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COP27: China-US standoff threatens to overshadow Egypt's collaboration goal

Highlights

Climate dialog suspended as tensions rise

China seeks new demand for solar, wind products

Opportunity to discuss CBAM and beyond

  • Author
  • Ivy Yin
  • Editor
  • Jonathan Loades-Carter
  • Commodity
  • Coal Electric Power Energy Transition Metals Petrochemicals
  • Tags
  • Solar energy United States Wind energy
  • Topic
  • COP27 Energy Transition Europe Energy Price Crisis Environment and Sustainability War in Ukraine

China's decision to halt climate talks with the US after House of Representatives Speaker Nancy Pelosi's visit to Taiwan in August poses a serious challenge to the UN's Climate Change Conference in Sharm el-Sheikh Nov. 6-18.

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Relations between the two superpowers have been stretched by US efforts to remove China from the list of developing countries, ban imports of certain Chinese solar products and bolster its own research and development to counter Chinese imports.

"Topics that are subjective to more international collaboration would face greater challenges, such as international aviation and shipping, and green finance provision for developing countries. Such sectors are already lagging in decarbonization pace and taxed with greater uncertainty," said Caroline Zhu, senior analyst with S&P Global Commodity Insights, specialized in energy transition.

"The climate-related communication between China and US remains stagnant, and COP27 is less than a month away. Even if they resume conversation or even negotiation, it may be difficult to see US-China cooperation push global climate actions forward again," said Kevin Mo, Principal at Chinese policy think tank the Innovative Green Development Program (IGDP), said.

Mo noted that the US Senate had called for China to be removed from the list of developing countries, which would fundamentally alter China's positioning in the talks.

"Developing countries are facing debt crises and are deeply affected by disasters caused by extreme weather due to climate change. China could be asked to contribute to the climate finance [if recategorized as a developed nation]," Mo said.

At last year's COP26 climate talks, the US and China produced a joint statement on a variety of collaborations, from carbon capture and storage, renewable energy development, methane emission reductions and cross-border carbon trading.

Further, China committed to develop a national action plan on methane emission reduction before COP27. This plan is yet to be published.

New partners, buyers

In the upcoming talks, meanwhile, China is expected to seek a new partnership with developing countries to drive renewable energy investments, while pushing back on "green barriers," namely trade barriers thrown up in the name of environmental protection.

Proposals for a global clean energy partnership emerged Oct. 11, with China committing to channel investments, foster collaboration and lower costs for renewable energy deployment. COP27 will be an ideal venue to negotiate with potential partner countries.

The partnership targets potential members (and new demand for solar and wind products) across Southeast Asia, the African Union, the Arab League, the Shanghai Cooperation Organization and BRICS (Brazil, Russia, India, China and South Africa).

In part China's proposals are a reaction to moves by the US, Europe, India and Indonesia to build their own solar industries, with Liu Yiyang, spokesman of the China Photovoltaic Industry Association (CPIA), expecting increased trade friction in the foreseeable future.

Earlier this year the US banned products made in China's Xinjiang region unless importers could prove goods were not produced using forced labor. The ban will have a significant impact on Xinjiang's exports of polysilicon, a key ingredient in solar panels.

"Triggered by the Russia-Ukraine conflict, energy security has become the top consideration of every country. Many countries now think solar PV production as one of their lifelines, and do not want to give it to the foreign suppliers," Liu Yiyang said at a recent industrial forum.

Coal realities

Despite the ambitious push toward clean energy, China is expected to remain cautious on coal, which accounts for 65% of the nation's generation mix and is not set to peak until later this decade (see chart).

"We cannot give up on the transition because of temporary difficulties, from COVID-19 to the energy crisis, nor should we lose sight of reality and rush for quick results," China's foreign minister Wang Yi said at the Informal Leaders' Roundtable on Climate Action in New York, Sept 28.

"Considering the present-day global energy crisis, and the resulting delay in cutting coal-fired electricity, every country now faces the conflict between the targets of short-term energy security and long-term net zero transformation," the IGDP's Mo said.

Another concern for China is the move by developed regions to push the developing world to accelerate decarbonization and put a higher price on carbon.

"In the face of global challenges, all parties should reject unilateralism, geopolitical rivalry and green barriers. Developed countries should significantly move up their timeline for carbon neutrality, and create more development space for developing countries, to rebuild trust between North and South with concrete actions," Wang said.

CBAM stumbling block

This was a clear reference to China's criticism of the EU's carbon border adjustment mechanism or CBAM, which the country sees as pushing climate issues into a trade conflict and violating World Trade Organization rules.

"We continue to forecast a medium-high likelihood that CBAM will be implemented by the EU, subject to World Trade Organization agreement," Michael Evans, carbon market analyst with S&P Global, said. He added the discussion between EU and WTO was ongoing.

Excluding trade in electricity, China is the EU's largest trading partner for CBAM-covered products.

Based on the European Parliament's latest proposal, imports into the EU of steel, aluminum, cement, fertilizer, electricity, organic chemicals, plastics, hydrogen and ammonia will be subject to CBAM certification.

Beyond government concerns, Chinese industry is worried that detailed emission disclosures may impact data security, while an expensive carbon levy would certainly affect the cost-competitiveness of their export products.

It remains to be seen whether this COP will provide a channel for China and the EU to discuss the mechanism, which, if implemented as planned, requires importers to start reporting from next year.

"How China views or whether it will participate in the Climate Club is also a noteworthy area for this COP," the IGDP's Mo said.

The club, promoted by German Chancellor Olaf Scholz and embraced by the G7 in June, seeks to accelerate international climate action through partnerships and cooperation.

The club is open to all countries, including China. It perhaps offers a positive rallying point to relieve current geopolitical tensions at both COP27 and the G20 summit in Bali scheduled for Nov. 15-16.

The hope is that there will be progress on a policy framework for a carbon credit registry and on a centralized accounting and reporting platform at the supervisory body of the UNFCCC, Dabkara said.

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