The green transition: views from East and West

Choosing sustainability as our growth driver

Predicting the trends surrounding energy transition in China and the European Union for the coming decade is an exercise fraught with difficulty. Both China and the EU have emphasised the importance of fighting back against climate change and environmental degradation. Yet, the current COVID-19 crisis raises concerns on how to get the economy back on track, as short-term recovery will be a priority. This creates room to challenge long-term commitments towards a more sustainable world. However, the green transition’s rationale remains just as valid as ever and has significant growth potential.

First, it is important to recognise that meaningful progress has already been made. EU-China cooperation in the fight against climate change is a bright spot in an increasingly complex relationship. As the 2019 Emissions Gap Report of the UN Environment Programme showed, China’s greenhouse gas emissions (“GHG”, mainly CO2) per capita is in the same range as that of the EU. In addition, among the G20 countries, both China and the EU appear to be on a path to reach their Nationally Determined Contributions by 2030 based on their current policies.

But while important advances have been made, there is nonetheless plenty of room for further progress. While the EU and China have identified key priorities as part of their ongoing dialogue, it is time to really push and deliver on the energy transition. Climate change is taking us down a dangerous path and emissions must be drastically reduced.

Mechanisms encouraging the market towards cleaner solutions are key. China and the EU already cooperate on this front and both highlighted the importance of carbon pricing at their 2019 dialogue. The EU experience with carbon pricing has proven these kinds of market solutions can work, and if we can push together for higher carbon prices, companies will naturally look for cleaner alternatives and sustainable energy use.

Dialogue also supports best practices sharing. For instance, China’s efforts to enhance urban mobility has produced rapid transformation. Besides recently ended subsidies to electric vehicle buyers, measures such as forbidding petrol and diesel 2- and 3-wheeled vehicles in megacities have had a considerable impact. Meanwhile, the EU regularly shares its insights into energy efficiency and decentralised energy systems, which have been increasingly prioritised in China’s renewables sector.

One critical area for cooperation between government and industry is cleaning up energy infrastructure. This demands public policies that support cleaner infrastructure, or at least deny any new development that falls below standards. It also involves a facilitating toolbox; China and the EU clearly had this in mind when they explicitly referred to the development of green finance in their latest joint declaration. It is imperative this be sustainable and business-oriented – subsidies cannot last forever.

Cleaning the energy mix remains challenging as it requires all players to cooperate and deliver on the transition. China and the EU agree on the broader goal, but differences remain. For example, the idea of ‘clean coal’ remains common in China whilst Europeans see it as a pure contradiction in terms.

There are similarities between the COVID-19 crisis and the climate crisis. The current situation serves as a brutal reminder of just how devastating a global crisis can be. The pandemic has also underscored what a herculean task it is indeed to build international cooperation, raise public awareness and coordinate the support measures needed to weather and recover from such a storm.

Challenges notwithstanding, it would be a mistake to allow this crisis to lead to a weakening of energy transition commitments. We already see a growing backlash towards the European Green Deal, as critics point to the alleged dangers that it would pose to economic recovery.

Meanwhile, China has moved ahead with its New Infrastructure plan as the country seeks to turn the recovery into a real opportunity to transition. Discussions are ongoing, but the plan already prioritises energy. Furthermore, the commitment to increasing production of renewable power remains. However, whether cutting-edge European players will be permitted to contribute remains to be seen, as the Chinese market has been, and remains, difficult to access.

To unlock the full potential of EU-China energy cooperation, China should be willing to open itself up to a much larger extent to European energy investment, and the EU should learn from China’s leap towards energy transformation. Rather than retreating in reaction to COVID-19, we should embrace the key message expressed at the EU Chamber of Commerce in China: let’s not waste this crisis.

A joint effort towards green finance

China and the European Union share a lot of the prerequisites needed for green finance collaboration. They are both amongst the world’s largest greenhouse gas emitters, both deliver strong rhetoric on climate ambitions, and both are frontrunners in prioritising greening the financial system. While still in its early stages, green finance collaboration is increasingly highlighted as a promising avenue for bilateral cooperation. The 2019 China-EU Summit Joint Statement explicitly says as much, vowing to “harness private capital flows towards a more environmentally sustainable economy”.

Furthermore, as representatives of the global North and South, collaboration can have a strong demonstration and facilitation effect in terms of scaling green finance efforts globally. With common prerequisites and stated intentions to collaborate, it is no surprise that several joint efforts have already taken shape over the last years. Scaling up such collaboration can take place across three key pillars.

First, expanding engagement in each other’s green finance markets is a key priority for both parties. Increasing the level in which companies and financial institutions invest and raise capital in each other’s financial systems requires learning lessons from each other. This means clarifying and harmonising differences, and incentivising organisations to pioneer efforts such as issuing green bonds in the counterpart’s market.

The current attempt to find common language on green finance is a step in the right direction. There are ongoing efforts to define and compare standards of which projects and sectors qualify as green and which don’t. Specifically, the Green Finance Committee in China and the European Investment Bank in the EU have launched two phases of white papers working towards harmonising green bond standards.

However, while the work has mapped out similarities and differences and put forward ideas on how to harmonise, the standards remain substantially different. This remains a key stumbling block for increasing participation in each other’s green bond markets. As the EU finalises its Sustainable Finance Taxonomy and Green Bond Standard, and as China revises its green bonds based on its recently launched Green Industry Catalogue, 2020 is a crucial opportunity to harmonise the forthcoming updated green bond standards. After starting with green bonds, this harmonisation can scale up to cover the entire concept of sustainable finance, which in turn can have spill over effects on the rest of the world.

Second, in addition to engaging in each other’s markets, both the EU and China should launch joint efforts in third countries. Key frameworks for such collaboration are the Belt and Road Initiative on the Chinese side, and the Connecting Europe and Asia Strategy on the European side. In practice, cooperation based on these frameworks takes place within the China-EU Connectivity Platform and the China-EU Co-Investment Fund.

Nonetheless, while these initiatives are well-intentioned, the practical results have so far been limited. Such ambitions should be prioritised further; infrastructure projects such as railways and electricity networks could boost the connectivity between EU, China, and all countries in between.

An ideal method to encourage this would be to start with co-financing between the European Investment Bank and the China Development Bank. This would catalyse private and commercial investment in both the EU and China’s financial systems. This effort can build upon current bottom-up initiatives such as the BRI Green Investment Principles, which provide a set of guidelines to ensure environmental sustainability, and whose founding members consist of primarily EU and Chinese financial institutions.

Third, the EU and China can coordinate their responses to COVID-19 through green stimulus packages. As both countries are using the financial system as a critical tool to support their economies, as opposed to pure fiscal spending, these stimulus packages are a key opportunity to spur green financial systems. So far, this pandemic has not led to the kind of coordination of stimulus packages between G20 countries that followed the 2008 global financial crisis. If the EU and China were to coordinate their responses in a more systematic manner, this would likely incentivise other G20 members to participate.

China and the EU can build upon existing efforts, including the Central Banks and Supervisors Network for Greening the Financial System (NGFS). This platform could function as an avenue to coordinate greening stimulus measures including quantitative easing, greening macroprudential assessment of commercial banks, or reducing risk weighting of green assets. With a joint push from the EU and China, such efforts could ensure that stimulus packages are aligned with the goals of the Paris Agreement. Ultimately, even outside the context of stimulus packages, the NGFS provides an important way to learn from each other’s experience and coordinate efforts. Positive results could create momentum for other countries to follow suit.

Despite the challenging circumstances, 2020 offers a key opportunity for collaboration on green finance in each other’s markets as well as third countries, and in coordinating green stimulus packages. As the COVID-19 crisis threatens to isolate countries from each other, strong cooperation is more important than ever. With all the prerequisites in place, 2020 is a window of opportunity to scale up joint green finance efforts.