation.^[44] Controversies on China’s fair contribution and geopolitical frictions have complicated international climate financing agreements and hampered broader financial reforms – to the detriment of climate and development targets.^[45]

The increasing alignment of climate, geopolitical, and economic interests could drive progress to net zero. Yet as reflected in the divides between China and the US, the transatlantic partners, and high- and low-income countries, the narrow focus on national economic and security interests rather than global climate needs could negate the benefits of trade and climate cooperation and, in turn, delay the green transition. Policy-makers will need to balance the focus on strengthening domestic green industries with efforts to forge international partnerships; and the need to reduce the vulnerability of clean technologies to weaponization with adequate cooperation to meet decarbonization goals.