Today, the imperative of meeting global energy and climate security needs is driving a third industrial revolution. With the combined market power of the European Union, the world’s largest single market, and China, the world’s second largest and fastest growing economy, there are unprecedented cooperation opportunities for the two sides to expand new markets for low-carbon goods, services and technologies. Linking these markets will accelerate market growth, help drive down the costs and begin to lay the standards underpinning the low carbon transition. This kind of historic partnership will bring benefits not only to producers and consumers in China and the European Union, but also across the globe.
China and the European Union are already economically entwined. The EU has been the largest source of foreign direct investment (FDI) into China, over two thirds more than the United States in 2008 and 2009. Most FDI in China goes to manufacturing (currently around 50%), real estate (around 20%) and utilities. China is the EU’s largest import source for cement, plaster and stone as well as iron and steel, and an increasingly important investor in energy intensive and other sectors in Europe.
The two powers will continue to face many common challenges in energy security in the next quarter century. According to the International Energy Agency (IEA), both regions will be highly dependent on oil imports by 2030 – China for 75% of its oil demand and the European Union for over 90%. Both will have high dependency on the Middle East and central Asian suppliers. The strength of domestic-demand growth in China is one reason that global energy prices reached record-breaking levels in 2008 and continue to be high by historical standards. Ensuring security of supply – and stability in resource rich regions – is thus paramount for both China and the European Union. Both 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.
It is now time for the two sides to reinforce their low-carbon partnership. This will not be straightforward. Many thorny issues lie in the way – from the public fallout in Copenhagen last December, which dampened trust between the two sides, to the interminable trade squabbles. EU businesses, together with their Atlantic counterparts, are also more openly critical of the investment conditions in China – from its public-procurement policy to complaints of China’s vast industrial subsidies. Yet a revival of industrial policies has occurred in the United States and Europe too. New disputes – say over the restriction on the export of rare earth metals from China and the threat of trade action against countries with weak climate-change policies – are also bringing new challenges.
Despite these roadblocks, China and the European Union are in a unique position to take the lead in mapping the pathways towards a global low-carbon economy. With the collapse of climate legislation in the United States, it is up to the EU and China as the world’s largest markets for low-carbon goods and services to strengthen their role as the locomotive of the low-carbon economy. The European Union and China launched a High Level Economic and Trade Dialogue in 2008. There were expectations of a new Partnership and Cooperation Agreement from 2010. These instruments may not generate real progress unless they are backed by a new political understanding of the strategic common interests of both parties, driven by the growing interdependence of our economies and our climate.
Do the political conditions for a step change in EU-China low-carbon cooperation exist on either side at the moment? China feels it is already doing a great deal and stresses the need for stronger leadership from developed countries, notably the United States. Europe shares China’s disappointment on the slow progress in the US but feels it is already providing its fair share of support for low-carbon initiatives in China. But, while individually useful, these initiatives remain too small and dispersed to have a transformative impact on China’s strategic direction. What is needed is concrete demonstration of low-carbon development on a large scale.
As William Hague, the United Kingdom’s foreign secretary said in a speech in New York at the end of September, a key challenge for Europe is to build an economic partnership with China that reinforces the steps China is taking towards a low-carbon economy. Recently, five provinces and eight cities have been designated formally as China’s “low-carbon pilots”, which together cover 350 million people.
Initiatives of this type have been the mainstay of low-carbon cooperation and research between China and the European Union. It is in the interest of the EU to take an ambitious cooperative approach to helping support these schemes as these pilots provide a critical boost to global confidence in the concept of low-carbon development and help put China on the path to sustainable prosperity. It could also produce huge two-way investment and partnership opportunities and provide an opportunity to forge a new constructive agreement that balances the issues of investment entry, protection of intellectual-property rights (IPR), government procurement, industrial policy, cooperative research, development and demonstration (RD&D) and carbon finance.
More specifically: the European Union and China can work together through:
• Joint development of standards for low-carbon goods and services
• Identifying and developing technology portfolios and business models in low-carbon pilot areas in China to attract European enterprises of various sizes with long-term strategic EU-China cooperation potential. This may involve establishing a joint Low Carbon Technology Development and Diffusion Fund, to promote bilateral investment, especially in SMEs (such as seed funding for research and development).
• Establishment of a joint EU-China Low Carbon Technology IPR Protection Service and Technology Trade Centre, to promote strategic IPR partnerships between government agencies and businesses from both sides.
• Identification of “fast-track” low carbon technology demonstration opportunities (such as low carbon building cooperation) to attract EU technology suppliers and enhance the low carbon pilots’ status as innovative low-carbon leaders.
The opportunities are clear, but so are the political and emotional barriers to agreement. Only by a taking a clear sighted view of the both the risks and rewards of closer cooperation can a more effective agreement be forged. Europe must regain its sense of confidence that open markets and competition will bring mutual benefits; China must take more seriously the concerns of EU investors and resolve some of the contradictions between its industrial and low-carbon policies. Both sides say they prioritise action in this area. By identifying a joint low-carbon vision and forging a new spirit of reciprocity, they can show that they are capable of turning this aspiration into real action.
Bernice Lee is research director - energy, environment and resource governance, at Chatham House - The Royal Institute of International Affairs.
Nick Mabey is a founding director and the chief executive of E3G, an independent not-for-profit organisation working in the public interest to accelerate the global transition to sustainable development.
Homepage image from china.com shows Chinese premier Wen Jiabao and European Commission president José Manuel Barroso.