E3G

Towards a low carbon future, together

By Bernice Lee and Nick Mabey

Common challenges

The combined power of the EU, the world’s largest single market, and China, its fastest growing economy, is formidable. This means that there are unprecedented opportunities to generate the benefits of scale that will help drive down the costs of climate-friendly goods and services for all.

China and the EU are already economically entwined. The EU has been the largest source of foreign direct investment into China; almost triple the volume from the United States. Most foreign investment in China goes to manufacturing (70%) and utilities. China is also the EU’s largest source for imported cement, plaster and stone as well as iron and steel.

The two powers will also face common challenges in energy and climate security for the next quarter of a century. Domestic energy shortages in China three years ago pushed up demands for imported oil in China propelling international energy prices to twenty-year highs. The International Energy Agency (IEA) estimates that both will be importing 8% of their oil supply by then.

Ensuring security of supply – and stability in resource rich regions – is thus paramount for both. China and the EU also need to manage the impacts of climate change, including water stress, shifting agricultural zones, and extreme weather events. These impacts are likely to affect food, water and human security adversely; with implications far beyond national borders.

With the anticipated closure of power stations due to aging infrastructure and modest demand increases, the EU – and indeed the US – requires a similar level of new generating capacity as China. This means both China and the EU will need to avoid locking investment into carbon intensive projects in the next decade, well before technologies like carbon capture and storage become commercially viable. They also have remarkably similar and ambitious energy policies to improve the security of supply through much greater energy efficiency and use of renewable energy.

Capturing gains

These new challenges call for a new kind of leadership. According to the President of the European Commission, José Manuel Barroso, Europe could “lead the world into a new, or….post-industrial revolution - the development of a low-carbon economy.” In fact, the EU and China can map the pathways towards a low-carbon economy through strengthening bilateral engagement towards energy and climate security. They could start with joint exploration in three areas:

First, rapid diffusion of almost ready to market, climate-friendly technologies is urgently needed in both regions. Embracing technological diffusion as a policy goal does not mean reducing profits for the innovators or investors that have developed the products. Rather, it is about maximising access to climate technologies at affordable prices, for example, through greater pricing flexibilities.

China and the EU could explore the important lessons from the US Clean Air Act that provides for the mandatory licensing of patented technologies which help to meet its requirements.

Second, the race for radical new solutions offers genuine opportunities for China and the EU to embrace new models of technological cooperation. The traditional assumption is that granting temporary monopoly income through patent protection will attract innovation to meet public policy goals. This is often complemented by the use of inducement mechanisms like subsidies, tax credits or direct research.

To meet energy and climate security goals, all the available options should be explored. Governments and companies could, for example, set up a new EU-China Climate Technology Prize Fund to stimulate innovation – along the line of the concept introduced in January in the US Senate by Joseph Lieberman.

Third, encouraging the transition to a low carbon future requires the removal of tariff and non-tariff barriers to trade in low carbon, energy efficient and environmentally friendly goods and services. With the Doha Round negotiations at the World Trade Organisation in permanent stasis, China and the EU could lead in liberalising trade in low carbon and energy efficient products. Other options – such as a climate-friendly bilateral investment arrangements and mutual recognition, or even joint development in low carbon standards – could be important to speed these transformations.