February 2015, Vol. 242, No. 2


U.S.-China Carbon Pact: Promising Start Or Path To Nowhere?

In November, President Obama and Chinese President Xi Jinping surprised the world by agreeing in principle to targets for carbon dioxide emissions in a symbolic effort to address climate change. This is a pact of historic magnitude that recognizes a need for the world’s two largest emitters – both longstanding antagonists – to reduce future release of greenhouse gas. But aside from a handshake and a promise, what will actually come from this mutual recognition?

For the Chinese, consumers of more than half the world’s coal on an annual basis, the agreement provides a road map for the next couple decades of development. But, far from unwinding Chinese dependence on coal, the agreement essentially ensures 15 more years of emissions growth before efforts will begin to reverse the trend in 2030.

After 2030, the handshake sets the parameters for a policy-driven push away from coal, which currently provides 80% of China’s electricity and nearly 70% of its primary energy. In the effort to reduce the carbon intensity of the energy mix, it is likely that non-fossil fuel energy sources – mainly nuclear and hydro – will make up 20% of the post-2030 primary energy mix, up from 8% today.
In practical terms, China will only be able to reach that goal if it begins to allow fuel sources other than coal to capture incremental demand growth between now and 2030. In fact, it is highly likely that the goal only becomes feasible if China launches large-scale developments of nuclear, wind, solar and hydroelectric power.

For the United States, the pact signals that the Chinese are finally on board, at least in principle, with a global climate action program. This is significant as it stands as a strong counter to those who argue that U.S. emissions cuts are futile if China does nothing. This, in fact, was one of the key drivers behind the U.S. Senate’s opposition to the Kyoto Protocol. Therefore, the handshake agreement could pave a clearer path for the U.S. to adopt more aggressive policies to reduce carbon dioxide emissions.

The agreement also gives a boost to producers of various energy technologies, which include both U.S. and Chinese companies. In particular, these firms will become more attractive to investors as policy will allow them to compete more vibrantly for market share in electricity generation as well as for carbon capture and storage (CCS) and other mitigation techniques. A guaranteed market could push improvements in cost and efficiency, especially if competition in the space is intensified.

Longer term, the drive to cut emissions in both the U.S. and China could spur research into new technologies that are more commercially viable than existing CCS, which is relatively high cost and carries a parasitic load. Indeed, on the R&D front, one of the best possible outcomes would see the U.S.-China agreement propelling technology development into lower cost CCS and/or commercial-scale electricity storage technologies, which would help overcome the problems associated with intermittency of renewables such as wind and solar.

All this said, how much can the U.S.-China agreement actually accomplish? To begin, the climate issue is a problem of the global commons, and addressing the concerns requires solutions implemented on a global scale. The decades-long impasse between the U.S. and China over climate action finally appears to be dissolving, and China for the first time has declared that it intends to deal with its carbon emissions.

The fact that China was willing to acknowledge climate action jointly with the U.S. – a strategic rival – is a significant diplomatic achievement that carries symbolic meaning. Indeed, both the U.S. and China have formally recognized that they must deal with climate change, which will enable both governments to credibly seek climate cooperation with other large developing countries, such as India and Indonesia. The U.S. and China now approach the table as credible actors.

Why did China shift to a more cooperative tone in the climate discussion? China is finding it increasingly difficult to defend its coal-led, carbon-intense development. China, which harbors 19% of the world’s population, is now responsible for 29% of global emissions. Not only is it the No. 1 carbon emitter, but China’s emissions per capita have recently overtaken those of the European Union. The Chinese government no longer can claim that individual emissions are modest, compared to those of developed countries.

The U.S. stance has been emboldened by the recent “shale revolution” that has resulted in large increases in domestic natural gas production. Indeed, U.S. CO-2 emissions have already been shrinking due to flattening demand and a switch from coal to natural gas in the power sector. In the last couple of years, U.S. CO-2 emissions have receded back to 1990 levels.

This momentum has not gone unnoticed in Washington, where the Obama administration is seeking to enhance these gains through the Clean Power Plan and other EPA-related actions aimed at mitigating the use of coal in power generation. In fact, Obama has committed the United States to reduce emissions to at least 26% below 2005 levels by 2025.

Interestingly, the recent U.S.-China agreement may put additional pressure on domestic opponents to the EPA’s recent actions targeting coal. Specifically, domestic opposition to CO-2 reductions in the U.S. could risk undermining efforts to cut emissions in China.

Altogether, it may seem like the handshake agreement will set a new path for international climate negotiations. However, there are numerous reasons to be skeptical. First, the Chinese commitment is modest to the point of being nearly indistinguishable from some business-as-usual cases for its carbon emissions, which some agencies already expected to peak sometime around 2030. Therefore, by some interpretations at least, the Chinese may not have to do much to hit their target.

Second, Jinping is already under strong domestic pressure to do something about local pollution from coal. To the extent that he can secure concessions from Washington in the process is a big win for Beijing. Local pollution is a genuine and palpable problem in China, a much bigger policy driver in dealing with the environmental costs of coal combustion than the threat of climate change.

But dealing with local pollutants such as sulfur dioxide, nitrogen oxides, mercury and particulates is a much different matter than dealing with carbon dioxide. Indeed, the installation of scrubbing technologies – which are already widely used in the U.S. – will address these local pollutants but do nothing to abate CO-2. Capturing carbon dioxide from the same flue gas stream is technologically possible, but it is relatively expensive and thus cost-prohibitive.

Also worrying is the fact that the U.S.-China agreement is essentially a MOU, or memorandum of understanding. MOUs are effectively signals that convey a mutual interest in doing something – be it commercial or otherwise – but they typically have no binding elements for either side. As a result, the MOU may not have much certainty of surviving beyond the two current leaders’ terms in office, barring a more formal commitment ratified by both governments.

This raises another important point that is often neglected in international climate policy discussions: what is the enforcement mechanism? Climate agreements are not like trade agreements. The latter carries clear benefits to all parties involved and, as a result, there is little-to-no incentive to cheat or violate the terms.

The former simply do not fall into this category, particularly when an industrial or economic advantage can be broadly gained by cheating, and this does not even address the accuracy and impartiality of measurement. Therefore, the United States and China have the potential to break new ground on these fronts, if they can establish a mutually beneficial agreement with binding commitments.

Overall, the most that can be said is that the agreement is a diplomatic achievement which draws China into the climate action arena and provides an example for other developing countries. Moreover, it can be viewed as an indication that the U.S. is ready to take actionable steps toward addressing CO-2 emissions alongside the world’s other large emitters. And, it accomplishes this at a time when the Lima negotiations provide a platform for greater action. Now, the question becomes, what comes next?
Authors: Kenneth B. Medlock III, Ph.D., is the James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics and senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
Jim Krane, Ph.D., is the Wallace S. Wilson Fellow for Energy Studies at Rice University’s Baker Institute.

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