When it comes to the climate arena, the United States and China are enjoying a wave of international goodwill resulting from the role each played in rallying other nations to achieve the iconic Paris climate agreement. In November 2014, China and the United States stood shoulder to shoulder as the first two countries to announce their post-2020 national greenhouse gas emission reduction targets and remained constructive partners on the path to reaching a historic outcome in Paris this past December.
Now, as the United States and China put new policies in place to achieve their national targets and fulfill their domestic and international commitments, both countries confront a common challenge: mobilizing sufficient investment at home to meet domestic energy, climate, and environmental protection goals, while at the same time steering outbound investments toward sustainable projects in other nations that support, rather than undermine, those nations’ climate targets. In this Center for American Progress issue brief, the authors consider the key domestic and international policies that were recently—or are currently being—put in place by China and the United States to achieve their respective climate goals. In addition, we evaluate the implications of these policies—both positive and negative—for green investment domestically and globally. Finally, we provide recommendations for enhanced cooperation in this space.
How green financing enables emission reductions
China and the United States emerged from Paris with clear climate goals but incomplete blueprints for how they would achieve them. To a large extent, this was inevitable, as there are no silver bullets for the kinds of ambitious transformations that the United States and China have committed to achieving. Rather, both countries need to develop a range of new policies across a number of interrelated sectors to either replace or build upon the policy landscape that currently exists. Regardless of the path each country pursues, however, one thing is increasingly clear: Mobilizing finance will be critical to achieving the needed emission reductions.
In this regard, China is guided by three top-tier national climate targets:
- Peak carbon dioxide emissions around 2030, and aim to peak before 2030 if possible
- Increase the nonfossil fuel portion of the nation’s energy mix from 11.2 percent at year-end 2014 to around 20 percent around 2030
- Reduce carbon intensity—which is the amount of carbon emitted per unit of gross domestic product, or GDP—to 60 percent to 65 percent below 2005 levels around 2030.
China already has a number of domestic policy measures in place to move it toward these climate goals. Those existing policy measures include increasingly stringent energy efficiency standards for motor vehicles, industrial equipment, and appliances; a feed-in-tariff scheme that pays renewable energy producers a premium for the power they generate; and fast-track coal control and emission peak programs that impose particularly ambitious coal use and emission reduction targets in regions that, when added together, produced more than 66 percent of China’s GDP in 2014.
In addition, under China’s new five-year plan for 2016 to 2020, its leaders are working to reform the electric regulatory system and impose more stringent coal caps in the nation’s inland and western regions. Power-sector reform will be particularly critical to this effort because China’s state-run power grid has been a bottleneck for clean energy expansion. In September 2015, Chinese President Xi Jinping stated that Beijing plans to move the nation toward a “green dispatch” system that would put renewable energy at the top of the priority list for transmission across the nation’s overloaded power grids. That would be a critical step toward meeting China’s international commitment to nearly double the nonfossil fuel portion of its energy mix by 2020. China’s other major new climate policy is a national emissions trading system that is expected to cover the nation’s power sector as well as six or more major industries starting in 2017.
The effectiveness of these and other new policies remains to be seen, but there is wide recognition that any path forward will require scaled-up investment. When Chinese officials speak of “green finance”—which they do increasingly frequently—they are referring precisely to the public and private investment that China will require to meet its environmental challenges, which include its climate targets. According to the latest estimates, China will need to invest up to $6.7 trillion in low-carbon industries by 2030, or around $300 billion to $445 billion per year over the next 15 years to meet its goals under the Paris Agreement. According to China’s Institute of Finance and Capital Markets, at most, only 10 percent to 15 percent of that investment will come from public funds; the vast majority will need to come from the private sector.
Meanwhile, in the absence of comprehensive energy and climate legislation, the Obama administration is working to implement a series of policies and regulations needed to put the United States on a track to achieve its Paris commitment of 26 percent to 28 percent reduction in greenhouse gas pollution below 2005 levels by 2025. As of 2015, U.S. emissions were 12 percent below 2005 levels, so the trajectory is consistent with the target.
At the federal level, this includes the Clean Power Plan, which will for the first time regulate greenhouse gas emissions from power plants; performance standards for motor vehicles; regulations on methane emissions from new oil and gas sources; and reforms to U.S. policy on coal leasing on public lands, all of which are being complemented by action at the state and local levels.
All told, the United States and China are making significant efforts to reduce domestic emissions. Both countries are demonstrating strong leadership on domestic climate policy, and that has opened up new opportunities for mutually beneficial bilateral and multilateral cooperation. The United States and China are already collaborating through the Climate Change Working Group, which has launched multiple collaborative projects under the U.S.-China Strategic and Economic Dialogue, or S&ED; the U.S.-China Clean Energy Research Center, which brings U.S. and Chinese experts together for joint clean energy technology development; and the Mission Innovation initiative, which aims to raise research and development funding across multiple sectors, including clean energy sectors in the United States and China. U.S. and Chinese officials also are engaged in a Domestic Policy Dialogue, formally established at the 2015 S&ED, which is a bilateral forum for sharing lessons learned from each nation’s climate policy experiences to date. Going forward, there is room to expand these initiatives. Possible areas for enhanced cooperation on domestic policy include reducing non-carbon dioxide greenhouse gas emissions, improving measurement capabilities for land-use and forestry-sector climate impacts and for policies for the power sector, technological innovation, and resilience policy.
Mobilizing green financing to meet domestic investment needs
Despite the array of collaborative exchanges that are already underway, the United States and China are not yet collaborating in any significant manner on one of their most important shared challenges: how to mobilize private-sector investment to achieve their emission reduction goals. Building out a new clean energy economy requires significant investment capital. Going forward, both nations will try out different approaches to catalyze those investments.
Domestic climate policy and investment policy are mutually reinforcing. Without clear, stable, and consistent climate policies, private firms cannot easily finance investments in low-carbon technologies. Understandably, banks are unwilling to make loans to projects where a reasonable return on investment cannot be expected. This is where policies such as Production Tax Credits, or PTCs; feed-in tariffs for renewables; performance standards; carbon taxes; or emissions trading programs come into play by creating economic return for cleaner technology industries. Such policies create markets for low-carbon technologies and thereby spur greater investment in clean energy. Even so, barriers to financing still can exist for newer technologies that are perceived as risky. Here again, smart renewable investment incentives delivered though Investment Tax Credits, or ITCs; Production Tax Credits, or PTCs; or loan guarantees can help firms obtain financing that otherwise would be unavailable through private capital markets.
The United States has fostered support for domestic clean energy investment through policies designed to reduce the cost of capital necessary to finance these projects. These policies include tax breaks in the federal tax code and several loan programs. To help companies seeking to commercialize new clean energy technologies, for instance, the U.S. Department of Energy disburses Title XVII loan guarantees for clean energy projects and Advanced Technology Vehicles Manufacturing, or ATVM, loans for automakers to increase transportation fuel efficiency. Title XVII loan guarantees help fledgling clean energy companies secure investment at more affordable rates than they would on their own because the federal government assumes some of the financial risk associated with new technologies. These types of programs allow companies to attract the investment necessary to develop commercial-scale production and build the clean energy marketplace. The federal programs have helped create or save an estimated 56,000 jobs through 2015 and have prevented 25 million metric tons of carbon dioxide emissions, equivalent to removing 5.28 million cars from the road.
On the other side of project development, the federal government provides an ITC and a PTC to attract investment in new clean energy projects. These two tax credits are central to U.S. clean electricity development and can be claimed by clean electricity generators and investors according to the cost of initial investments or electricity produced over time. From 2000 to 2013, the PTC supported the generation of approximately 417 billion kilowatt hours of clean electricity and recently has been extended with a phasedown through 2020. The ITC, which has been extended with a phasedown through 2022, predominantly supports solar projects and has been credited with helping the solar industry grow by more than 1,600 percent since 2006 and increasing solar employment in the United States by 86 percent since 2011.
These programs and others—including the Advanced Energy Manufacturing Tax Credit, the Energy Efficiency and Conservation Loan Program, and Qualified Energy Conservation Bonds—have all supported more than $442 billion of clean energy investment in the United States since 2007. Since 2008, they have helped wind and solar power more than triple in capacity and will continue to fuel growth. For example, by 2020, the extension of the ITC is expected to support an additional 100 gigawatts of solar power and some $40 billion in investment specifically because of its extended tax credit. In 2015, $56 billion was invested in U.S. clean energy sectors, which amounts to an 8 percent increase from the year before.
China, meanwhile, leads the world in clean energy investment. In 2015, $110.5 billion was invested in China’s clean energy sector, a 17 percent increase over the previous year and twice the U.S. investment total of $56 billion. Much of this investment has been driven by the market formation policies in support of renewable energy discussed above, most notably China’s feed-in tariffs for wind and solar power.
Now Chinese leaders are introducing a new array of financial incentives designed to move beyond clean energy market stimulation measures to address specific market failures in clean energy finance. As mentioned above, even when there are good market demand signals for clean energy, individual technologies and firms still can fall through the cracks, particularly if they are working on breakthrough technologies that do not yet have a strong track record of commercial market success and are therefore seen as risky investments in private capital markets. Just like the United States, China is looking for ways to lower the risks and transaction costs associated with such investments. Beijing is rolling out multiple new initiatives on this front, some of which could provide new opportunities for U.S.-China cooperation.