August 2023: ISSUE 137

Taking Stock of China and the Geopolitics of Energy
Introduction .......................................................................................................................................................................... 1
How China thinks about energy security under the energy transition ........................................................................... 6
Michal Meidan
Critical minerals for the low-carbon energy transition: why China matters ..................................................................10
Philip Andrews-Speed
What counts as de-risking? The geopolitics of energy and China ................................................................................14
Henry Sanderson
Europe’s policy responses to China’s dominance of new energy supply chains ........................................................16
Patrick Schröder
Market dilemmas and strategic balancing acts: Chinese renewable manufacturers in an era of geopoliticalcompetition .........................................................................................................................................................................20
Herbert Crowther
The geopolitics of hydrogen: the emerging role of China ..............................................................................................23
Rainer Quitzow and Xiaohan Gong
Financing net-zero transition for Dd countries: China’s dilemma in a fragmenting world ..........................................28
Ji Chen and Shurui Jiang
The impacts of the EU Carbon Border Adjustment Mechanism on China’s supply chain and China’s response .....33
Yan Qin
The normalization of Chinese infrastructure lending in Africa .......................................................................................38
Dan Marks
Navigating geopolitical complexity through collective action on clean energy transition in South-East Asia
Muyi Yang, Xunpeng Shi, and Weihua Wang
US–China relations and the global energy transition ......................................................................................................44
Jane Nakano
The evolving energy relations between China and the Gulf Cooperation Council .......................................................47
Dongmei Chen
Marriage of inconvenience—how the war in Ukraine is tying Russia to the Chinese market ......................................52
Sergey Vakulenko
China gas: is the gas dream over? ...................................................................................................................................55
Neil Beveridge
Complexities in the energy sector relationship between India and China in 2023 .......................................................56
Mohua Mukherjee
CONTRIBUTORS TO THIS ISSUE ......................................................................................................................................57

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INTRODUCTION
China has a huge and growing influence on the global politics and economics of energy. The topic of China’s role in the newgeopolitics of energy is hardly new, but the supply chain crisis following Covid and then the Russian invasion of Ukraine in 2022
have combined to further elevate the topic. Decarbonization and the risk of de-globalization are increasingly central to energy
policies and are framing the geopolitics of energy. China’s energy security concerns are also closely linked to these trends:
China is a leading importer of oil and gas, so its energy supplies are exposed to price volatility, which is exacerbated by supply
shocks due to instability in producer countries, transportation bottlenecks, and sanctions. But as China has established itself as
the world’s leading manufacturer of renewable energy sources, and as the energy transition gathers momentum, China’s energy
security opportunities and challenges are evolving.
From the point of view of the advanced economies of Western Europe and North America, China has long been viewed both as
an economic partner and as an industrial competitor. Since the Paris Climate Agreement, China has been viewed as a central
actor in climate diplomacy as well as a leader in clean energy, but China’s dominance of clean energy supply chains has raised
concerns about whether Western countries can catch up. For many years, the example of China’s clean energy scale-up acted
as a positive spur to more policy action, but since 2020 these efforts have taken on a more urgent and confrontational aspect asgovernments explicitly target reducing China’s dominance in specific technologies (batteries, solar) and critical materials.
In other world regions, attitudes towards the role of China in energy geopolitics are vastly different and are informed, in part, by
the deepening rift between China and the US. For Russia, China represents an important energy customer and strategic
partner, even though Russia must balance its growing reliance on China with its reluctance to allow China to become too
dominant within its economy. For the Middle East, especially the countries of the Gulf Cooperation Council, China’s growing
diplomatic clout in the region and rising demand for fossil fuel imports, combined with partnerships on investment in clean
energy and carbon capture, point to closer ties. But these must be balanced against relations with the US. For India, despite
perceptions of deep-rooted competition and mistrust between the two, China represents a partner in climate diplomacy even as
it remains a competitor for imports of fossil fuels and clean energy manufacturing. For South-East Asia, China is a key investor
and partner in energy infrastructure overall, and clean energy manufacturing, even as the region maintains strong ties to the US.
The rapidly changing role of China in world energy politics makes it important and timely to review the topic. In this issue of the
Oxford Energy Forum, we present insights and views from 18 experts from around the world, showcasing the broad range ofviews on China’s geopolitical position and trajectory. The issue discusses the role of China and perceptions of it in thegeopolitics of hydrogen, renewables, power grids, minerals, finance, and carbon, combined with regional perspectives from
Russia, the US, the Middle East, Africa, South-East Asia, and India.
Overview and sectoral perspectives
The OEF begins with an essay from Michal Meidan, who unpacks some of the Chinese debates around the changes in energy
politics and economics. In the Chinese analyses, the tone on the geopolitics of fossil fuels and new energy is shifting. The
traditional analysis of the geopolitics of oil and gas—which was historically framed by a discussion of the dynamics between
producers, consumers, and transit countries—is increasingly shaped by a ‘de-globalization’ lens and a view of different global
groupings, pitting the US and China against each other. The debates around how to mitigate the vulnerabilities associated withthe reliance on oil and gas continue, but all now include a recognition that ultimately, China will be less vulnerable aselectrification accelerates. This, in turn, also brings industrial opportunities: building large renewable bases and ultra-highvoltage transmission lines to connect them as well as storage infrastructure and a robust energy internet. These priorities
resonate with the central government’s penchant for investing in industries of the future while moving very slowly on market
reforms. Electrification, however, raises new concerns of cybersecurity and climate risks, but also leads to a new race, once
again between developed and developing economies, over access to critical materials, technology, financing, and know-how.
These analyses also point to a greater degree of involvement in global governance, as China champions the developing world
and can lead in themes such as the energy-food nexus, where global leadership is currently perceived as lacking. Ultimately,
geopolitical struggles and challenges will not go away as the energy transition evolves, but their nature is changing withcompetition between the West and the Rest clearly at the core.
From a Western perspective, diversification of supply chains is clearly one of the main challenges facing decarbonization,
alongside decoupling from China or de-risking trade with that country. As renewable energy scales up globally, the sector has
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become a new field of geopolitical competition and tension. This issue features three articles focused on critical materials andnew energy supply chains. First, Philip Andrews-Speed traces the history of critical minerals policies, noting that China is notrich in materials or minerals, but its main advantage is in processing. Its pre-eminence in rare earth mining and processing wasachieved through a combination of long-term industrial policy, state investment, export controls, low labour costs, and decades
of weak environmental and safety regulation and illegal mining. Andrews-Speed argues that Western efforts to diversify criticalmaterials supplies will only modestly reduce dependence on China through 2030, given the time needed to commission newmines and processing plants, but a sustained effort could eventually diminish China’s dominance in these fields after 2030.
Henry Sanderson’s piece points out the many unresolved policy questions about efforts to de-risk supply chains. For example,
to what extent do advanced economies accept Chinese investment in local supply chains or shifting production to third
countries? Despite resistance from a number of developing economies, China will seek to retain or increase its dominance in
key fields, boost investment overseas, and use investment as an element of climate diplomacy—and in diplomacy overall.
Further, China’s long history of policies that lead to overcapacity typically result in boom-bust cycles that ultimately keep prices
low and drive out competition. Hence, if China is destined to remain a low-cost manufacturer in many fields, what is the cost andpolitical sustainability of efforts to diversify away from China? Ultimately, Sanderson expects the West to remain in a weak
position in manufacturing supply chains, and calls for better strategy to balance the need to keep down costs long-term whilepursuing near-term efforts at de-risking.
Also addressing the topic of critical materials, Patrick Schröder offers an assessment of EU efforts to diversify from Chinese
supply chains in the energy field. Like Sanderson and Andrews-Speed, he notes that policy efforts along these lines, including
recycling, can enhance supply chain resilience but will take sustained effort over many years. While he notes the costs of derisking and diversification, he sees these as manageable. At the same time, the EU's trade and investment strategy also aims tosecure access to critical materials while ensuring high environmental, social, and governance standards in mining andtransparent trade practices. This interlocking set of policy responses has been described as a novel ‘security-sustainability
nexus’ where policymakers and businesses are equating resource security and sustainability policies. Whether this approach
will indeed generate the win-win partnership benefits for third countries will depend on high degrees of transparency in mining
operations and bringing high-risk investments for higher-value economic activities to third countries. In the end, de-risking will
require consideration of the needs of both producer and consumer countries, while closely monitoring China's industrial policies
and continuing to engage with China bilaterally and in international settings.
While there is significant discussion about the effectiveness and cost implications of Western efforts to de-risk from China, tradebarriers and supply chain diversification are also challenges for China’s renewable energy manufacturers. Herbert Crowthernotes that while China’s dominance in renewable energy faces some uncertainty, China is set to retain its ‘unavoidable
presence’ in global supply chains. But efforts in some regions to diversify sources of supply present Chinese renewable energy
manufacturers with a dilemma of how to respond: focus on the domestic market and take advantage of local government
support, or set up international manufacturing centres that satisfy requirements for market access to places like the US and EU.
Ultimately, Crowther argues, China’s renewables manufacturers will pursue a combination of both. With active local support forclean energy supply chain build-out, Chinese exports will continue to face trade barriers, suggesting that they will focus on thedomestic market and on developing economies. At the same time, Chinese firms will continue to set up production overseas,even in the US; but in developed economies they will grapple with political risk and higher costs as well as the potential forexport bans by the Chinese government. When expanding abroad, they could also face the risk of some technology transfer, but
this will be a trade-off for expanding China’s manufacturing footprint and enhancing its climate diplomacy, especially in Asia andthe Middle East.
In a somewhat similar vein, even though China’s hydrogen strategy is still very domestic-focused, it has growing international
dimensions and some potential overlaps with the challenges faced by renewables manufacturers. Rainer Quitzow and
Xiaohan Gong note that even though China is the world’s largest hydrogen consumer, it has been a latecomer to greenhydrogen. Its targets are not very ambitious compared to those of the EU, with the exception of fuel cell vehicles. However,provincial ambition on green hydrogen is larger than central government policy would imply, emphasizing how national targets
are less important than the policy signal that pushes local governments and state-owned companies to experiment with greenhydrogen. Further, hydrogen is a field where foreign investment is encouraged, given China’s recognition that it needs to catch
up with other countries in fields such as electrolysis and hydrogen transportation and storage. This implies active cooperation
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with other countries on hydrogen technology and business models, but it also raises concerns abroad about technology transfer
and industrial competition with Europe and others in the long term. In terms of global energy geopolitics, China is actively
engaged on hydrogen with countries in Latin America, Africa, and South Asia, opening up a new playing field in energy
geopolitics.
Even as Chinese investors look to South-East Asia, their efforts are increasingly complicated by international restrictions.
Echoing Schröder’s calls for increased coordination rather than fragmentation and competition, Ji Chen and Shurui Jiang
discuss the role of finance as a factor setting the pace of the energy transition, especially in the developing world. They foresee
substantial risk that the fragmentation of clean energy markets resulting from industrial policy and trade disputes will result inboth higher technology costs and more difficulty in financing clean energy projects. They note that financing costs for renewableenergy projects are already high in many parts of the developing world. But China is the sixth-largest investor in developing
countries’ clean energy sectors, and its role is set to grow, especially as financing for coal-fired power projects is discouraged.
They see China’s role in financing the energy transition in the developing world as a positive factor, opening up the possibility ofa more rapid energy transition in these regions, but equally note that rising protectionism in supply chains has led to increased
investment and trade barriers, which have imposed greater transaction costs for China’s financing to developing countries too.
Turning to trade, on carbon markets, Yan Qin discusses the overall near-term and long-term impact of the Carbon Border
Adjustment Mechanism (CBAM). While she notes that for a decade the CBAM will mostly affect aluminium and steel exports
from China, and these sectors will undergo a transitional period when only greenhouse gas emissions reporting is required andthe impact is estimated to be limited, the CBAM is nevertheless an important external factor pushing Chinese energy-intensive
enterprises to speed up decarbonization and the deployment of more green energy. Meanwhile, at the international level, theCBAM is likely to continue to act as a source of tension between China and the EU, with China arguing that it represents a
unilateral and discriminatory trade practice that goes against the principles of common but differentiated responsibilities andclimate cooperation.
When thinking of changes in China’s appetite for overseas infrastructure investments, Dan Marks argues that these are notsolely determined by geopolitics. Marks writes that while China’s investments in Africa have diminished for a variety of reasons,this results from an inevitable maturation of the Chinese investment approach to the continent rather than from a strategic shift.
Chinese investment since the early 2000s was more opportunistic than strategic—despite perceptions to the contrary—resulting
in poor returns and high risk due to lack of experience. Funding patterns are shifting towards more commercially oriented
institutions rather than export-led or state-led deals. For some African governments, Marks writes, ‘the shine has also worn off
Chinese money’, given past experiences with costly buried loan clauses and political backlash over Chinese labour practices.
Crucially, however, Chinese financing remains an important alternative to Western capital or development finance, andinvestment funding overall is unavailable at the scale required for the clean energy transition in Africa. Geopolitically, therefore,
China’s changing role in the Africa energy picture is less of a political threat and more of an opportunity for beneficial
development.
In a similar vein, Muyi Yang, Xunpeng Shi, and Weihua Wang view South-East Asia more as a field of cooperation than oftension. According to them, the energy transition could ‘serve as a bridge for fostering cooperation between major powers or, atthe very least, establishing channels of communication between them, a modest but essential step towards managing
geopolitical divides’. Given that South-East Asia relies on fossil fuels for 80 per cent of its energy needs, and needs financing tomeet its energy demand growth and expand clean energy, the region needs help from all sides. Both China and the West can
provide needed investment, advice on regulatory matters, and capacity building. For China, South-East Asia offers an attractive
base for manufacturing, helping boost the case for cooperation. As for traditional Western trading partners in the US, Europe,and Australia, the region can benefit from private sector investment, capacity building, and development finance.
Underpinning many of the geopolitical shifts and challenges discussed in this issue are the deteriorating relations between the
US and China. Jane Nakano turns to the topic of US-China relations, where rising political and diplomatic tensions are playingout across the fields of trade and technology. While China leads by far in manufacturing of clean energy and is dominant incritical materials, China is also competing strongly in technology and innovation, threatening what had been a major source ofstrength for the US economy. Still, Nakano believes that US-China energy relations are not a zero-sum game. Carbon captureand storage remains an area of collaboration, including on CCUS (carbon capture, utilization, and storage) projects inside China
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and in third countries. Even in the electric vehicle sector, where the US has erected new trade barriers and initiated subsidies ina bid to better compete with China, the two countries are also seeing business deals and increased integration, in both
directions. However, dependence on China for technology is widely perceived as problematic in the US, with a bipartisanconsensus that the US must react to China’s industrial policies and state capitalism. This has led to a climate of distrust that
could lead to costly policy choices, according to Nakano.
The deterioration in US-China ties creates uncertainties for China’s future economic growth and energy demand, which in turnimpacts the backbone of China’s relations with the Gulf Cooperation Council (GCC). Dongmei Chen discusses the evolution ofrelations as the energy transition unfolds. The growing importance of China-GCC relations is largely attributable to their aligned
economic agendas: their needs for investment and trade, boosting oil and gas flows, and cooperating on low-carbon
technologies, especially CCUS. China seeks to secure oil and gas supplies, build out infrastructure connectivity, and enhancecooperation on nuclear energy, new energy, and space satellite technology. According to Chen, this fits in with the Gulf region’s
desire to achieve economic diversification and sustainability, building on their geographical location connecting Europe, Asia,
and Africa for global trade, finance, logistics, and tourism. While viewing the growing ties in a positive light, Chen does notesome important outstanding questions, such as how China and the GCC will balance relations with other strategic energy
partners (respectively, Russia and the US), how the GCC countries can coordinate relations with China as a bloc and at theindividual state level, and to what extent the GCC countries can improve regional coordination on policy and infrastructure inorder to best scale up new technologies.
Shifting to Russia, Sergey Vakulenko delves into the long history of Russia-China energy trade and cooperation, noting thatwhile China is a natural partner for Russia, there are also deep and long-lasting tensions. Russia has few viable large
alternatives to the China market, and is dependent on imports from China—exacerbating historic tensions about giving too
much control of Russian resources or the economy to China. For China’s part, although Asia has gained new access to low-costenergy supplies from Russia, China has always been historically wary of becoming too reliant on Russian energy supplies. The
sudden availability of large volumes of low-cost energy resources creates a conundrum for Chinese policymakers. The
traditional approach of portfolio diversification would dictate limiting the Russian share of the Chinese supply, while cost reasons
might nudge towards an increase. At the same time, the use of the Chinese currency to pay for Russian oil and gas is also anadvantage for China. Vakulenko argues that the volume of trade between China and Russia is such that it might create a new
regional standard and a working currency different from the currently predominant US dollar. Ultimately, Vakulenko says the
Ukraine war has created new geopolitical dynamics, ‘tipping the balance resolutely in China’s favour’ and creating an importantnew factor in global energy politics comparable to the longstanding US-Saudi Arabia connection in the twentieth century.
Related to this point, the appeal of Russian gas in China is still an open question. The deterioration in US-China relations andvolatility in global markets following the Russian invasion of Ukraine have led China to focus on energy security and, as it
relates to gas, on domestic consumption. But despite this, China will remain heavily exposed to global markets. Neil Beveridge
notes that despite the weakness in China’s gas consumption in 2022, the country’s appetite for gas is likely to remain strong, as
evidenced by ongoing efforts to sign long-term supply agreements for oil and gas. China’s own targets imply nearly 50 per cent
growth in gas demand by 2030 from 2022 levels. This means import dependence is set to rise, though domestic production is
likely to increase steadily too. For imports, Beveridge estimates that incremental imports are likely to be split about equally
between LNG and pipeline gas. The Power of Siberia 2 pipeline is the largest single project that could bring on additional
supplies, but the Ukraine war and sensitivities about diplomatic considerations are likely to prevent any big announcements on
Power of Siberia in the near term, while the urgency to secure it is somewhat diminished by progress on Central Asia Line D.
On LNG, China will remain the largest incremental buyer of new supplies, with Qatar and the Mideast benefitting the most, but
Australia and the US also represent potential sources of additional supply, despite ongoing trade and diplomatic tensions.
Finally, turning to India, Mohua Mukherjee views the present phase of energy geopolitics as creating both converging anddiverging interests. India’s overall energy relationship with China can be seen as including both collaboration and competition.
Areas of converging interests include their similar positions on climate change policy and acceptance of the role of fossil fuels inbridging the energy transition. Areas of divergence and competition include obtaining imports of low-cost fossil fuels, often fromsome of the same supplier countries, as well as on industrial policy towards clean energy, where India has the potential to
become a major manufacturer. On a positive note, Mukherjee notes that the two countries are actively engaged on a variety ofissues in various multilateral institutions and associations. And, as for competition on manufacturing, India has shifted from a
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policy of erecting trade barriers and tariffs towards greater support for domestic manufacturing, which could be seen as lessthreatening in the long term even if the aim is similar.
Perspective and outlook
Overall, the articles in this issue of the OEF capture a snapshot of energy geopolitics at a time of rapid transition. They highlightthe contradictions between government policies that are pointing towards a greater fragmentation of trade and markets looking
to adapt both trade and investment flows accordingly. Similarly, rising concerns over supply chain security are creating newopportunities but risk raising costs and slowing the energy transition. And in many instances, China’s relations with its largest
energy trading partners are affected by a mix of convergent and divergent interests. For each sector, and for each region, there
exists a different picture of China’s role in the world and diverse views of China’s position. Meanwhile, the view from China is
more complex than often recognized in Western debates. The deterioration in US-China ties and rising protectionism in green
trade are reshaping the global energy landscape, making this a time of increased uncertainty, risk, and potentially opportunity.

HOW CHINA THINKS ABOUT ENERGY SECURITY UNDER THE ENERGY TRANSITION
Michal Meidan
Following the Russian invasion of Ukraine, concerns about energy security—both the availability and affordability of supplies—
have become central to policymaking in Europe, leading to debates about the urgency of the energy transition and the extent towhich the energy trilemma is being reframed. In reality, however, the three elements of the trilemma—availability, affordability,
and sustainability—remain closely linked as energy security policies and the energy transition are feeding into industrial policies,
as governments look to accelerate their energy transitions and support the development of industries of the future in theirnational jurisdictions.
Meanwhile, the Covid-19 pandemic and ensuing concerns in the West about market concentration for a large number of goods
in China have increased the frequency of discussions about ‘decoupling’ between China and the US (reframed more recently as‘de-risking’). Decarbonization and de-globalization are increasingly central to energy policies and framing the geopolitics ofenergy, while the Russian invasion of Ukraine has further highlighted energy security, geopolitical risk, and market volatility.
China’s energy security concerns are also closely linked to these trends: China is a leading importer of oil and gas, so its energy
supplies are exposed to price volatility, which is exacerbated by supply shocks due to instability in producer countries,
transportation bottlenecks, and sanctions. But as China has established itself as the world’s leading manufacturer of renewableenergy sources, and as the energy transition gathers momentum, China’s energy security opportunities and challenges are
evolving. Electrification is set to reduce China’s oil and gas demand, but questions around power sector flexibility and resilience
as well as access to critical materials are becoming more dominant. In addition, viewed from China, access to capital andtechnology are emerging as the key battlegrounds for the industries of the future.
This article lays out some of the key themes that emerge from the academic literature and specialized press in China about
energy security and the geopolitics of energy. While it is by no means an exhaustive account of debates in China, it seeks tohighlight a number of emerging trends.
A diminishing threat from oil and gas
Debates about energy security in China have long revolved around oil and gas. Since China became a net oil importer in the
1990s, the government has sought a variety of commercial, diplomatic, and strategic tools to mitigate the vulnerabilities
associated with it.1 Contemporary analyses still highlight the need to manage this exposure by increasing output of domestic oil
and gas—which is currently the main focus of government policy documents—while also arguing that the electrification of end
uses will reduce China’s reliance on oil and gas.2

1 Meidan, M. (June 2023), The Outlook for China’s Fossil Fuel Consumption under the Energy Transition and Its Geopolitical Implications, OIESPaper CE8, https://www.oxfordenergy.org/publications/the-outlook-for-chinas-fossil-fuel-consumption-under-the-energy-transition-and-itsgeopolitical-implications/.
2 Zhongquan, M. (16 July 2021), ‘World energy order and geopolitical dynamics’, https://brgg.fudan.edu.cn/articleinfo_3708.html; Hongyuan, Y.
(2019), ‘Challenges and responses to China’s energy security in the new era’, West Asia and Africa, 4.

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There are different views about the best approach for China in order to achieve security of oil and gas supplies. Some argue fora diversified, stable, and reasonably priced energy supply system domestically, 3 others suggest that China should play a moreproactive role in global governance to ensure the stability of producer countries, while still others argue for a greater role for
China in financial flows and transactions.4 None of these arguments are new, and all have been pursued with different levels ofcentral government commitment and success in the past. For example, the creation of a diversified, stable system that focuses
on storage and flexibility is mentioned in policy documents (including the 14th Five Year Plan); policy implementation to date
has tended to focus more on ensuring supplies through production and stockpiling rather than through price reform andintroducing more market mechanisms.
The foreign policy tone of the discussion is notable as it argues for a more prominent role in global governance, and likely
dovetails with developments in China’s broader foreign policy stance. China’s exposure to the Middle East and Central Asia foroil and gas respectively is discussed, as are some of the concerning developments in these regions—including the politicalturmoil created by lower incomes following the Covid-19 pandemic and the Russian invasion of Ukraine, foreign interference (byboth the US and Russia), and the political uncertainty generated by the energy transition. Analyses note that geopoliticaldevelopments over the past few years (implicitly the decoupling risk) have also changed the nature of the geopolitics of fossil
fuels. Traditionally, these have been analysed through the dynamics between three main groupings: oil and gas producers,
consumers, and transit countries.
Another divide is now discussed by Chinese authors: the rivalry between the West and China, or even between the West andthe rest of the world. Following the Russian invasion of Ukraine, the argument goes, Western countries are forming a club
based on their civilizational identity, bringing in countries with shared values and excluding countries such as China, Russia,
Venezuela, Iran, Cambodia, Hungary, Cuba, North Korea, and other countries that ‘dare to confront their bullying andcoercion’.5 This notion of clubs—that are formed based on varying attributes—is repeated in other analyses of energy rivalry.
This is interesting because Chinese analysts discuss energy security for both fossil fuels and new materials through a
decoupling lens that pits the US and China squarely against each other in the competition for access to fossil fuels and for theleadership of the energy transition.
While the US is clearly on the other side of any geopolitical divide, there is also some caution with regards to Russia. Not only is
its interference in the Middle East noted as a complicating factor, but in the oil and gas space, authors suggest gas flows from
Russia should be limited to around one-third of China’s total imports while flows from Qatar and even Turkmenistan and Iranshould increase. The flurry of LNG supply deals between China and Qatar seems to be reinforcing the need for lessgeopolitically contentious flows just as progress on the Line D pipeline from Central Asia also emphasizes these priorities. So,even though Russian supplies are expected to play a prominent role in China’s imports, there is also recognition that it should
be capped.
Chinese analysts also suggest that China should limit its imports from the US and allies to around 5 per cent of total imports andthat even a reliance on Iraq for 11 per cent of China’s oil imports is too high. They argue that imports from the Middle East
should not rise and should even decrease slightly in favour of greater flows from Africa, South America, and East Asia—and thatno single oil producer should gain more than 20 per cent market share in China,6 a limit that seems to be adhered to at present
but could become more challenging to maintain going forward. The extent to which these geopolitical ambitions are rooted incommercial and operational realities remains to be seen.
Finally, beyond relations with producer countries and regions, the discourse on China’s role in global governance seems to be
increasingly backed by action. There have long been calls for China to play a more significant role in global energy governance;
Daojiong, Z. (March 2023), ‘How to improve the national energy resilience capacity’, National School of Development, Peking University,
https://cnisscad.pku.edu.cn/gd/529129.htm.
4 Yujie, G. (20 October 2022), ‘Accelerate the construction of energy internet to help improve China's energy security and resilience’,
http://www.coalchina.org.cn/index.php?m=content&c=index&a=show&catid=82&id=143416; Jin, X. (10 March 2022), ‘Ten revelations from theRussia-Ukraine conflict concerning China’s energy security, https://interpret.csis.org/translations/ten-revelations-from-the-russia-ukraine-conflictconcerning-chinas-energy-security/; ‘China’s energy security in light of three factors’ (9 April 2023), Shanghai Petroleum and Gas Exchange,
https://finance.sina.com.cn/money/future/roll/2023-04-09/doc-imypumwi4716190.shtml.
5 Li, X. (March 2023), ‘The civilisational rivalry underpinning energy politics in the context of the Russia-Ukraine conflict: features andrecommendations’, The Paper, https://www.thepaper.cn/newsDetail_forward_22288283.
6 Zhongquan, M., ‘World energy order and geopolitical dynamics’.
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and even though foreign policy statements are vague on what this could look like, the Chinese leadership seems more intent on
projecting itself as an active mediator in global political hotspots (such as the peace deal between Iran and Saudi Arabia, andrecent talks with Israel and the Palestinian Authority, and even between Russia and Ukraine). The stability of oil- and gasproducing countries and regions may not be the sole driver of these efforts (and their effectiveness is still a very open question),but the rhetoric seems to be backed by more activity than at any time in the past. The view is also that China can promote
global governance on the food/energy/climate nexus, where leadership under the United Nations is currently lacking. This is
novel in that it encompasses a broader view of the energy/food security nexus (which is also reflected in domestic policy
documents), but also in that it builds upon the new geopolitical divisions identified by Chinese scholars.
Electrification and coal—two critical factors
Notwithstanding these debates about how to manage current exposures, China’s energy insecurity has in the past stemmed
from domestic policies rather than from international supply cut-offs. In this sense, electrification remains key to enhancing
China’s energy security and increasing its self-sufficiency, but if ill-managed, could be a vulnerability. Given the rapid
deployment of renewables in China, there is considerable discussion about a New Power System for the country. The concept
was rolled out in March 2021 as a key part of China’s zero-carbon future, but any detailed and concrete consensus on what thismeans has not been published. Broadly speaking, though, the New Power System recognizes the need for continued growth inelectricity consumption, with new energy at its core. Even though renewable power sources are being added rapidly, many areconcentrated far from load centres, and since power market reforms are still in progress, coal will still remain critical.
At the same time, the New Power System will need to ensure the extensive and balanced development of green power, support
the development of large-scale energy storage as a source of flexibility, and use digital technology and artificial intelligence toenable a smart electric power grid. Demand is also discussed as a participant in system balancing but seems to receive lessattention than other, supply-side, priorities.
Part of the challenge lies in the government’s own desire to promote large energy bases, discussed in the 14th Five Year Plan
too. These bases include large wind and solar parks in northern China and hydropower bases in the south as well as offshore
wind along the east coast, connected through long-distance transmission lines with—in most cases—‘supporting’ coal power
plants. Underpinning this system is innovation in energy storage and a critical balancing mechanism: the energy internet.7
Storage is discussed in passing in analyses focused on energy security8—although government policies are focusing heavily on
storage, including hydrogen—while carbon capture, utilization, and storage is highlighted in analyses more than in policy
support.
Critically, the energy internet is discussed as a means to resolve power outages and deal with the intermittency of arenewables-based energy system, but also as a source of economic growth, job creation, and industrial development.
Unsurprisingly perhaps, authors from the State Grid tend to promote these notions and emphasize the energy internet as muchas, or even more than, power price reforms as a means of effectively balancing supply and demand. This isn’t to minimize thedebate about power price reform in China, only to note that in the context of energy security and the geopolitics of energy, theindustrial policy lens is significant.
Despite various points of debate, there is clear consensus on the importance of coal, which is mentioned without fail as the
backbone of the Chinese energy system and the key to grid reliability and flexibility. This is reflected in policy documents,
ranging from the 14th Five Year Plan to government work reports that have over the past few years gradually increased theimportance of coal, as seen by the approval of large coal-fired power plants and increases in coal mining in China.
A new geopolitical landscapeElectrification enhances self-sufficiency, and with China’s growing confidence in its ability to manufacture and deploy
renewables, it is increasingly seen as a means to energy security. But electrification also poses a number of challenges and7 Gao Yujie, “Where will China’s energy security and resilience come from?” (我国能源安全韧性从哪里来?), 20 October 2022,

http://www.coalchina.org.cn/index.php?m=content&c=index&a=show&catid=82&id=143416
8 Jianliang, W. (November 2022), ‘China’s energy security under the changing situation: challenges and breakthroughs’, National GovernanceWeekly, http://www.rmlt.com.cn/2022/1108/659671.shtml.

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risks. First, renewables are vulnerable to climate risks,9 and cyber-attacks are a threat to electricity networks. The analyses
reviewed raise the issue of intentional power cuts, as seen in Ukraine in 2015, 10 stating that power-exporting countries could, inthe future, cut off flows on transnational power grids.
But the most frequently discussed themes of the new geopolitical landscape are access to critical materials, financing, andtechnology. The energy transition does not reduce the importance of geopolitics, it merely changes the actors and the
dynamics. As rivalry around access to fossil fuels might ease, it will intensify around access to critical materials and key metals(such as copper and nickel).
While authors note concerns in the West about China’s dominance in the processing of rare earths and batteries, there is no
mention of how China should respond to these concerns. This is due to a combination of factors. First, these geopoliticalconcerns have only recently risen to the fore in a concerted and systematic way in Western policymaking and resonate less in
China, given that China is already well established in both the mining of critical materials and their processing. Second andperhaps more importantly, China’s National Plan for Mineral Resources dates back to 2016 and discusses a range of mineral
resources, classifying some as ‘strategic’ and others as ‘advantageous’, ‘protected’, or ‘strategic emerging industry’ minerals,
but China does not have a critical minerals list.
For the different categories of minerals, the Plan identifies where China needs to encourage exploration of minerals in short
supply, regulate the amount of minerals that China can leverage to pursue strategic objectives, cut production of minerals withexcess capacity, and ensure supply of minerals in strategic emerging industries. The Plan identifies three broad categories:energy minerals—oil, gas, shale gas, coal, coal bed methane, and uranium;

ferrous minerals—iron, chromium, copper, aluminium, gold, nickel, tungsten, tin, molybdenum, antimony, cobalt,
lithium, rare earths, and zirconium;

non-ferrous minerals—phosphorus, potash, crystalline graphite, and fluorite.11

This list includes metals and minerals that are excluded from developed economies’ lists of critical materials but also excludes anumber of materials often cited by developed economies (such as vanadium, tellurium, niobium, and others that are used inhydrogen, solar photovoltaic, or wind turbines). So while advanced manufacturing economies with a high dependency on
imported raw materials include supply risk as a key parameter, Chinese assessments of ‘strategic minerals’ use a broader,more flexible set of criteria in which some ‘strategic minerals’ are subject to supply risk and others are not.12 On the contrary, theavailability of minerals in China give the country leverage. Beyond the strategic emerging industries, though, there are to dateno policies aimed specifically at energy-transition-related minerals. To be sure, China’s industrial policies—aimed at
encouraging the creation of supply chains in China as well as (in some cases) for overseas investments in mining—are now
effectively a template used by the West.
Access to critical materials is discussed as a future flashpoint, but analyses note that power system nodes, hubs, and standards
are set to replace pipelines and shipping routes for oil and gas as key areas of competition. Equally, technology and financing
will be key, but incumbents (mainly developed economies) seek to slow technology transfers and financial flows to the global
South in a bid to maintain their dominance in energy trade. The world, therefore, is fragmenting in many different ways andalong different fault lines, impacting developing countries’ ability to engage in the energy transition and enhance their security.
Conclusion
The analyses cited by no means provide a comprehensive overview of the energy security and geopolitics-of-energy debate in
China. But they point to a number of new interesting trends. First, the traditional analysis of the geopolitics of oil and gas is
9 Gao Yujie, “Where will China’s energy security and resilience come from?” (我国能源安全韧性从哪里来?), 20 October 2022,

http://www.coalchina.org.cn/index.php?m=content&c=index&a=show&catid=82&id=143416 “China’s energy security in light of three factors”, (三因素叠加下的中国能源安全), Shanghai Petroleum and Gas Exchange, 9 April 2023, https://finance.sina.com.cn/money/future/roll/2023-0409/doc-imypumwi4716190.shtml
10 Shoujun, C., et al. (2020), ‘Major technological changes and transformations in the geopolitics of energy’, Journal of Natural Resources.
11 China Ministry of Natural Resources (November 2016), ‘China’s 24 strategic minerals’, https://www.gov.cn/xinwen/201611/30/content_5140509.htm.
12 Andersson, P. (2020), ‘Chinese assessments of “critical” and “strategic” raw materials: concepts, categories, policies, and implications’, The
Extractive Industries and Society 7, pp. 127-137

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increasingly being shaped by a de-globalization lens and a view of different global groupings, pitting the US and China against
each other. Second, the focus is clearly shifting to electrification and the industrial opportunities it brings: building large
renewable bases and ultra-high-voltage transmission lines to connect them as well as storage infrastructure and a robustenergy internet.
These priorities resonate with the needs of the incumbents (namely State Grid) to maintain their dominance as the country
undertakes the energy transition, but also with the central government’s penchant for investing in new industries of the future
while moving very slowly on market reforms. This raises new concerns of cybersecurity and climate risks, but also leads to a
new race, once again between developed and developing economies, to gain access to critical materials, technology, financing,and know-how.

CRITICAL MINERALS FOR THE LOW-CARBON ENERGY TRANSITION: WHY CHINA
MATTERS
Philip Andrews-Speed
The important role played by China in many mineral supply chains came to wide attention in 2009 due to the imposition ofexport controls by the government. In response, the United States (US), the European Union (EU), and Mexico complained to
the World Trade Organization in what became known as the China – Raw Materials dispute. The case involved nine materials
including three relevant to the low-carbon energy transition (manganese, silicon metal, and zinc). The decision went against
China, even after appeal. This was closely followed in 2012 by the China – Rare Earths dispute, brought to the World Trade
Organization by the US, the EU, and Japan. This was triggered by China’s imposing export quotas on rare earths, tungsten, andmolybdenum. Once again, the panel decided against China.
Since that time, China has been steadily increasing its presence along the supply chains of several non-fuel minerals. Many ofthese minerals are seen as being important to the low-carbon energy transition due to their role in the manufacture of electricvehicles, wind turbines, solar panels, and other devices. Some are also required by the defence industry. As the urgency andrequired scale of the energy system transformation has become increasingly apparent, so projections of future demand for key
minerals have been drawing the attention of policymakers around the world. In this context, China is seen as a key threat due its
strong presence along these supply chains, and governments of industrialized nations have started taking steps to reduce theirdependence on China.
The earliest use in the industrial era of the terms ‘strategic’ and ‘critical’ as applied to non-fuel minerals was 1939, when the US
passed the Strategic and Critical Mineral Stockpiling Act in response to the start of World War Two. These minerals wereidentified on the basis of their importance to the military and the wider economy. In 1979, the Department of the Interior
published a list of 35 minerals and mineral groups deemed critical. However, by this time, most of the pre-existing mineralstockpile had been sold to private businesses. The European Commission started publishing lists of critical minerals in 2014.
The latest update, in 2020, contained 30 minerals. In the specific context of the low-carbon energy transition, the International
Energy Agency (IEA) published a study in 2021 demonstrating the criticality of 12 minerals and mineral groups. 13
This article examines China’s role in the upstream sections of the supply chains for the 12 minerals and mineral groups
identified by the IEA—as well as the metal tellurium, which is a component of cadmium-tellurium photovoltaic (PV) cells and forwhich China refines more than 50 per cent of the global supply.
The IEA’s list of critical minerals is only one of many such compilations and is global in scope. The US, the EU, and the United
Kingdom have all published their own lists in recent years that reflect their specific conditions. 14 The manufacture of low-carbon
industrial products and equipment is not included in this study, though China also plays a major role in many cases. Suffice it to
13 International Energy Agency (May 2021), The Role of Critical Materials in Clean Energy Transitions, The Role of Critical Minerals in Clean

Energy Transitions – Analysis - IEA
14 ‘Final list of critical minerals 2018’, Federal Register, https://www.federalregister.gov/documents/2018/05/18/2018-10667/final-list-of-criticalminerals-2018; EUR-Lex - 52020DC0474 - EN - EUR-Lex, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0474;
https://www.bgs.ac.uk/download/uk-criticality-assessment-of-technology-critical-minerals-and-metals.

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say that China’s growing capacity to manufacture these goods is drawing heavily on international markets for critical minerals,
and that itself threatens availability for other users.
China has large geological reserves of only two minerals
China’s strong position along these supply chains does not arise from abundant geological reserves. Of the 13 minerals shownin the table below, it has a significant share of global geological reserves for only two: rare earths and molybdenum. In addition,
China is currently the only major miner of heavy rare earths, which are in high demand for permanent magnets. Accumulationsof heavy rare earths in high concentrations are relatively rare and tend to occur in weathered surface materials. Such weatheredclays occur in large quantities across southern China. In contrast, rare earth accumulations in hard rocks tend to be rich in lightrare earths and poor in heavy rare earths.
For all the other minerals in the table, China’s geological reserves are either modest at around 15 per cent of the global total orless than 10 per cent. Data is not available for silicon, as the source material (sand) is available in large quantities in many
countries.
China’s proven geological reserves and output from mines and processing plants as shares of global totals in selectedsupply chains. Data from different years 2020-2022.

Rare earths
Molybdenum
SiliconGraphite
Zinc
Manganese
CobaltLithium
Telluriumb
CopperNickelChromium
Platinum group

Technology
Wind, EV
Wind
PV
EV
Wind
EV, wind
EV
EV
PV
EV, wind, PV,
networksEV, hydrogen,geothermal
CSP, geothermal
Hydrogen

Mining interests
overseas8%

Processing andrefining output
90%
?
69%
100%a
46%
95%
73%
55%
53%
42%

2%

3%

35%

Indonesia

Negligible
Negligible

Negligible
Negligible? (large)? (small)Zimbabwe
South Africa, Zimbabwe

Reserves
34%
31%
16%
15%
16%
2%
7%
9%
3%

Mine output
70%
40%
68%
65%
32%
5%
1%
15%

Australia
Gabon
DRC
Australia, Latin America
DRC, Zambia

Notes: All numbers are approximate. Yellow shading = 25–50%; orange = 50–75%; red = 75–100%. EV = electric vehicles; PV = solar
photovoltaics; CSP = concentrated solar power; DRC = Democratic Republic of the Congo.
a This refers to high quality spherical graphite. b Tellurium is a by-product of copper mining.

Sources: for reserves and annual mine output, US Geological Survey (31 January 2023), Mineral Commodity Summaries 2023,
https://www.usgs.gov/publications/mineral-commodity-summaries-2023; for processing and refining output, International Energy Agency (May2021), The Role of Critical Materials in Clean Energy Transitions, The Role of Critical Minerals in Clean Energy Transitions – Analysis - IEA.
Many other online sources were used for additional data on individual minerals that were missing from these sources.

Caveats are necessary for any discussion of global geological reserves. First, the scale of reserves varies depending on theprice fetched by the mineral. Prices rise and fall as the balance between supply and demand fluctuates. Second, the quantity ofreserves varies with the cost of extraction. Falling costs achieved through increased scale of production, improved production
technology, state subsidies, or weak environmental and safety regulation will enhance reserves. Finally, more geographicallyextensive or technologically advanced exploration can boost the level of proven reserves, especially in little-explored regions of
the world. For these reasons, data on geological reserves are only a very rough snapshot at a certain point in time and provide
very little information on future potential. It is certain that increasing demand for some or all of the minerals required by theenergy transition will result in the successful identification of new geological reserves.

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China’s advantage comes from the scale of its mining and processing
Despite the relatively modest scale of its geological reserves for most of the critical minerals under discussion, China has built a
disproportionately strong position in the annual output of its mines and processing facilities. It is a global leader in several
minerals in these parts of the supply chain, most notably rare earths. Despite hosting only 34 per cent of the world’s identified
geological reserves of rare earths, China accounts for about 70 per cent of annual mine output and 90 per cent of processing
and refining to produce rare earth metals. Most companies that mine rare earths in other countries send their ores (after
beneficiation) to China. The major exception is Lynas, which has built a processing plant in Malaysia for rare earth ores from its
Mount Weld mine in Australia. Elsewhere, Estonia has a small refining facility, and France hosts a plant for recycling rare earth
metals.
China’s pre-eminence in rare earth mining and processing was achieved through a combination of early moves into the industry,
state investment along the full length of the supply chain including research and development, export controls, low labour costs,
and decades of weak environmental and safety regulation and illegal mining and processing.
Aside from rare earths, China’s share of global annual mine production is significant for only four minerals: silicon, graphite,molybdenum, and zinc. The country’s share of global processed silicon is roughly in proportion to its mine production. In
contrast, China is reported to account for 100 per cent of the world’s output of spherical graphite, which is used for battery
anodes.15 The share of global zinc supply processed in China is also much larger than the share of global mine production.
There are seven minerals for which China’s geological reserves and mine output account for a modest or small share of the
global total. Nevertheless, the country has succeeded in becoming the dominant, or at least a major player in the processing
and refining of these minerals. The shares of global output range from 95 per cent for manganese to 35 per cent for nickel. Thisstrong position in processing and refining arises, in part, from the government’s Go Out policy, which started in 1999 andencouraged state-owned enterprises (SOEs) in several industries to invest overseas. This policy had two main objectives: tobuild the SOEs into major international players and, in the case of natural resource industries, to secure access to raw materials
to support the country’s economic growth.
Examples of substantial Chinese overseas mining interests include copper and cobalt in the Democratic Republic of the Congoand Zambia, lithium in Australia and Latin America, nickel in Indonesia, manganese in Gabon, zinc in Australia, platinum inSouth Africa, and chromium in Zimbabwe. Much of this ore is shipped back to China for processing and refining. Moreover, theSOEs have steadily taken advantage of their low labour and energy (coal) costs and soft budgetary constraints to build
processing and refining capacities in China that exceed the requirements of the domestic economy. This is equivalent to what
has occurred in the oil industry, where China’s refining capacity now exceeds its domestic demand for oil products.
The platinum group metals, principally platinum and palladium, appear to be an exception. South Africa hosts 90 per cent of theworld’s geological reserves of these metals, and accounts for 75 per cent of global production of platinum and 40 per cent of
palladium. Russia is the other major source of supply. China’s reserves and mine production are very small, though precise
numbers are difficult to find. Processing and refining capacity is probably modest and includes a plant opened by Johnson
Matthey in 2016.16 China has compensated for these weaknesses by importing large quantities of platinum, pushing the global
market into deficit—a deficit which has been exacerbated by sanctions on Russia. China is now believed to hold 85 per cent of
the world’s stocks of platinum, up from less than 5 per cent four years ago.17
What are other countries doing to reduce their reliance on China?
A combination of deteriorating relations with China and rising demand for minerals critical to the low-carbon transition has led
industrialized countries to take steps to reduce their reliance on China for these minerals. Actions include imposing import
restrictions, incentivizing domestic investment and production, stockpiling, and building partnerships with other countries. An‘Graphite emissions fuel search for solutions along EV supply chain’, S&P Global Market Intelligence,https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/graphite-emissions-fuel-search-for-solutions-along-evsupply-chain-69599516.
16 ‘Johnson Matthey opens new platinum group metal refinery in China’, Johnson Matthey, https://matthey.com/en/news/2016/johnson-mattheyopens-new-platinum-group-metal-refinery-in-china.
17 ‘Platinum market expected to hit record deficit this year’, Financial Times, https://www.ft.com/content/01352385-372f-4b79-9446a03c518ba28a?desktop=true&segmentId=7c8f09b9-9b61-4fbb-9430-9208a9e233c8#myft:notification:daily-email:content.
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additional priority is research and development to identify alternatives to the currently used minerals, enhance their efficiency ofuse, and expand recycling.
The US is the most active country in this regard. In February 2021, President Biden signed an Executive Order on America’s
Supply Chains. Eleven months later, a bipartisan bill was introduced in the Senate to block US defence contractors from buying
Chinese rare earths and allowing the Pentagon to build a stockpile. By February 2022, the Department of Defense had invested
over US$100 million in US rare earth supply chain resilience. In September 2022, the Department of Energy issued a call forbids for a Rare Earth Demonstration Facility (US$156 million) for the extraction of rare earths and other critical minerals fromunconventional sources such as mine waste.
The 2022 Inflation Reduction Act also provides a range of policy instruments. It includes a tax credit of 10 per cent of the
production cost for critical components and allows the Department of Energy to provide up to US$40 million in loan guarantees
for critical materials projects. The president may direct up to US$500 million of economic incentives to critical materials, which
President Biden did in designating battery materials as a priority for domestic manufacturing under the Defense Production Act.
The Inflation Reduction Act also includes targets for the percentage of battery materials that should come from the US or freetrade-agreement partners. Starting in 2025, to be eligible for US purchase subsidies, an electric vehicle battery may not containany critical minerals that were extracted, processed, or recycled by a ‘foreign entity of concern’—presumably including China.
The Department of Energy’s Critical Materials Institute, founded in 2013, has expanded the range of minerals and materials it
researches. Together, these policies are stimulating investment in new mines and plants for processing and recycling. In
addition, the Defense Logistics Agency is building up stockpiles not just of ores and metals but also of intermediate goods suchas NdFeB (neodymium-iron-boron) permanent magnets.18
Australia and Canada are two other industrialized countries where investment in new mining and processing capacity is
increasing. Likewise, mining companies from various countries are increasingly active in their search for commercial
accumulations of critical minerals across Africa and Latin America.
In 2023, the EU published a draft Critical Raw Materials Act that includes targets for 2030 that specify benchmarks of
10 per cent, 40 per cent, and 15 per cent, respectively, for the amount of mineral extraction, processing, and recycling thatshould take place in the EU. The Act sets a 65 per cent threshold for the maximum annual consumption from any stage of
production or processing that can come from a single third country. It requires monitoring of critical raw materials supply chains,coordination of strategic raw materials stocks among member states, and auditing/stress-testing of strategic raw materials
supply chains for large companies.
Realizing that international cooperation was needed, the US led the establishment of the Minerals Security Partnership in June
2022 to ‘bolster critical mineral supply chains essential for the clean energy transition’. The first meeting, in September 2022,
was attended by official partners Australia, Canada, Finland, France, Japan, the Republic of Korea, Norway, Sweden, the United
Kingdom, the US, and the EU. Mineral-rich countries such as Argentina, Brazil, the Democratic Republic of the Congo, Mongolia,
Mozambique, Namibia, Tanzania, and Zambia also attended.
Two trends, in particular, should help reduce dependence on China. The first is reducing or obviating the need for supplies ofcritical minerals. This includes developing sodium-ion batteries for electric vehicles and permanent magnets free of rareearths,19 as well as increasing the efficiency of use and recycling of the materials. The second trend involves the increasing
support given to promoting the domestic production of renewable energy equipment and electric vehicles in the US and Europe,
which should result in growing capacity to process and refine metal ores.
Taken together, these moves mark a potential turning point in international policies to address Chinese dominance in the mining
and processing of critical minerals. However, the impact is likely to be modest from now to 2030 given the length of time needed
to commission new mines and processing plants and to scale up the use of new technological solutions, not least due toenvironmental and social concerns. Beyond 2030, these and possibly additional policies should start to weaken China’s position
significantly, provided that the policies are sustained.

18 https://www.bis.doc.gov/index.php/documents/section-232-investigations/3141-report-1/file.
19 ‘Hina launches sodium-ion battery tests in vehicles’, Electrive.com, https://www.electrive.com/2023/02/23/hina-launches-sodium-ion-battery-

tests-in-vehicles/; ‘Substitution of rare earths using nanotechnology’, Institute for Rare Earths and Metals, https://en.institut-selteneerden.de/substitution-seltener-erden-mithilfe-der-nanotechnologie/.

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WHAT COUNTS AS DE-RISKING? THE GEOPOLITICS OF ENERGY AND CHINA
Henry Sanderson
Concern around China’s dominance of clean energy technologies and their supply chains is now at the top of the geopolitical
agenda. It was a core part of discussions at the May G7 meeting in Japan, where leaders vowed to build clean energy supply
chains that ‘reduce undue strategic dependencies’. Yet despite the rhetoric, the US and Europe realize that in order todecarbonize their economies and reach their climate change targets, they will have to rely on technologies and minerals madeor processed almost exclusively in China, such as solar cells, rare earth magnets, graphite, and lithium ion batteries. Even if
manufacturing is set up at home for some parts of the supply chain, re-shoring production of every single step would be a
gargantuan industrial task. As a result, policymakers as well as corporate executives now talk of ‘de-risking’ supply chains rather
than ‘de-coupling’ from China.
Yet this de-risking agenda is still set to require large amounts of government subsidies and support, raising questions about thecosts versus the benefits. In the US, President Joe Biden has staked his administration on an Investing in America agenda thathas seen billions invested in battery plants and solar factories. The European Union has also launched targets for homegrownprocessing and mining of critical minerals, loosening up state aid rules to achieve them.
There is also no clear acknowledgement of what level of reliance on China is acceptable. If a Chinese company builds a battery
plant in Europe or the US, does that count as de-risking or is it a dependency? Should the West import skills and technologies
from Chinese companies to learn how to manufacture, or is it better to start from scratch? In addition, should Western countries
aim to invest in third countries to secure supplies of critical minerals, or, without a processing industry, will these just go to
China? These are questions yet to be answered.
China’s view
Under President Xi Jinping, China has accelerated investments in clean energy manufacturing as well as the deployment ofclean energy technologies such as solar and electric vehicles (EVs). China accounts for over half of the EV market and this year
is set to deploy 154 gigawatts of solar, more than the entire US, according to Bloomberg. China also produces 90 per cent of
the solar supply chain, 80 per cent of lithium ion batteries, and over 90 per cent of battery anodes made of graphite. It’s also
home to over 90 per cent of the production of rare earth magnets.
Reducing reliance on China is not just a matter of building plants to produce solar cells or batteries. It requires entire new supply
chains outside of China—from mine to finished product. Otherwise, products will contain minerals processed in China, or
alternatively, minerals processed outside China will be sent to the country to be made into products.
Xi is fully aware of China’s dominance in clean energy technologies and has supported its companies to expand overseas,
especially into South-East Asia, where nickel companies have invested heavily in Indonesia. Chinese battery companies havealso made large investments in Hungary. This overseas expansion is encouraging China’s efforts to boost climate diplomacy,
especially in Europe. China has capitalized on its dominance of clean energy to try to enhance ties with Europe, using it as acalling card for cooperation. Premier Li Qiang said during a recent visit to Germany that the countries should become ‘green
partners’.
Ignoring these suggestions might not be easy for Europe. The West faces a double vulnerability with China—without costefficient Chinese clean energy technologies, its decarbonization could be delayed, and it needs China, the largest emitter, toreduce its own emissions of greenhouse gases. Beijing is unlikely to separate climate cooperation from access for its own clean
energy companies to European markets.
Europe has not given clear rules about how much Chinese investment is allowable. Its proposed Critical Raw Material Act setstargets for homegrown mining and processing. The draft aims for at least 10 per cent of critical minerals consumed in the EU to
be mined in Europe by 2030, at least 40 per cent to be processed in Europe, and at least 15 per cent to be recycled.
Yet it does not say if it should be non-Chinese companies doing this mining or processing. Chinese battery materials companies
have been allowed to invest in projects in Hungary and France, for example. And while the European Investment Bank has
supported a graphite project in Sweden, a Chinese company is also set to build its own battery anode plant in the country.

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At the same time, exports of Chinese EVs are increasing in Europe, challenging European automakers, especially in thecheaper vehicle segment.
Biden’s clean energy agenda
The US faces a similar problem. Combating China’s dominance has galvanized efforts to stimulate US clean energy
manufacturing. Clean energy is now seen as fulfilling multiple aims: challenging China, regenerating areas that have lost jobs
and industry over the last two decades, and boosting energy security. ‘This moment demands that we forge a new consensus,’
Jake Sullivan, the US national security advisor, said in April.
So far Biden’s Inflation Reduction Act (IRA) has been a success, attracting over $100 billion in investments in clean energy andbatteries. The planned battery capacity out to 2030 in the US has grown from around 300 gigawatt hours, when Biden took
office, to over 1 terawatt hours—surpassing Europe in just two years, according to Benchmark Mineral Intelligence.
But Biden has yet to define the acceptable involvement of Chinese companies. The IRA said the companies could not receive
tax credits for EVs if minerals were processed or extracted by ‘foreign entities of concern’, which includes China. Yet theadministration has not clarified what level of Chinese involvement is prohibitive, despite these rules coming into force in 2024.
The result is that automakers are signing agreements with Chinese companies regardless. And Chinese companies areinvesting in joint ventures in South Korea (a free trade agreement country) with the hope that their minority equity positions will
not fall foul of this requirement.
In June 2023, South Korean steel firm Posco and Chinese cathode precursor maker CNGR Advanced Material announced ajoint venture for a 110,000 tonnes per year precursor cathode active material plant in South Korea alongside a 50,000 tonnes a
year nickel sulphate refinery. The Posco-CNGR deal is the third deal involving a Chinese battery materials company in South
Korea this year.
Ford has even struck a licensing deal with China’s largest battery producer, CATL (Contemporary Amperex Technology Co.
Limited), to build a plant in Michigan. Ford says it will only use technology from CATL, and that the company will not build thebattery factory. Yet any Chinese involvement could damage the future of the IRA. There are concerns that the IRA could be
repealed by a future Republican administration. Republicans have already targeted some provisions of the legislation for repealin Congress.
The US therefore faces a key challenge: Chinese involvement in clean energy supply chains is inevitable if it wants to meet its
EV and climate change targets, yet that involvement could invite a Republican counterattack that could end up undermining the
IRA.
Investing overseas
In both the US and Europe, policies to stimulate clean energy manufacturing also have an overseas dimension. The US IRA
says that minerals must be processed or extracted in free trade agreement countries to be eligible for tax credits, while the EU
has signed a free trade agreement with Chile, to improve access to its copper and lithium. Yet the IRA definition of ‘free trade
agreement countries’ does not include any African country, limiting the benefits for companies in the US to source from Africa
and reducing any strategic efforts to limit China’s advance on the continent.
As a result, Chinese companies are the largest investors in lithium on the continent and face little Western competition. Over90 per cent of lithium supply from Africa this decade is set to come from mining companies partly or fully owned by Chinesecompanies, according to Benchmark.
Investments in resources in developing countries are also counterproductive if those resources are still sent to China to beprocessed. As a result, the US Department of Energy is helping to fund a graphite anode plant in the US for Syrah Resources,
which mines graphite in Mozambique, which is currently sold to China. Yet there need to be more of these projects.
Australia and Canada as a solution
Australia and Canada offer the potential for a solution, and are the key beneficiaries so far of the IRA outside of the US. The US
has deepened its engagement with Australia, in the hope that minerals from Australia can be diverted from China to feed US
industry. Companies such as Element 25 are building plants in the US to process Australian minerals for batteries.
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Australia is also encouraging the buildout of processing facilities at home, with the support of an A$2 billion fund. That aims toredirect the flow of Australian minerals from China to the US and Europe. In Canada, General Motors is building a complex with
South Korea’s Posco to process battery minerals and produce battery cathodes—a stage where China is extremely dominant.
These two countries are likely to form a key part of efforts to de-risk clean energy supply chains from China for the US andEurope. They are both mining friendly and have access to supplies of renewable energy. Yet the process is likely to be slower
than government targets for EV sales allow, meaning some sort of Chinese involvement in clean energy supply chains will be
inevitable. And it is yet to be seen how cost-effective processing plants in Australia and Canada can be against Chinesecompetition.
Competing on costs
China faces considerable overcapacity at home in its battery and solar industries, meaning that it needs to export to overseas
markets. Its clean energy industries often suffer from cycles of investment and overcapacity.
This can be extremely challenging for overseas companies to compete with, as overcapacity drives down prices. It’s unlikelythat Chinese companies will willingly give up their market dominance and the economic benefits that has provided. They will
most likely cut costs even further, challenging Western producers. Already, building a lithium processing plant in the US can be
double the cost of one in China, while a graphite processing plant can be three to four times the cost.
Conclusion
The West remains in a weak position in regards to China and clean energy. If ‘decoupling’ is no longer desirable, it is imperative
to define what sort of diversification ‘de-risking’ requires. While the West has a global alliance of friendly countries with which tobuild new supply chains that don’t involve China, it will be hard to compete on cost with Chinese companies. Thus, continued
subsidies may be needed to ensure Western companies can survive. Or consumer companies such as automakers will have to
pay more for Western-produced products—to back geopolitical gains, or just to de-risk their supply chains.
Beijing is unlikely to see its dominance go unchallenged, and will use a number of tools to try and defeat Western competition. It
will also continue to call for ‘cooperation’ on climate change, which in reality will mean opening up markets for Chinesecompanies. The West needs to come up with a strategy to de-risk reliance on China without delaying the energy transition. It will
be a difficult balancing act.

EUROPE’S POLICY RESPONSES TO CHINA’S DOMINANCE OF NEW ENERGY SUPPLYCHAINS
Patrick Schröder
In the wake of the Russian invasion of Ukraine, many countries have accelerated their net-zero and clean energy strategies. As
a result, the global critical materials landscape is becoming increasingly complex. Europe’s efforts to secure these resources for
its green transition need to be seen in the light of China’s dominance, not only in the supply and processing of critical raw
materials (CRMs), but also in the production of low-carbon technologies such as solar photovoltaic (PV) panels and electricvehicle (EV) batteries. China has been and will remain a dominant provider of many raw materials for Europe as the demand forthe critical materials needed in its solar, wind, and electric mobility sectors will increase in the coming years and decades.
This article assesses some of the recent policy responses of the European Union (EU) and the United Kingdom (UK) to China’s
dominance in new energy supply chains, particularly materials used in solar PV, wind turbine magnets, and batteries.
Furthermore, it explores the industrial and geoeconomic implications of diversifying critical material supply and re-shoring of
manufacturing low-carbon technologies as a strategy to reduce dependence on China.
The EU’s trade and investment strategy aims to secure access to critical materials while ensuring high environmental, social,and governance (ESG) standards in mining and transparent trade practices. The EU has signed critical minerals deals with
Canada, Kazakhstan, Namibia, and Ukraine and is beginning to engage in negotiations for trade agreements with various
countries including Chile, Argentina, and the Democratic Republic of the Congo that address market access, investment
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protection, and sustainable sourcing of critical materials. Furthermore, the circular economy for critical materials has received
increased attention, not primarily because of environmental concerns, but to provide a stable supply of secondary CRMs
through enhanced recycling practices.
This interlocking set of policy responses has been described as a novel ‘security-sustainability nexus’20 where policymakers andbusinesses are merging resource security and sustainability policies. Whether this approach will indeed generate win-win
partnership benefits for third countries will depend on high degrees of transparency in mining operations and bringing high-risk
investments for higher-value economic activities to third countries.
Critical raw material trade disputes
European trade policy responses to China’s dominance in critical materials needed for the clean energy transition are not new.
In 2012, the EU, together with Japan and the United States (US), charged China with trade violations through the World Trade
Organization (WTO) and filed a case against China’s quotas on rare earths. A second case was launched in 2014. In 2015, theWTO found that China’s restrictions were inconsistent with WTO rules and as a result China removed the restrictions on rareearths.21 In July 2016, the EU together with the US launched a third case against China for limiting supplies of 11 raw materials,
including graphite, cobalt, and indium.
Despite these previous trade disputes, China still provides 100 per cent of the EU’s supply of heavy rare earth elements today.
The spectre of rare earth trade restrictions by China emerged again in April 2023 when Nikkei reported that proposed provisions
by China would prohibit or limit exports of alloy tech for making high-performance magnets derived from rare earths. This was
based on China’s commerce and technology ministries announcement in December 2022 of 43 amendments or additions to thecountry’s technology restriction act.22 Most recently, in July 2023, China announced export restrictions on gallium andgermanium, critical materials needed for semiconductor manufacturing.23
Europe is over-reliant for CRMs not only on China but also on other countries. For example, Turkey provides 99 per cent of the
EU’s supply of boron, which is used for high-performance magnets. South Africa provides 71 per cent of the EU’s platinum, acritical material used in electrolysers to produce hydrogen and in fuel cells. Furthermore, as a report published in April 2023 by
the Organisation for Economic Cooperation and Development pointed out,24 not only China, but also India, Argentina, Russia,
Vietnam, and Kazakhstan introduced export restrictions on critical minerals during the decade from 2009 to 2020.
European policy responses
More recently, in March 2023, the European Commission unveiled a proposal for a new Critical Raw Materials Act (CRMA). The
objectives of the CRMA are ambitious—it aims to achieve a high degree of self-sufficiency by 2030. EU capacity should reach atleast 10 per cent of domestic demand for mining and extraction and at least 40 per cent for processing and refining. But themeans to achieve these objectives may be inadequate, given the non-binding nature of the key targets and lack of any
additional funding announcement. The CRMA’s overarching circular-economy-related target is that by 2030, 15 per cent of the
EU’s annual consumption of strategic raw materials should be met by EU recycling capacity.
On the same day, the Commission presented the Net Zero Industry Act. While the CRMA aims to address overreliance on
China’s supply chains, the Net Zero Industry Act has been interpreted as the European response to US clean tech subsidies
stemming from the Inflation Reduction Act. It aims to achieve strategic net-zero technologies manufacturing capacity of at least
40 per cent of the EU’s deployment needs by 2030.
Also in March 2023, the UK government published the Critical Minerals Refresh, which reinforces the government’s commitment
to the Critical Minerals Strategy. In addition to safeguarding UK industry and boosting the security of the UK’s supply of critical

Riofrancos, T. (2023), ‘The security–sustainability nexus: lithium onshoring in the Global North, Global Environmental Politics,
https://direct.mit.edu/glep/article/23/1/20/111308/The-Security-Sustainability-Nexus-Lithium.
21 World Trade Organization (2015), Dispute Settlement DS432: China—Measures Related to the Exportation of Rare Earths, Tungsten and
Molybdenum, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds432_e.htm.
22 ‘China weighs export ban for rare earth magnet tech’, 6 April 2023, Nikkei https://asia.nikkei.com/Spotlight/Supply-Chain/China-weighsexport-ban-for-rare-earth-magnet-tech.
23 ‘China’s curb on metal exports reverberates across chip sector’, 4 July 2023, Financial Times https://www.ft.com/content/2fa865a7-176f4292-8842-38bb6470d732.
24 Organisation for Economic Co-operation and Development (2023), ‘Supply of critical raw materials risks jeopardising the green transition’,OECD Paris https://www.oecd.org/newsroom/supply-of-critical-raw-materials-risks-jeopardising-the-green-transition.htm.
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minerals, it highlights the UK’s ambition to demonstrate ‘global leadership on ESG performance to champion high standards andreducing vulnerability to disruption, and levelling the playing field for responsible businesses’ and ‘exploring how to tackle illegal
mining in partnership with third countries’.25
Beyond solar and wind, China’s lithium battery manufacturing has started dominating the global market. EV sales in China havereceived support from government policies and economic incentives, including cash subsidies and purchase tax exemptions,and EV sales in China by far outpace sales in Europe and the US. China has extended its breaks for EVs, initially introduced in2014, until 2027. By the end of 2022, the cumulative tax exemption exceeded RMB 200 billion (US$27.7 billion), and it could
surpass RMB 115 billion (US$15.9 billion) in 2023. France has been pushing the EU to launch anti-dumping measures against
insurgent Chinese EV makers, while Germany is more cautious and more exposed to potential countermeasures from China.26
Furthermore, Europe is investing in and building giga-factories to produce lithium-ion batteries, in part due to ongoing concerns
over reliance on China’s manufacturing base. The new European Battery Regulation, adopted on 14 June 2023, imposessustainability and transparency standards for batteries, including the origin of raw materials used in their manufacture.27 It
includes more stringent targets for battery collection, recycling efficiency, and material recovery, as well as a due diligencepolicy to address associated social and environmental risks across the battery supply chain.
Building alliances and ‘win-win’ partnerships
European solar and wind energy industries have been particularly exposed to different demand and supply risks. The windindustry is more vulnerable to supply bottlenecks and the price volatility of CRMs, especially those used in the production of
permanent magnets, a key component in wind turbines.28 The EU’s policy responses to China’s dominance in clean energy
supply chains includes measures to diversify supply chains and thereby enhance resilience to potential disruptions.
One of these measures is the establishment of the European Raw Materials Alliance (ERMA), announced in September 2020,
as part of the European Action Plan on Critical Raw Materials, and the publication of the 2020 List of Critical Raw Materials.29
ERMA focuses on developing sustainable and responsible supply chains for CRMs and fostering partnerships with resource-richcountries other than China. The specific value chains ERMA focuses on are rare earth magnets and motors and materials forenergy storage and conversion. Furthermore, the alliance promotes reducing dependency on primary CRMs through circular
use and recycling of resources and sustainable products to mitigate potential resource scarcity or cut-offs. There are several
barriers to recycling and to finding alternative components for permanent magnets. The ERMA network includes over 50
European and UK recycling companies.
The EU’s trade and investment strategy has also started focusing on CRMs. In the CRMA, the EU seeks to build a ‘win-win
partnership’ with resource-rich countries that is beneficial for both sides by applying high ESG standards in mining and creating
added value through further processing.30 The first test of how such a win-win partnership would work is the 2003 trade
agreement between the EU and Chile, which the two parties are in the final stages of updating. The aim is to conclude a
separate strategic partnership for raw materials, especially lithium and copper. The updated trade agreement will provide better
access for EU businesses investing in the raw materials sector in Chile, with EU companies given the same treatment as
Chilean companies. A key aspect of the strategic partnership will be to create local added value in Chile rather than purely
extract and export the minerals.

25 UK Government (2023), Critical Minerals Refresh: Delivering Resilience in a Changing Global Environment,

https://www.gov.uk/government/publications/uk-critical-mineral-strategy/critical-minerals-refresh-delivering-resilience-in-a-changing-globalenvironment-published-13-march-2023.
26 Joshua Posaner. Wilhelmine Preussen, “Why Berlin will slam the brakes on France’s car war with China”, 19 June 2023, Politico
https://www.politico.eu/article/volkswagen-mercedes-bmw-berlin-will-slam-the-brakes-on-frances-car-war-with-china/.
27 European Parliament (2023), Making batteries more sustainable, more durable and better-performing,
https://www.europarl.europa.eu/news/en/press-room/20230609IPR96210/making-batteries-more-sustainable-more-durable-and-betterperforming.
28 Rabe, W., Kostka, G., and Stegen, K. (2017), ‘China’s supply of critical raw materials: risks for Europe’s solar and wind industries?’, Energy
Policy, 101, 692–699, https://www.dahrendorf-forum.eu/wp-content/uploads/2017/01/Chinas-supply-of-critical-raw-materials.pdf.
29 The EU’s List of Critical Raw Materials was updated in 2023, and a fifth list covering 34 CRMs was published—https://single-marketeconomy.ec.europa.eu/sectors/raw-materials/areas-specific-interest/critical-raw-materials_en.
30 Sinom, F. (2023), EU pushes alternative model to China in global race for raw materials, EURACTIV,
https://www.euractiv.com/section/circular-economy/news/eu-pushes-alternative-model-to-china-in-global-race-for-raw-materials/.

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Other like-minded trade partners rich in CRMs are a key resource for the EU. The current trade agreement with Canada, andnew agreements not only with Chile but also with Mexico and Australia, could help the EU diversify its supply of both primaryand secondary CRMs.
The UK government is also accelerating its collaboration on critical minerals with international partners, including recent
partnerships established with Canada and South Africa and engagement through the Minerals Security Partnership. The
Partnership was announced in June 2022 by the US to strengthen critical mineral supply chains. One of the stated aims is ‘toensure that critical minerals are produced, processed, and recycled in a manner that supports the ability of countries to realize
the full economic development benefit of their geological endowments’.31
Making resource security, sustainability, and competitiveness work together
Diversification and re-shoring critical material extraction, production of clean energy technologies, and recycling can enhance
supply chain resilience by reducing dependence on a single dominant player like China is perceived to be. Also, diversifying
sources and bringing production and recycling closer to end markets mitigates some of the risks of supply disruptions and tradedisputes, providing more control over resource availability. Yet building these supply chains will require several years, andmeeting the targets will be challenging and will require scaling quickly. For example, Europe aims for its clean energy
manufacturing capacity to meet at least 40 per cent of its generation needs by 2030; but currently, Europe has only about half ofthat capacity.
In addition to scaling up, domestic clean energy production also needs to close the cost gap with external competitors, as this
could impact the speed and scale of installation and diffusion. 32 In the case of solar PV manufacturing, European companies
already face a cost competitiveness gap of US$0.08 per watt against Chinese producers. For the 450 GW of new solar capacity
needed by 2030 under the REPowerEU plan,33 this would translate to an additional cost of US$36 billion, if all PV panels were
manufactured in Europe. However, to put this in perspective, although not an insignificant sum, it would only be about 7.3
per cent additional cost on top of the currently estimated $490 billion (€452 billion) 34 of total solar investment needs.
It remains to be seen if the new CRM trade partnerships and alliances will generate new economic opportunities beyond
extraction with added-value for producer countries, while creating decent jobs and sustainable practices on mining sites. New
investments are needed, including for re-mining of tailings dams and mining waste valorization,35 but it is challenging to bringinvestments into countries with weak ESG standards and high political risk. The European Investment Bank and the EU’s Global
Gateway Initiative, which announced €300 billion for high-quality infrastructure projects in the global South, will have a key roleto play. Transparency and equal partnerships are essential to ensure that European investments contribute positively todevelopment objectives in recipient countries.
Strategic cooperation and alliances among countries can play a vital role in navigating geoeconomic shifts; however, ‘friendshoring’ critical material supply and production might also drive further fragmentation in the global economy and threatens todrive up the cost of the clean-energy transition. Europe’s effort to secure critical materials for the green transition has seen
effective policy responses, including diversification of supply but also circular economy approaches to ensure supply of highquality secondary materials. Careful consideration of environmental impacts, social factors, and international cooperation isessential to ensure that the ‘security-sustainability nexus’ works for security, environment, and competitiveness, for bothproducer and consumer countries.
For the EU and the UK, as the countries are pursuing supply chain diversification strategies, it will remain important to closely
follow China’s industrial policies to identify any upcoming policy changes that may affect the supply of CRMs and technologies
needed for the clean energy transition. Ongoing engagement with China, either bilaterally or in international fora such as theG20, will be important to avoid supply chain disruptions or the need for future WTO dispute settlements.

31 US Department of State (2022), Minerals Security Partnership, https://www.state.gov/minerals-security-partnership/.

McKinsey (2022), ‘Building a competitive solar-PV supply chain in Europe’, https://www.mckinsey.com/industries/electric-power-and-naturalgas/our-insights/building-a-competitive-solar-pv-supply-chain-in-europe.
33 European Commission (2023), Solar Energy, https://energy.ec.europa.eu/topics/renewable-energy/solar-energy_en.
34 RystadEnergy (2022), ‘REPowerEU: Europe’s big budget and bold energy plan may fall short of objectives’,
https://www.rystadenergy.com/news/repowereu-europe-s-big-budget-and-bold-energy-plan-may-fall-short-of-objectives.
35 Kinnunen, P., and Kaksonen, A. (2019), ‘Towards circular economy in mining: opportunities and bottlenecks for tailings valorization’, Journalof Cleaner Production, https://www.sciencedirect.com/science/article/abs/pii/S0959652619312508.
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MARKET DILEMMAS AND STRATEGIC BALANCING ACTS: CHINESE RENEWABLE
MANUFACTURERS IN AN ERA OF GEOPOLITICAL COMPETITION
Herbert Crowther
The politics of renewable energy manufacturing have become an area of central importance in the global energy transition.
Particularly as geopolitical tensions escalate, the future geography and efficiency of green energy supply chains is becoming
more uncertain. This uncertainty is driven by a combination of factors: green industrial policy coming into vogue in major
markets like the US and EU, smaller markets seeking more niche ways to benefit from green industries, and the global green
manufacturing incumbent, China, maintaining an unavoidable presence.36 If managed imprudently, these tensions threaten to
result in disjointed supply chains for many green technologies.
Within that picture, Chinese renewable energy manufacturers now face difficult new dilemmas, particularly about which endmarkets to prioritize and how to approach new overseas manufacturing investments. How Chinese firms approach thesequestions will affect many key variables for the global energy transition, from the diffusion of green technology breakthroughs
across borders to the political capital of green energy industries in developed markets. These dilemmas make Chinese
renewable manufacturers key strategic actors today in a more concrete way than they have ever been before.
End-market prioritization: balancing local government support with export restrictions
Even before today’s geopolitical headwinds, Chinese renewable energy firms experienced periods of sharply different strategic
outlooks. When the solar industry took off in the early 2000s as China’s first green champion industry, it was largely oriented
towards exports to European markets, where solar purchase subsidies were generous. But by the early 2010s, Chinese firms
had consolidated solar supply chains so much that US and EU officials placed tariffs on Chinese solar imports, forcing Chinese
producers to look inward for new sources of solar demand.37
As the reality of trade barriers on Chinese solar set in in the late 2000s and early 2010s, Chinese solar producers made theirfirst strategic market re-evaluation: pivoting to prioritize the domestic market. Before the 2010s, domestic demand had only
been a small part of Chinese solar manufacturing demand. But with export markets becoming less accessible, the Chinese
government enacted policies to expand domestic solar demand, most notably the Golden Sun and Solar Roof programs, as well
as a national feed-in tariff for solar generation.38
These programs helped Chinese solar producers weather this first storm, and provided the initial impetus for China to become
the world’s largest source of solar demand (today over three times the next largest market by installed capacity).39 And despite
the rising cost for the central government of these programs and the growing international attention to the role of China’s
industrial policy ecosystem in skewing the playing field, this ecosystem remains significant in China’s solar industry.
Just like today, the case for trade restrictions on Chinese solar (and other green industries) in the early 2010s revolved aroundthe policy support that Chinese firms enjoy from local governments. Particularly during China’s first solar manufacturing boom,
manufacturers could count on incentives from local governments like land concessions, tax benefits, less expensive operating
environments, and in some cases, even direct investment.40 The central government contributed by providing guidance for local
officials to adhere to these principles, directing state financing bodies to participate in these projects, and even helping catalysecost declines in input materials like polysilicon.41

Bloomberg NEF, ‘Localizing Clean Energy Value Chains Will Come at a Cost,’ 7 November 2022, https://about.bnef.com/blog/localizing-cleanenergy-value-chains-will-come-at-a-cost/.
37
Matt Daily, ‘U.S. sets new tariffs on Chinese solar imports,’ Reuters, 17 May 2012, https://www.reuters.com/article/us-china-tradeidUSBRE84G19U20120517.
38 Yongxiu He and Sufang Zhang, ‘Analysis on the development and policy of solar PV power in China,’ Renewable and Sustainable Energy
Reviews, Volume 21, May 2013, pp 393-401, https://www.sciencedirect.com/science/article/pii/S1364032113000269?via%3Dihub.
39 Sandra Enkhardt and Beatriz Santos, ‘New global solar capacity additions hit 191 GW in 2022, says IRENA’, PV Magazine, 22 March 2023,
https://www.pv-magazine.com/2023/03/22/new-global-solar-capacity-additions-hit-191-gw-in-2022-says-irena/.
40 Chen Gang, ‘China's Solar PV Manufacturing and Subsidies from the Perspective of State Capitalism,’ Copenhagen Journal of Asian Studies,
Volume 33 Number 1, 2015, https://rauli.cbs.dk/index.php/cjas/article/view/4813.
41 Varun Sivaram, Taming the Sun: Innovations to Harness Solar Energy and Power the Planet, MIT Press, 2018, pp 27-52,
https://direct.mit.edu/books/book/4478/Taming-the-SunInnovations-to-Harness-Solar-Energy.
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Today, traditional mechanisms for local government support are just as accessible for green energy manufacturers as they were
before trade restrictions on Chinese green exports began almost 15 years ago. This fact has important implications for how
Chinese green manufacturers are likely to approach end-market prioritization and overseas expansion strategies.
The persistence of the traditional model for local support in China is driven by a number of key factors. Firstly, the strength of
China’s domestic renewable energy demand has been sufficient to make up for lost export markets, leaving Chinese
manufacturers with little incentive to refuse local government support. In fact, with the reorientation of Chinese green
manufacturers towards the domestic market in the 2010s, the political value of green manufacturers to local governments has
become even more salient. With no urgency to change the practices that first attracted US/EU criticism, this industrial policy
playbook has further entrenched itself with local officials as an example of how aggressive policy support can expand local
industry.
A demonstrative case study of how this ecosystem continues today is the recent growth in China’s offshore wind industry.
Despite being a relatively nascent industry for much of the 2010s, China’s coastal eastern provinces now boast over 20
industrial parks dedicated to offshore wind manufacturing.42 This process of neighbouring provinces rushing to promote local
companies in an emerging green industry mirrors (in some ways) the initial expansion of Chinese solar producers in the 2000s,
where local industrial clusters helped spur rapid growth.43
Secondly, China’s rhetorical focus on ‘high quality development’ has further singled out green industries as a priority area for
local governments. Particularly since the enshrinement of the ‘dual carbon’ goals in September 2020, promoting green industry
has become an effective way for local officials to win central government approval. Xi’an is an example of a city that has
become more aggressive in its support for green industries in recent years, especially its local green champion LONGi Solar.
Since 2020, Xi’an has used traditional mechanisms like land grants and tax benefits to ensure that a large share of LONGi’s
manufacturing expansion stays in Xi’an. These incentives have helped LONGi announce multiple new manufacturing
investments in Xi’an, helping satisfy Xi’an metrics for high quality development. 44 In Changzhou, another green industrial hub,
Trina Solar continues to enjoy strong government support, especially through new government programs that attract top solar
talents to Changzhou’s renewable industrial base. Xi’an and Changzhou were early adopters of strategies that used green
industries as a path to satisfying economic growth metrics, and have clearly doubled down on this approach in recent years.
Thirdly, the intensification of international demand for green technologies has created new potential markets for Chinese green
exports. Importantly, a significant share of those markets—particularly developing markets—are unlikely to enact trade barriers
in response to Chinese local government support. This is because in countries not aspiring to become green industrial
behemoths themselves, the most important consideration in green industrial imports is, almost exclusively, price. If Chinese
local incentives help Chinese producers reduce prices, that only increases the attractiveness of Chinese exports in thosemarkets. This reality likewise leaves little incentive for Chinese manufacturers or local governments to change course.
The persistence of the traditional local support model means that Chinese renewable energy manufacturers are likely tocontinue to prioritize the domestic market and developing markets for future demand growth. This persistence also means thatmarket restrictions from the US and EU are unlikely to change. For Chinese manufacturers with even more ambitious
international plans that do include those developed markets, then, this will mean new dilemmas on how to secure market
access.
New dilemmas: risks in international expansion
Perhaps the most important new consideration for Chinese renewable manufacturers is how (or whether) to set up international
manufacturing centres that satisfy market access requirements in developed markets like the US and EU. In the US, forexample, while solar equipment manufactured in China is subject to heavy trade duties, solar equipment manufactured by
Chinese companies within the US is not. Particularly with incentives offered by the Inflation Reduction Act, Chinese green

42 Cheng Chao, Song Gu, Zhao Lei, Yang Li, ‘Development trend and suggestions of my country's offshore wind power equipment industrial

park/base,’ Wind Energy Magazine, 7 November 2021, https://news.bjx.com.cn/html/20221107/1266681.shtml.
43 Jonas Nahm, ‘China’s Specialization in Innovative Manufacturing,’ Collaborative Advantage: Forging Green Industries in the New Global
Economy, Oxford Academic, 19 Aug. 2021, https://academic.oup.com/book/39911/chapter/340167345.
44
Polaris Solar Photovoltaic, ‘LONGi Green Energy's annual production of 100GW of monocrystalline silicon wafers and 50GW of
monocrystalline cells has landed in Xixian New Area, Shaanxi,’ 17 January 2023, https://guangfu.bjx.com.cn/news/20230117/1283736.shtml.

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manufacturers are increasingly tempted by the promise of access to the US market. Doing so, however, will require multiple
strategic balancing acts.
The first of these balancing acts is managing political risk. This is particularly true in markets already spurned by China’s green
supply chain dominance. In the US, for example, local and state politics can be even more volatile than federal policy. One
recent case of this is Virginia’s refusal of a CATL (Contemporary Amperex Technology Co., Limited) battery plant on politicalgrounds.45 But despite the negative overall atmosphere in the US towards Chinese investment, some industrial states haveexpressed interest in attracting Chinese green investment. Ohio, for example, this March announced a major project between
LONGi Solar and US energy developer Invenergy to construct a 5 GW solar factory outside Columbus.46 JA Solar announced a
new solar factory in Arizona this January, and the CATL plant rejected by Virginia ultimately settled in Michigan.47 These early
projects are all on ambitious timelines, and will be important reference cases as other Chinese renewable manufacturers
consider following suit.
The second dilemma Chinese producers will face is how to apply the Chinese domestic model of manufacturing efficiency toother countries. Many of the variables that help Chinese producers dominate green industries will be challenging to replicate inplaces like the US or EU. These variables include land prices, tax rates, electricity costs, permitting timelines, construction
timelines, construction costs, labour costs, and supply chain sourcing (just to name a few). For solar, US scrutiny of input
materials like polysilicon from Xinjiang will require the supply chains of US factories to be more complex than those of theirChinese counterparts. Labour costs and labour relations will also offer a stark contrast between Chinese facilities and US or EU
facilities. Managing the corporate culture implications of Chinese supervisors at an American factory, for example, will be atightrope walk in both local politics and financial health.
Third, questions over technology transfer and intellectual property rights will increasingly put China in the opposite position fromwhat it has enjoyed in recent decades. Technology transfer has long been a key criterion for foreign firms securing access to theChinese market. But with Chinese firms now leading technology innovation across clean technology industries, how Chinese
firms allow foreign companies to participate in the technological development of overseas investments will also be aconsequential question. Early indications suggest that Chinese firms may be open to technology transfer, with Chinese firms
confident that their manufacturing know-how is more important than technological protections. But there are downside risks inthe medium and long term if Chinese firms and foreign governments disagree on appropriate technology transfer levels—
particularly if disagreements come after factories are already up and running.
Lastly, Chinese firms will also need to consider how foreign manufacturing investments are perceived by the Chinese
government. While the Chinese government is generally supportive of foreign expansions because they develop China’s
industrial footprint and help China’s narrative of a ‘green Belt and Road’, these conditions could change. Reports this year of adraft regulation restricting exports of solar manufacturing technologies are one indicator of China’s potential willingness to use
green technologies as a tool for strategic leverage.48 If more of that leverage is lost as Chinese firms set up operations (and/or
pursue technology transfer) overseas, they may begin to face a different atmosphere at home.
Diverging implications: upside and downside risks for Chinese manufacturers’ strategic choices
This strategic landscape for Chinese renewable manufacturers presents several implications and risks. In terms of direct
implications, the persistence of China’s local industrial support model means that trade barriers on Chinese green imports tocountries with green industrial ambition are unlikely to change anytime soon. In a certain way, however, this may be an
acceptable equilibrium to both sides. For China, it means a continued prioritization of the domestic market and a growing focus
on green exports to developing markets—both of which still provide robust room for demand growth. For developed markets, itmeans more runway to pursue policy mechanisms that brand green industrial policy as a political winner: as a platform to create
blue-collar jobs, to reduce reliance on foreign supply chains, and to reframe the traditional politics of decarbonization.

Dan Mihalascu, ‘Virginia Rejects Ford Battery Plant Investment Over CATL's CCP Ties,’ InsideEVs, 19 January 2023,
https://insideevs.com/news/632160/virginia-rejects-ford-battery-plant-investment-over-catl-ccp-ties/.
46
Veselina Petrova, ‘Invenergy, Longi tie up in 5-GW solar panel production JV in Ohio,’ RenewablesNow, 20 March 2023,
https://renewablesnow.com/news/invenergy-longi-tie-up-in-5-gw-solar-panel-production-jv-in-ohio-817814/.
47
Jonathan Touriño Jacobo, ‘JA Solar to build 2GW module manufacturing facility in Arizona,’ PV Tech, 12 January 2023, https://www.pvtech.org/ja-solar-to-build-2gw-module-manufacturing-facility-in-arizona/.
48
Sangita Shetty, ‘China May Restrict Exports of Solar Technologies,’ SolarQuarter, 3 February 2023,
https://solarquarter.com/2023/02/03/china-may-restrict-exports-of-solar-technologies/.
45

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A more nuanced picture emerges when considering how Chinese manufacturers may pursue overseas manufacturing
investments. Here, there is a wider range of positive and negative outcomes. On the positive side, successful investments inother markets (especially developed markets) could create stronger green supply chains within those countries. That would also
drive down green technology costs globally and present a positive example of Chinese manufacturing investment in foreign
markets. On the negative side, the complications involved in replicating the Chinese manufacturing model in other countries
could raise the risks of major problems with new projects. From technology transfer to labour relations, Chinese firms will needto demonstrate extreme political and economic shrewdness to minimize downside risks. In those downside risk scenarios, highprofile clashes over Chinese investments could lead to a further bifurcation of green supply chains, and add another irritant tothe broader geopolitics of the energy transition.
As such, how Chinese firms approach these dilemmas over the next 12–24 months is a crucial variable in forecasting the speed
and tone of the global energy transition. This path will be reflected both in progress on existing projects (like LONGi in Ohio) andin the pace of new project announcements. For large Chinese renewable firms, this represents a strategic position much more
prominent—and delicate—than anything they have faced before.

THE GEOPOLITICS OF HYDROGEN: THE EMERGING ROLE OF CHINA49
Rainer Quitzow and Xiaohan Gong
The Chinese government is a relative latecomer among major economies to the formulation of a dedicated hydrogen strategy.
Its Mid-and-Long-Term Hydrogen Industrial Development Plan (2021–2035) was published in March 2022.50 Moreover, thestrategy remains relatively modest when it comes to the promotion of hydrogen supply, targeting 100,000 to 200,000 tons ofrenewable hydrogen production per year by 2025. This compares with the EU’s ambition to install 6 GW of electrolyser capacity
by 2024 to produce approximately 1 million tons of renewable hydrogen per year. 51
China’s target for fuel-cell electric vehicles (FCEVs) is more ambitious, aiming for 50,000 FCEVs by 2025. 52 Other dimensionsof hydrogen development, including transport and storage infrastructure and other hydrogen end uses, are not subject toformalized, quantitative targets.
Parallel to the rather modest hydrogen-related ambitions at the central level, activities in a number of major cities and provinces
are developing dynamically. Indeed, the sum of local and provincial hydrogen targets, for both hydrogen production and FCEVs,
surpasses those formulated by the central government.53 The Autonomous Region of Inner Mongolia alone aims to produce
more than 480,000 tons of renewable hydrogen annually by 2025, more than double the central government’s target. 54
This seeming mismatch between local-level ambition and restraint at the national level does not mean that the central
government has not identified the hydrogen sector as an important strategic priority. Indeed, the central government declared
the hydrogen sector as a strategic emerging industry as early as 2016 in its 13th Industrial Development Plan of Strategic
Emerging Industries.55 However, government policy remains at an experimental stage, offering important incentives forinnovation and industrial development at the local and provincial levels. Most prominently, the central government has launcheda pilot city scheme for the development and deployment of FCEVs and related refuelling infrastructure. Additionally, the49

The research for this article was conducted in the context of a research project at the Research Institute for Sustainability, Helmholtz Centre
Potsdam entitled ‘Geopolitics of the Energy Transformation: Implications of an International Hydrogen Economy’ (GET Hydrogen) with financial
support from the German Federal Foreign Office.
50 National Development and Reform Commission (2022), The Mid-and-Long-Term Hydrogen Industrial Development Plan (2021–2035) (氢能产业发展中长期规划（2021–2035 年）), https://www.ndrc.gov.cn/xxgk/zcfb/ghwb/202203/t20220323_1320038.html?code=&state=123 (lastaccessed on 22 December 2021).
51 European Commission (2020), A Hydrogen Strategy for a Climate-Neutral Europe, COM/2020/301 final.
52 National Development and Reform Commission, The Mid-and-Long-Term Hydrogen Industrial Development Plan.
53 Gong X.H., Quitzow R. and Boute A. (2023), China's Emerging Hydrogen Economy: Policies, Institutions, Actors, https://publications.rifspotsdam.de/rest/items/item_6002649_5/component/file_6002687/content.
54 Inner Mongolia Energy Bureau (2022), Inner Mongolia Autonomous Region 14th Five-Year Hydrogen Energy Development Plan (内蒙古自治区十四五氢能发展规划).
55 State Council (2016), The 13th Industrial Development Plans of Strategic Emerging Industries (十三五国家战略性新兴产业发展规划).

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government is encouraging local governments and state-owned enterprises (SOEs) to launch demonstration projects across thehydrogen value chain by promoting measures like discounted electricity prices for hydrogen production.56
This experimental approach to the sector’s development is also reflected in China’s engagement with the emerging geopolitics
of hydrogen. Chinese policymakers are gradually increasing their international activities, emphasizing exchange with otherinternational actors to promote knowledge acquisition and learning. Importantly, this includes activities to encourage foreign
investment in China’s hydrogen sector. More outward-oriented activities to develop strategic alliances and partnerships do not
yet feature prominently in its international hydrogen policy. Nevertheless, the government has signalled its future intentions toaddress hydrogen actively within the Belt and Road Initiative (BRI), and SOEs have begun to launch demonstration projects inthird countries where these firms have pre-existing investments in the energy sector.
China’s geoeconomics of hydrogen: overcoming technological bottlenecks and promoting industrial leadershipthough international cooperation
A central driver of China’s international hydrogen policy to date is the concern that it still lags behind Western technology
leaders in a number of critical areas of hydrogen technology. This is considered particularly urgent, due to the increasingly
hostile geoeconomic competition with the US and worries that Western governments will curtail the transfer of key technologies
and know-how to China.57 Indeed, governments in the US and Europe have voiced their own concerns that Chinese competitors
could outcompete their domestic firms in key hydrogen technologies, in particular electrolysers.58 In 2022, China already had
the largest electrolyser manufacturing capacity, with 7.6 GW per year, compared to 4 GW in Europe and 1.6 GW in the US. 59
Moreover, according to a study by Bloomberg New Energy Finance, manufacturing alkaline electrolysers in China is estimatedto cost less than US$400/kW, compared to around US$1,200/kW elsewhere.60 On the other hand, for now, Chinese
electrolysers are said to have significantly lower operational lifetimes and to be less efficient, due to lower quality materials. 61
An important priority for the Chinese government is, therefore, the continued acquisition of foreign know-how to further boost
China’s technological development. The Catalogue of Industries for Encouraging Foreign Investment 2022 highlights thegovernment’s priority areas for the promotion of foreign involvement in China’s domestic hydrogen economy.62 According to thecatalogue, China supports foreign investments in different spheres of renewable hydrogen production, refuelling, transport, andstorage.
Given that proton-exchange membrane (PEM) electrolysers are considered more suitable for storing excess renewableelectricity, a particular priority in this regard is technology transfer in this field, where European firms remain in the lead. Chinese
firms still lack the capacity for large-scale manufacturing of platinum catalysts, needed for PEM fuel cell stacks. In addition,
China lacks the required know-how in various dimensions of hydrogen storage and transport, including high-pressure gaseous
storage and hydrogen liquefaction.63 This is considered a liability in the development of domestic hydrogen trade between future
centres of hydrogen demand in the east and regions with abundant renewable energy resources in the north and southwest. 64
To encourage foreign investment in the hydrogen sector, foreign companies may receive preferential treatment, such as
financial rewards or simplified administrative procedures, when developing hydrogen-related technologies.65 This has led to
56 Gong X.H., Quitzow R. and Boute A. (2023), China's Emerging Hydrogen Economy: Policies, Institutions, Actors,
57

Gong X.H., Quitzow R. and Boute A. (2023), China's Emerging Hydrogen Economy: Policies, Institutions, Actors.
European Commission (2023), Proposal for Net Zero Industry Act, COM (2023) 161.
59
International Energy Agency (2022), Electrolyzers, https://www.iea.org/reports/electrolysers (last accessed on 14 February 2023).
60
Collins, L. (22 September 2022), ‘Cheap Chinese hydrogen electrolysers “likely to become popular worldwide during 2025–30”: BNEF’,
RECHARGE, https://www.rechargenews.com/energy-transition/cheap-chinese-hydrogen-electrolysers-likely-to-become-popular-worldwide-during2025-30-bnef/2-1-1304666 (last accessed 13 June 2023).
61
Heyward, H. (19 April 2022), ‘Beijing hydrogen body admits that Chinese electrolysers cannot compete with Western machines—yet’,
RECHARGE, https://www.rechargenews.com/energy-transition/exclusive-beijing-hydrogen-body-admits-that-chinese-electrolysers-cannot-competewith-western-machines-yet/2-1-1202835 (last accessed 13 June 2023).
62
National Development and Reform Commission and Ministry of Commerce (2022), Catalogue of Industries for Encouraging Foreign
58

Investment (2022 Version)（鼓励外商投资产业目录（2022年版））, http://wzs.mofcom.gov.cn/article/n/202210/20221003362982.shtml (lastaccessed 13 June 2023).
63
Haitong Securities (28 December 2021), Hydrogen Energy: Challenges and Opportunities (氢能源：痛点和机会),
https://www.htsec.com/jfimg/colimg/upload/20211229/31011640762851799.pdf (last accessed 13 June 2023); Chen L., Zhou K.M. and Lai T.W., (2020),

Hydrogen Fuel Supply Chain Based On Liquid Hydrogen, (《液氢为核心的氢燃料供应链》), Cryo. & Supercond. 48 (11) pp. 1-7, at 3.
64
Gong X.H., Quitzow R. and Boute A. (2023), China's Emerging Hydrogen Economy: Policies, Institutions, Actors.
65
Gong, X.H., and Boute, A. (2021), ‘For profit or strategic purpose? Chinese outbound energy investments and the international economic
regime’, The Journal of World Energy Law & Business, 14(5), 345–362.

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investments in joint ventures and projects by a number of prominent companies across the hydrogen value chain. Amongothers, Germany’s Siemens Energy collaborated with China’s State Power Investment Corporation on the construction of a
PEM electrolyser for the Beijing Winter Olympics.66 French Air Liquide has been active in the deployment of refuelling stations
around China. It supplied the technology for the Daxing hydrogen refuelling station in Beijing, the world’s largest at the time of
construction, and signed a joint venture agreement with two Chinese firms to develop an even larger station in Shanghai.67
Hyundai and Toyota are major partners for the development of fuel-cell electric trucks and buses, respectively.68 Hyundai now
operates Sichuan Hyundai Motor Company as a subsidiary for the production of fuel-cell electric trucks as well as the related
fuel cell stacks. Indeed, Sichuan Hyundai Motor Company became the first wholly foreign-owned automobile manufacturer in
China. Toyota, on the other hand, is engaging in a number of joint ventures and strategic alliances with Chinese companies in
the field of fuel-cell electric buses.69
This cooperation with foreign firms in China—to overcome strategic technology bottlenecks and promote access to technology
from cutting-edge foreign suppliers—is complemented by an outward-oriented strategy to promote Chinese industrial leadershipin FCEVs. In its Mid-and-Long Term Development Plan for the Automobile Industry (2017), the Chinese government
encourages the export of FCEV products, services, technologies, and standards via investments in foreign markets andcooperation in technology and standardization. It encourages Chinese firms to take majority stakes in foreign ventures for the
production of fuel-cell vehicles and related technologies and engage in technology cooperation in other leading markets. 70 The
government is also encouraging Chinese SOEs to lead in the development of industrial parks for the manufacturing of
automobiles in countries along the BRI. Complementing this, the Ministry of Industry and Information Technology has also
promoted cooperation with the EU, Germany, France, Japan, and the Asia-Pacific Economic Cooperation forum on formulating
the standards for fuel cell vehicles,71 an ambition that has been echoed by China’s Standardization Administration. 72
Finally, the government promotes technological cooperation with a range of actors at the forefront of hydrogen development.
NDRC and NEA have stated China’s ambition to integrate into global hydrogen value chains by engaging in both bilateral andmultilateral technological cooperation.73 In this vein, China has worked with the International Energy Agency, the International
Renewable Energy Agency, the International Partnership for Hydrogen and Fuel Cells in the Economy, and the United Nations
Industrial Development Organization in the sphere of technology and to promote exchange on policy and best practices. 74
Moreover, the China Society of Automotive Engineers promoted the launch of the Chinese-led International Hydrogen Fuel Cell
Association.75 In addition, bilateral exchange on research and development and policy-related questions has been launchedwith Australia, Germany, Saudi Arabia, the UK, and the US.

Radowitz, B. (19 August 2020), ‘Siemens Energy and SPIC in green hydrogen deal for major sports event in China’, RECHARGE,
https://www.rechargenews.com/transition/siemens-energy-and-spic-in-green-hydrogen-deal-for-major-sports-event-in-china/2-1-860294 (last accessedon 1 December 2022).
67
Reuters (6 November 2019), ‘Sinopec, French Air Liquide in MOU for hydrogen fuel development in China’,
https://www.reuters.com/article/china-france-hydrogensinopec/sinopec-french-air-liquide-in-mou-for-hydrogen-fuel-development-inchinaidUSL3N27M32G (last accessed on 1 December 2022).
68 Chen, Q.N. (21 December 2021), ‘Hyundai’s fuel cell strategies in China’, INTEGRAL, https://www.integralnewenergy.com/?p=32428 (lastaccessed 13 June 2023).
69
Chen, ‘Hyundai’s fuel cell strategies in China’.
70
Ministry of Science and Technology, Ministry of Industry and Information Technology, and National Development and Reform Commission(2017), The Mid-and-Long Term Development Plan of Automobile Industry (汽车产业中长期发展规划),
http://www.gov.cn/gongbao/content/2017/content_5230289.htm (last accessed 13 June 2023).
71
Ministry of Industry and Information Technology (2020), Key Working Points of Standardizing New Energy Vehicles in 2020 (2020年新能源汽车标准化工作要点), https://www.miit.gov.cn/xwdt/gxdt/sjdt/art/2020/art_6b3143c8375341229ece2c37c65a5373.html (last accessed 13 June 2023).
72
Standardization Administration (2022), Key Working Dimensions of National Standardization (年全国标准化工作要点).
73
National Development and Reform Commission and National Energy Agency (2022), Opinions on Improving the Regime and Implementation
66

Measures of Energy Green Low-Carbon Transition (关于完善能源绿色低碳转型体制机制和政策措施的意见).
74International Energy Agency-Hydrogen Implementing Agreement (2016), ‘People's Republic of China becomes a member of the International
Energy Agency Hydrogen Implementing Agreement’, https://www.prnewswire.com/news-releases/peoples-republic-of-china-becomes-a-member-ofthe-international-energy-agency-hydrogen-implementing-agreement-iea-hia-300348681.html (last accessed on 14 February 2023); International
Renewable Energy Agency (7 June 2021), ‘IRENA and National Energy Administration of China sign MoU to advance the transition andcooperate on market development’, https://www.irena.org/News/pressreleases/2021/Jun/China-and-IRENA-Boost-Ties-as-Leading-Renewables-MarketEyes-Net-Zero-Goals (last accessed on 14 February 2023); International Partnership for Hydrogen and Fuel Cells in the Economy (2023),‘Partners’, https://www.iphe.net/partners (last accessed on 22 April 2023).
75
Delaval B., Rapson T., Sharma R., Hugh-Jones W., McClure E., Temminghoff M., Srinivasan V. (2022), Hydrogen RD&D Collaboration
Opportunities: China. Commonwealth Scientific and Industrial Research Organisation, Australia, http://mission-innovation.net/wpcontent/uploads/2022/09/H2RDD-China-FINAL.pdf (last accessed 13 June 2023).

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Geopolitics of hydrogen supply: an advantage for renewables-rich China
While China has been actively engaged in the acquisition and development of hydrogen-related technologies, its engagementwith questions of hydrogen supply is more recent. A clear policy only emerged with the Mid-and-Long-Term Hydrogen Industrial
Development Plan in 2022.76 As mentioned above, this set the relatively modest target of producing 100,000 to 200,000 tons ofrenewable hydrogen per year by 2025. This goal might be seen less as a strategy for meeting growing hydrogen demand thanas a strategy to promote hydrogen as a storage medium within a power system with increasing shares of renewable energy.
Indeed, this rationale is highlighted not only in the national hydrogen development plan but also in the 14th Five Year Plan for a
Modern Energy System and the 14th Plan for Renewable Energy Development.77 The latter states that renewable hydrogenproduction is envisioned both in low-cost sites for renewable power generation and in the vicinity of hydrogen demand centres.
Although the national hydrogen development plan clearly highlights the role of renewable hydrogen, China’s policies regarding
the production of hydrogen remain ambiguous. No policy has defined the different types of hydrogen production, nor is there aframework in place for limiting greenhouse gas emissions from hydrogen production. As a result, local and provincial
governments are pursuing strategies to ramp up all types of hydrogen production, including from coal, industrial by-products,
and nuclear power, depending on their local competitive advantage. Also, low-carbon hydrogen production, based on carbon
capture and storage technologies, is not emerging as a priority. There are only selected local developments and no clear policy
commitment from the central government. This ambiguity by the central government is likely to be a deliberate strategy tosecure the needed short-term hydrogen supply to fuel the development of emerging applications over the coming decade. This
includes its rapidly growing FCEV sector but also emerging ambitions to deploy hydrogen to decarbonize industrial processes. 78
In the long term, the government can rely on abundant renewable energy resources in the north and southwest of the country tosecure its renewable hydrogen supply. Indeed, abundant renewable energy resources in China offer an important strategic
advantage in a future carbon-neutral energy system. The replacement of oil and natural gas with renewables, whether in theform of electricity or hydrogen, would significantly reduce China’s current reliance on imported fossil fuels. Consequently, thedevelopment of international supply routes and trade-related infrastructure has not emerged as a priority of the central
government to date. Rather, as mentioned above, the government has articulated concerns regarding the acquisition oftechnological know-how in transport and storage to avoid dependence on foreign firms. This technological know-how will play
an important role in developing domestic supply routes, given the large distances between future hydrogen demand centres on
the coast and renewable energy resources further inland.79
Renewable hydrogen as a building block in China’s overseas energy investments
Despite China’s abundant domestic potential, Chinese SOEs have begun to engage internationally in the field of renewablehydrogen production, though largely based on strong pre-existing engagement in the respective countries’ energy sectors, mostnotably in Brazil, Pakistan, and Egypt. Chinese companies have held a strong position in Brazil’s electricity market for over a
decade, holding more than 10 percent of generation, transmission, and distribution.80 Both the State Power Investment
Corporation and the China Three Gorges International Corporation have invested in research and development activities in
Brazil in the field of renewable hydrogen.81 China Three Gorges, which operates 17 hydropower and 11 wind power projects in
Brazil, has also initiated a cooperation with Brazil’s National Service for Industrial Learning to develop a transaction platform forrenewable hydrogen.82

76

National Development and Reform Commission, The Mid-and-Long-Term Hydrogen Industrial Development Plan.

77

National Development and Reform Commission and National Energy Agency (2022), The 14th Five-Year Plan of Modern Energy System (十四五现代能源体系规划); National Development and Reform Commission, National Energy Agency, Ministry of Finance, Ministry of Natural Resources, Ministry of Ecology andEnvironment, Ministry of Housing and Urban-Rural Development, Ministry of Agriculture, China Meteorological Administration and National Forestry and Grassland
Administration (2022), The 14th Five-Year Plan of Renewable Energy Development (十四五可再生能源规划).
78

Gong X.H., Quitzow R. and Boute A. (2023),
Gong X.H., Quitzow R. and Boute A. (2023),
80
Global Development Center (25 January 2021), Lighting Up: China’s Arrival in Brazil’s Electricity Sector,
https://www.bu.edu/gdp/2021/01/25/lighting-up-chinas-arrival-in-brazils-electricity-sector/ (last accessed 13 June 2023).
81
Uchôa, V. (18 November 2021), ‘Brazil sets its sights on the global green hydrogen market’, Diálogo Chino,
https://dialogochino.net/en/climate-energy/48497-brazil-sets-sights-green-hydrogen-market/ (last accessed on 17 June 2022); China Three
Gorges International Corporation (2022), Operation Information of China Three Gorges International Corporation in 2021 in Brazil, (CTGI，
79

2021|稳中求进，突破创新——三峡巴西公司交出精彩答卷), ,https://www.ctgi.cn/ctgichina/1047999/1166000/1287664/index.html?3IbZtGUb=wiqsTalqEHshOzfEUxGiVZE8f90IixcSXTnk5VHnGJWl3QZ_HN7JErvAJ_ShYF
XQH4jcOcKrU2YejP68gG3R9DxnrE6Yv1Fy (last accessed on 25 July 2022).
82
CTGIC (2022), ‘Green hydrogen cooperation between CTGIC and SENAI’ (三峡巴西公司与SENAI合作投资创新绿氢项目),https://www.ctgi.cn/ctgichina/1047999/1166000/1288625/index.html?3IbZtGUb=oCbnualqEHshOzfEUxGiVZE8f90IixcSXTnk5VHnGJWl3QZ_HN7JErvAJ_ShYF
XQH4jcOcKrU2KCtiTS2.G0LkGCB0VL6IqS (last accessed on 25 July 2022).

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In Pakistan, the project developer Oracle Power has signed MOUs with PowerChina International Group and China ElectricPower and Technology Co., a subsidiary of the State Grid Corporation of China, to jointly develop renewable hydrogenproduction facilities in the country. Two initial projects are targeting 900 MW of electrolyser capacity.83 After COP27 in Egypt inNovember 2022, the China Energy Engineering Corporation signed an MOU with the Egyptian New and Renewable Energy
Authority, the Suez Canal Economic Zone Authority, sovereign wealth funds, and power transmission companies to develop
renewable hydrogen projects.84 In March 2023, the Egyptian government announced that construction of a US$5.1 billion
renewable hydrogen plant would commence in May 2024.85
These activities are consistent with China’s broader policy to promote the export of energy-related technology, services, andequipment and to increase its role in global energy value chains.86 In this vein, the development of energy infrastructure hasfeatured prominently in China’s BRI, representing between a third and half of investments since 2016. 87 Indeed, Egypt andPakistan constitute critical building blocks in the initiative. Egypt is a gateway to the African continent and the MediterraneanSea, while Pakistan is envisioned as an important element in creating new trade routes between China and the Middle East.
Both have been the destination of large Chinese energy-related investments in the past. Close to 8 GW of power generation
capacity has been developed under the China-Pakistan Economic Corridor since its inception in 2015.88 In Egypt, Chinese
SOEs have invested approximately US$3.5 billion in energy-related infrastructure.89 While Brazil has not officially joined the
BRI, it is a critical player on the South American continent.
China and the emerging geopolitics of hydrogenIn sum, China can build on important strengths as it gradually ramps up its domestic hydrogen sector and positions itself within
the global geopolitics of hydrogen. Firstly, China is a global manufacturing leader in both electrolysers and fuel cell vehicles.
Although it may still confront technological bottlenecks in some segments of the hydrogen value chain, notably in transport andstorage, and lag behind in quality, China has demonstrated its ability to catch up and even overtake technology leaders in thepast. Indeed, this is the primary focus of its policy to date.
Secondly, China holds abundant renewable energy potential, which it could mobilize to replace fossil fuels with hydrogen andhydrogen-based derivatives in the long term. This is an advantage in terms of energy security and provides the basis fordeveloping competitive green steel and chemical production. The latter may also offer a prospect for the development of lowerincome regions with high renewable potential in northern and western China, although this has not been a major priority to date.
China’s abundant renewable energy resources also provide a vast potential for domestic market development, once Chinese
policymakers decide to ramp up the production of renewable hydrogen. The timing of this could offer an important strategic
advantage in the global competition for industrial leadership, potentially providing Chinese firms with a lifeline in the face of
global downturn.
In terms of its international engagement, China remains clearly focused on building its technological capacities, promoting bothinward- and outward-oriented cooperation with international partners. Here FCEVs are a clear priority. Engagement in overseas
investments in hydrogen production largely continue the logic of China’s broader energy-related investments along the BRI andwith other strategic partners. Here hydrogen does not feature as a unique policy agenda but rather as a building block in China’s
overarching geopolitical strategy.

Whitlock, R. (11 October 2021), ‘Oracle Power signs cooperation agreement for green hydrogen facility in Pakistan’, Renewable Energy
Magazine, https://www.renewableenergymagazine.com/hydrogen/oracle-power-signs-cooperation-agreement-for-green-20211011 (last accessed on 19
August 2022).
84
Seetao (9 December 2022). ‘CEEC's hydrogen business goes to sea for the first time’, https://www.seetao.com/details/194586.html (lastaccessed on 1 December 2022).
85
Reuters (2023), ‘China Energy to build green hydrogen project in Egypt with expected investments worth $5.1 bln’,https://www.reuters.com/article/egypt-china-greenhyrogen-idUSS8N35D0E9 (last accessed on 1 May 2023).
86
National Development and Reform Commission and National Energy Agency (2016), Energy Production and Consumption Transition Strategy(2016–2030) (能源生产和消费革命战略（2016—2030）).
87
Wang, C.N. (2023), China Belt and Road Initiative (BRI) Investment Report 2022, https://greenfdc.org/china-belt-and-road-initiative-briinvestment-report-2022/ (last accessed on 17 May 2023).
88
China-Pakistan Economic Corridor Secretariat Office, ‘Energy projects under CPEC’, https://cpec.gov.pk/energy (last accessed 13 June 2023).
89
American Enterprise Institute, China Global Investment Tracker, https://www.aei.org/china-global-investment-tracker/ (last accessed 13 June2023).
83

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FINANCING NET-ZERO TRANSITION FOR DEVELOPING COUNTRIES: CHINA’S DILEMMA
IN A FRAGMENTING WORLDJi Chen and Shurui Jiang
Achieving net-zero transition for developing countries requires significant investment in clean energy. According to theInternational Energy Agency (IEA), to ensure that the world is on track to meet the 2050 target of net-zero emissions,developing countries would require over $1 trillion in clean energy investment per year by 2030; 90 in contrast, between 2015 and2023, clean energy investment received by developing economies (China excluded) ranged from $214 billion to $250 billion per
year.91 A significant financing gap thus exists, which will eventually impede global progress toward achieving the Paris
Agreement climate goal. ‘Geoeconomic fragmentation’, as the International Monetary Fund (IMF) describes the tendency of
globalization to slow or even reverse,92 is making it even more difficult for developing countries to close this gap.
China is the powerhouse of the global clean energy supply chain, and has been actively increasing overseas investments. Will
China be able to play a bigger role in financing developing countries’ net-zero efforts in such a fragmenting world? This article
attempts to answer this question by analysing the impacts of global geoeconomic fragmentation on developing countries’
financial ability to adopt clean energy, as well as China’s willingness and ability to provide more financial resources fordeveloping countries’ clean energy sectors.
Developing countries’ weaker capacity for financing clean energy
Developing countries are confronted with greater challenges in clean energy financing as their net-zero transition is often more
expensive than that of developed countries.93 The fragmenting geoeconomic landscape, as the IMF highlighted, further
weakens their financing capability for clean energy, primarily due to three characteristics that increase international financial
costs:
1.

Disruptions to international payment systems — geoeconomic fragmentation directly results in financial restrictions,
including the freezing of financial assets or investment activities, and in extreme cases, shutting down a cross-border
payment communication protocol, such as the removal of select Russian banks from SWIFT. 94 These restrictions leadto higher costs of international investment transactions and reduced volume of cross-border payments.

2.

Reversal of cross-border capital—investors may allocate less capital to countries that are less aligned on foreign policy
issues,95 for reasons that include financial constraints that increase transaction costs, information asymmetry, general
mistrust, and fear of expropriation.96

3.

Asset price volatility—increased geopolitical tensions could lead to disruptions to commodity markets, which in turncause higher inflation and justify a tightening of monetary policy. This could depress asset prices, raising borrowing
costs for non-financial corporations.97

The impact of geoeconomic fragmentation on financing costs is particularly pronounced for developing countries,98 as
evidenced by their substantially larger increase in financing costs resulting from geopolitical tension compared to developed
economies. For example, right after the outbreak of the Russia-Ukraine conflict, short-term nominal interest rates of developed

90 IEA (2021), Investment Data Explorer, https://www.iea.org/data-and-statistics/data-tools/investment-data-explorer.
91

IEA (2023), World Energy Investment 2023 Datafile, https://www.iea.org/data-and-statistics/data-product/world-energy-investment-2023datafile-2.
92 Aiyar, S., Chen, J., Ebeke, C. H., et al. (2023), Geoeconomic Fragmentation and the Future of Multilateralism, International Monetary Fund,
https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2023/01/11/Geo-Economic-Fragmentation-and-the-Future-of-Multilateralism527266.
93 Buhr, B., Volz, U, Donovan, C., et al. (2018), Climate Change and the Cost of Capital in Developing Countries, UN Environment,
https://unepinquiry.org/publication/climate-change-and-the-cost-of-capital-in-developing-countries/.
94
CNN (2022, February 26), White House and EU nations announce expulsion of ‘selected Russian banks’ from SWIFT,
https://edition.cnn.com/2022/02/26/politics/biden-ukraine-russia-swift/index.html.
95 Portes, R. & Rey, H. (2005), The determinants of cross-border equity flows. Journal of International Economics, 65(2), 269-296,
https://doi.org/10.1016/j.jinteco.2004.05.002.
96 IMF (2023), Global Financial Stability Report: Safeguarding Financial Stability amid High Inflation and Geopolitical Risks,
https://www.imf.org/en/Publications/GFSR/Issues/2023/04/11/global-financial-stability-report-april-2023.
97 IMF (2023), Chapter 3: Geopolitics and Financial Fragmentation: Implications for Macro-Financial Stability, https://www.imf.org//media/Files/Publications/GFSR/2023/April/English/ch3.ashx.
98 Georgieva, K. (2023, January 16), Confronting Fragmentation Where It Matters Most: Trade, Debt, and Climate Action, IMF Blog,
https://www.imf.org/en/Blogs/Articles/2023/01/16/Confronting-fragmentation-where-it-matters-most-trade-debt-and-climate-action.

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countries increased less than one percentage point in April 2022 compared to March 2021, while developing economies such as
Vietnam and Pakistan saw higher increases of 3–4 percentage points. Financing costs in some developing countries rose evenmore sharply. For example, the short-term nominal interest rate of Zimbabwe reached 80 per cent and that of Argentina rose to
44.5 per cent in April 2022.99
Short-term nominal interest rates (2021–2022)

0.5

12

0.4

Mar 2021(%)

Apr 2022
12.3

9

7.6

0.3
6

scenario 1- mean level of geopolitical tension
scenario 2- high level of geopolitical tension

0.7
Pakistan

Emerging anddeveloping economies

VietnamAdvanced economies

Australia

0

1.7
0.8
0.5
0.1
0.1
0.1
0
Canada

0

0.5
0

UK

3

6.9
4.8

4

0.2
0.1

11.5

Nigeria

15

Bangladesh

0.6

US

the increase percent offinancing cost (%)

Effect of geopolitical tension on financing costs (2001–2021)

Sources: International Monetary Fund, China International Capital

Sources: China Economic Information Center, Trading Economics,

Corporation Global Institute

China International Capital Corporation Global Institute

In addition, successive US rate hikes have lured international capital to the US, impeding the financing capacity of developing
countries. According to an IMF report published in 2021, financing costs in developing countries have increased due to US
monetary policy, with each percentage point rise in US interest rates tending to immediately lift long-term interest rates by onethird to two-thirds of a percentage point in emerging markets.100 In particular, US monetary tightening has had a greater financial
impact on developing countries than on developed countries. According to the IMF, developed countries are not significantly
affected since their higher level of financial development allows them to better hedge against such shocks, but net capital
inflows to developing countries might decline significantly when foreign interest rates rise. 101 Moreover, empirical studies showthat developing countries experience a greater decline in GDP compared to developed countries after US monetary
tightening,102 making it even more difficult for them to access lower-cost financing.
Higher financing cost impedes developing countries’ ability to attract domestic capital for their clean energy sectors. 103 As aresult, developing countries are likely to become even more dependent on international capital. The IEA estimates that about
one-quarter of total energy investment in emerging and developing economies (China excluded) today comes from international
institutions. In the clean energy sector, international investment plays an even more crucial role in some countries or projects.
For example, sub-Saharan Africa has long been highly dependent on international capital; 90 per cent of project financing forlarge-scale natural gas infrastructure in developing countries comes from international sources, providing project debt with longterm off-take agreements. According to the IEA, international investment will remain one of the main providers underpinningclean energy financing in developing countries through 2030.104

99 Neufeld, D. (2022, April 21), Mapped: Interest Rates by Country in 2022, Markets in a Minute, https://advisor.visualcapitalist.com/mapped-interest-rates-by-country-in-2022/.
100
Engler, P. , Piazza, R. , & Sher, G. (2021, April 5), How Rising Interest Rates Could Affect Emerging Markets, IMF Blog,
https://www.imf.org/en/Blogs/Articles/2021/04/05/how-rising-interest-rates-could-affect-emerging-markets.
101 IMF (2023), Global Financial Stability Report: Safeguarding Financial Stability amid High Inflation and Geopolitical Risks,
https://www.imf.org/en/Publications/GFSR/Issues/2023/04/11/global-financial-stability-report-april-2023.
102 Iacoviello, M. , & Navarro, G. (2019), Foreign effects of higher U.S. interest rates, Journal of International Money and Finance, 95, 232-250,
https://www.sciencedirect.com/science/article/pii/S0261560618303942.
103 Ameli, N. , Dessens, O. , Winning, M. , et al. (2021), Higher cost of finance exacerbates a climate investment trap in developing economies,
Nature Communications, 12, 4046, https://doi.org/10.1038/s41467-021-24305-3.
104
IEA (2021), Financing clean energy transitions in emerging and developing economies, IEA, https://www.iea.org/reports/financing-cleanenergy-transitions-in-emerging-and-developing-economies.

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More specifically, clean energy investment in developing countries today is highly dependent on international finance frompublic sources.105 Efforts are underway to mobilize investment through public finance by employing two main strategies: scaling
up public finance and mobilizing private finance. However, both strategies face challenges. First, the prioritization of otherissues, arguments in international climate agreements, and the lack of transparency in disclosure of funding aggravate thechallenges in scaling up public finance.106 For example, there is still a gap of $16.7 billion in developed countries’ commitment of$100 billion to climate-related financing.107 Second, the lack of profitability in climate investments,108 and limited utilization ofrisk-sharing instruments in mobilizing mechanisms such as guarantees, discourage the private sector from participating. 109
Private financing mobilized by public sources has reached only a 0.4:1 private:public ratio for low-income and middle-income
economies.110
China’s stronger impetus for investing clean energy in developing countries
China is one of the top investors in developing countries’ clean energy initiatives. China’s foreign direct investment (FDI) in theclean energy sector accounted for 6 per cent of the total FDI received by developing countries between 2013 and 2022, 111
making it the country with the sixth-largest investment in developing countries’ clean energy sectors. The largest investor in thissense is the US, which accounts for no more than 10 per cent. The following three factors could potentially drive further growthof China’s investments in this area:
1.

Stopping overseas coal-fired power projects frees up more space for clean energy financing. In September 2021,
China committed to ceasing support for building new coal-fired power projects overseas. The transition to clean energy
investment has paid off, with China’s overseas clean energy investment increasing to over $16 billion in 2021 and $17
billion in 2022, and non-clean energy investment falling rapidly from $13.5 billion in 2021 to $6.9 billion in 2022.112

2.

Growing demand for new energy minerals (metallic mineral resources—such as lithium, cobalt, and nickel—that play
an important role in renewable energy generation and new energy vehicles) drives investment in developing countries
with rich mineral resources. New energy minerals exhibit high concentration of supply and uneven regional distribution,
resulting in a mismatch between China’s supply and demand for renewable energy metals. With a substantial share of
global renewable energy production capacity, China’s demand for lithium, cobalt, and nickel accounts for 48 per cent,
32 per cent, and 56 per cent of the global total, respectively, while its domestic supply is far lower, with lithium, cobalt,
and nickel accounting for only 22 per cent, 1 per cent, and 4 per cent of the global total in 2020.

105 IEA (2021), Financing clean energy transitions in emerging and developing economies, IEA, https://www.iea.org/reports/financing-clean-energy-transitions-in-emerging-and-developing-economies.
106
Quatrini, S. (2020), Challenges and opportunities to scale up sustainable finance after the COVID-19 crisis: Lessons and promising
innovations from science and practice, Ecosystem Services, 48,101240, https://www.sciencedirect.com/science/article/pii/S2212041620301820;
Reichenbach, C. (2022), The missing dispute resolution mechanisms in international climate change agreements, Global Energy Law andSustainability, 3(2), 129-158, https://euppublishing.com/doi/full/10.3366/gels.2022.0077.
107 OECD (2022), Climate Finance and the USD 100 Billion Goal, https://www.oecd.org/climate-change/finance-usd-100-billion-goal/.
108 UNEP (2019), Driving Finance Today for the Climate Resilient Society of Tomorrow, https://www.unepfi.org/publications/driving-financetoday-for-the-climate-resilient-society-of-tomorrow/.
109 Gohdes, B. , & Christianson, G. (2017, December 20), INSIDER: Expanding the Toolbox: A Glimpse at a New Generation of MDB DeRisking Approaches, World Recourse Institute, https://www.wri.org/technical-perspectives/insider-expanding-toolbox-glimpse-new-generationmdb-de-risking-approaches.
110 AfDB, ADB, AIIB et al. (2021), 2021 Joint Report on Multilateral Development Banks’ Climate Finance, http://dx.doi.org/10.18235/0004505.
111 Data source: FDI Markets database, https://www.fdimarkets.com.
112 AEI (2022), China Global Investment Tracker, https://www.aei.org/china-global-investment-tracker/.

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NickelCobaltLithium

Global market share of lithium-cobalt-nickel supply and end-use demand (2020)

DemandSupplyDemandSupplyDemandSupply0%
China

North America

20%
EuropeOceania

40%
RussiaAfrica60%
Southeast Asia

80%
Central & South America

100%
Other regions

Sources: US Geological Survey, China Association of Automobile Manufacturers, EV Sales, China International Capital Corporation Global
Institute

The mismatch could be larger if China produces more in the global supply chain. According to the IEA, China’s
cathode production capacity is projected to rise from around 80 per cent of global production to 93 per cent by 2030, 113a clear sign of the continuous rise in China’s demand for renewable energy metals. However, the growth potential of
China’s renewable metal production capacity is limited. For example, the optimistic projection suggests that China’s
global share of lithium and nickel production capacity will by 2030 reach 24 and 14 per cent, respectively, 114 which
creates considerable potential for China to increase investment in countries with abundant new energy mineral
supplies. In fact, Chinese companies have already begun to take action. For example, CATL (Contemporary Amperex
Technology Co., Limited), the world’s leading battery manufacturer, has strategically positioned itself in Indonesia,
integrating nickel mining, refining, battery manufacturing, and recycling in comprehensive power battery projects. 115
3.

113

Growing market uncertainty brought by industrial and trade policies from a growing number of economies such as the
US and Europe are pushing Chinese manufacturers to deploy production abroad. US and European countries have
implemented green industrial policies for the clean energy sector, such as subsidies for the domestic lithium andphotovoltaic (PV) industries and tariffs on related import products from China.116 For example, the China International
Capital Corporation has compared the total costs of the lithium batteries and PV products manufactured for US
markets in China, South-East Asia, and the US.117 The results indicate that these products enjoy the lowest costs when
they are produced in the US, followed by South-East Asia, while products manufactured in China cost the most in this
scenario. In fact, a growing number of Chinese solar PV manufacturers have been relocating their production capacity
to South-East Asia. LONGi, for example, has established overseas production bases in Malaysia, Vietnam, and otherdeveloping countries to minimize its transaction costs.118

IEA (2023), Energy Technology Perspectives 2023, https://www.iea.org/reports/energy-technology-perspectives-2023.

114 BNEF (2023), Energy Transition Investment Trends 2023, https://about.bnef.com/energy-transition-investment/.
115 Bloomberg (2022, April 15), China Battery Giant CATL Joins $6 Billion Venture in Indonesia, https://www.bloomberg.com/news/articles/2022-

04-15/china-battery-giant-catl-joins-6-billion-venture-in-indonesia?leadSource=uverify%20wall.
116 For the US: The White House (2023), Inflation Reduction Act Guidebook, https://www.whitehouse.gov/cleanenergy/inflation-reduction-actguidebook/; for European countries: European Commission (2023), The Green Deal Industrial Plan, https://commission.europa.eu/strategy-andpolicy/priorities-2019-2024/european-green-deal/green-deal-industrial-plan_en.
117 CICC (2022, November 11), https://www.research.cicc.com/zh_CN/report?id=1114824 (in Chinese).
118 Reuters (2021, November 11), China's Longi plans to set up more manufacturing plants overseas,
https://www.reuters.com/business/sustainable-business/chinas-longi-plans-set-up-more-manufacturing-plants-overseas-2021-11-11/.

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In addition, strengthening cooperation with developing countries installing wind and solar power plants also creates
opportunities for Chinese companies to diversify their markets, and boosts exports of China’s renewable products to developing
countries through overseas project investment and development. From 2012 to 2020, Chinese companies accumulated an
installed capacity of over 9.4 GW of solar power plants and over 9.3 GW of wind power projects through overseas
investment.119
Geoeconomic fragmentation makes things harder
While there is growing impetus for China to provide more financing to developing countries for clean energy, particularly in newenergy minerals and manufacturing, the changing global landscape presents at least two challenges, as elaborated below,
impeding Chinese institutions from doing so.
First, being overly concerned about supply security may exacerbate the fragmentation risk for the new energy minerals market.
In recent years, there has been a growing emphasis on supply chain security in new energy minerals as a response togeoeconomic fragmentation.120 It is acknowledged that international trade and FDI liberalization enhance productivity andeconomic growth.121 However, overly protecting supply chain security has led to increased investment and trade barriers, whichhave imposed greater transaction costs on China’s financing to developing countries:
1.

From the demand side of new energy minerals, alliances such as the Energy Resource Governance Initiative and theMinerals Security Partnership have been launched to strengthen supply chain security by diversifying the sources ofsupply.122 These alliances tend to take protectionist and exclusive measures, and hinder the access for other countries
to invest in new energy minerals in key supplier countries.123

2.

From the supply side, resource-rich countries such as Argentina, Bolivia, and Chile are establishing an OPEC-stylelithium cartel and promoting nationalization to enable greater state control,124 raising concerns of potential restrictions
on lithium mining and foreign investment,125 which may not necessarily be beneficial to resource-owning countries in
the long run. For example, excessive involvement of the Mongolian government has negatively affected the profitabilityof mineral projects and caused delays in committed project timelines, resulting in reduced FDI in Mongolia.126

Second, the escalation of international trade restrictions will impose higher costs for China’s investment in clean energy
manufacturing sectors in developing countries. For example, the US government has conducted anti-circumvention
investigations against solar PV products from four South-East Asian countries, which may lead to restrictions on product exports
when tariff exemptions expire on 6 June 2024.127 This brings greater uncertainty to the industrial chains in South-East Asian
countries. Manufacturers in those countries would encounter constraints and may be compelled to recalibrate their supply
chains and production processes to adhere to the potential US anti-circumvention requirements. These uncertainties can result
in delays in investment or higher production costs,128 posing significant challenges for Chinese companies seeking to transfer
119 WRI (2021, November 5), https://wri.org.cn/insights/green-development-overseas-renewable-energy-investments (in Chinese).
120 Korinek J. (2018, July 23), Trade restrictions on metals and minerals, https://resourcetrade.earth/publications/trade-restrictions-on-metals-

and-minerals.
121 Dabla-Norris,E. , Romain Duval, R. (2016), How Lowering Trade Barriers Can Revive Global Productivity and Growth, IMF Blog,
https://www.imf.org/en/Blogs/Articles/2016/06/20/how-lowering-trade-barriers-can-revive-global-productivity-and-growth.
122 Reuters (2020, June 3), U.S. hopes to expand strategic minerals initiative, https://www.reuters.com/article/us-usa-minerals-idUSKBN23930I;
Vivoda, V. (2023), Friend-shoring and critical minerals: Exploring the role of the Minerals Security Partnership, Energy Research & Social
Science, 100,103085, https://doi.org/10.1016/j.erss.2023.103085.
123
Rajan, R. G. (2022, June 4), Just say no to 'friend-shoring’, https://www.gulf-times.com/story/718485/Just-say-no-to-friend-shoring.
124 Bloomberg (2023, March 30), Creation of 'Lithium OPEC' Underway in South America as EV Demand Surges Worldwide, https://www.bloomberg.com/press-

releases/2023-03-30/creation-of-lithium-opec-underway-in-south-america-as-ev-demand-surges-worldwide; Mining Technology (2023, May 9), Lithium
nationalisation: another step towards protectionism, https://www.mining-technology.com/comment/lithium-nationalisation-another-step-towards-protectionism/.
125
Global Times (2023, April 24), Chile's lithium nationalization plan may have negative impact on China's supply,

https://www.globaltimes.cn/page/202304/1289705.shtml.
126
Ganbold, M. & Ali, S. H. (2017), The peril and promise of resource nationalism: A case analysis of Mongolia's mining development,
Resources Policy, 53,1-11, https://doi.org/10.1016/j.resourpol.2017.05.006.
127
US Department of Commerce (2022, December 27), Department of Commerce Issues Preliminary Determination of Circumvention Inquiriesof Solar Cells and Modules Produced in China, https://www.commerce.gov/news/press-releases/2022/12/department-commerce-issuespreliminary-determination-circumvention.
128 Hoang, K. (2022), How does corporate R&D investment respond to climate policy uncertainty? Evidence from heavy emitter firms in the
United States, Corporate Social Responsibility and Environmental Management, 29(4), 936-949, https://doi.org/10.1002/csr.2246.

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clean energy production capacity. Furthermore, this might hinder the advancement of developing countries in the clean energy
sector, as it potentially reduces cooperation with China’s clean energy industry.
In recent decades, globalization has significantly enhanced production efficiency and reduced the cost of clean energy
technologies. For example, a study indicates that if countries shifted to complete domestic production starting from 2020, theglobal prices of solar panels in 2030 would be 20–25 per cent higher compared to relying on a globalized supply chain.129
Looking ahead, even with the global tendency towards geoeconomic fragmentation, it is critical for the entire international
community to create a more collaborative environment so that China’s stronger impetus toward financing developing countries’
net-zero transition can be fully taken advantage of.

THE IMPACTS OF THE EU CARBON BORDER ADJUSTMENT MECHANISM ON CHINA’S
SUPPLY CHAIN AND CHINA’S RESPONSE
Yan Qin
The European Union will implement a carbon border adjustment mechanism (CBAM) on certain imported goods from 2023. This
first carbon tariff in the world will have implications for the trade and supply chain of China, the EU’s largest trading partner. In
the beginning, the EU CBAM will mostly affect China’s aluminium and steel exports, and the impact is estimated to be limited.
The response from China to the CBAM to date has been twofold. Internationally, official communications criticize the CBAM asa trade barrier which violates the multilateral principle in global climate talks. Domestically, intense discussions are taking place
among enterprises regarding the CBAM’s implications for China as well as policy recommendations to both the government andprivate sector. This could be due to the recognition that, while the CBAM will initially only have a limited impact on China’s
exports, that impact will increase following the expansion of the CBAM, especially given the potential inclusion of more
downstream products.
In addition, the CBAM will be an external factor pushing Chinese energy-intensive enterprises to speed up decarbonization anddeploy more green electricity. The latter will also help China to integrate the vast deployment of renewables and reduce
curtailment. China’s energy-intensive industries are expected to phase down output under the carbon peak and carbon
neutrality pathways, and they are already experiencing stress due to the slowdown in the real estate sector. The EU CBAM may
also put pressure on China to speed up the expansion of its national emissions trading scheme (ETS) to CBAM-exposed
sectors.
Launching the CBAMIn May 2023, the EU CBAM legislation entered into force,130 after lengthy negotiations among EU lawmakers since it was
officially proposed in July 2021. The transitional period will start on 1 October, marking the beginning of the first carbon tariff in
the world. It is an important legislation in the EU’s landmark ‘Fit for 55’ package to put EU on the path to reduce emissions by 55
per cent in 2030 from 1990 levels.
The CBAM will run in parallel with the EU ETS, which has been in operation since 2005. It will follow a careful, predictable, andproportionate transition pathway for EU and non-EU businesses. It will initially apply to certain imported goods: cement, iron andsteel, aluminium, fertilizers, electricity, and hydrogen. In the transitional period from 2023 to 2026, importers of goods in these
sectors will only have to report greenhouse gas emissions embedded in their imports. From 1 January 2026, the CBAM will
formally start. Starting then, importers must purchase CBAM certificates each year based on the embedded emissions of theirgoods and surrender these certificates to comply. The price of CBAM certificates will be calculated depending on the weekly
average auction price of EU ETS allowances. The gradual phase-in of the CBAM will be combined with a gradual phase-out of
free allowances for CBAM sectors under the EU ETS until 2034.
The European Commission will release a series of regulations governing the implementation of the CBAM. On 13 June 2023,
129 Helveston, J. P. , He, G. , & Davidson, M. R. (2022), Quantifying the cost savings of global solar photovoltaic supply chains, Nature, 612, 83-

87, https://www.nature.com/articles/s41586-022-05316-6.
130 https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en.

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the Commission published a first call for feedback on specific reporting obligations in the CBAM’s transitional phase. The
consultation seeks details about the reporting obligations and information sought from EU importers of CBAM goods, as well as
the provisional methodology for calculating embedded emissions released during the production of CBAM goods.
EU CBAM timeline

2005: EUETS waslaunched.

July 2021:
CBAM wasproposed aspart of the'Fit for 55'
package.

1 October2023: CBAM
transitional
periodstarts;importers
reportembeddedemissions ofcoveredgoods.

31 January
2024: First
reportingperiod forimportersends.

1 January2026:
Permanent
phase starts;
importers
need to buy
CBAMcertificates.

2026–2034:
Free
allocations
in EU ETS
aregraduallyphased out.

Source: EU CBAM regulation from May 2023

Limited initial impacts on China’s supply chain costs
The objective of the EU CBAM is to avoid ‘carbon leakage’, i.e. to prevent EU production from moving to non-EU jurisdictions
with less stringent climate policies and carbon prices and EU goods being replaced by energy-intensive imports. By imposing
carbon costs on goods imported into the EU, the CBAM could create a level playing field to ensure that the carbon price ofimports is equivalent to the carbon price of domestic production and that the EU's climate objectives are not undermined.
Without doubt, the implementation of the CBAM will have impacts on the EU’s trading partners and global trade.
China was the largest partner for EU imports of goods in 2022, with a 20.8 per cent share according to Eurostat data.131
Telecommunications equipment and automatic data processing machines are the two most imported products from China into
the EU. Among the CBAM-covered sectors under the current set-up, aluminium and steel products from China will be exposedto the additional carbon costs. As can be seen in the figure below, China was the largest exporter of iron and steel in 2022 to
the EU, accounting for 17 per cent of total imports by volume. Among the exporters of aluminium to the EU, China’s share was
12 per cent, just behind Norway’s 18 per cent. Norway is exempted from the EU CBAM since it is already covered by the EU
ETS.

131 https://ec.europa.eu/eurostat/statistics-explained/index.php?title=China-EU_-_international_trade_in_goods_statistics.

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Top 10 exporters to the EU in the CBAM sectors, with their shares of total volume of imports in 2022—provisional data

Source: Information session on the CBAM organized by the EU at WTO Trade and Environment Week, 14 June 2023
https://www.wto.org/english/tratop_e/envir_e/envir_1206202310_e/envir_1206202310_e.htm.
*Norway and Iceland are excluded as they are covered by EU ETS

The introduction of EU CBAM will bring additional costs to China’s exports, albeit limited under the initial scope. Researchers at
China’s Ministry of Commerce estimated that 3.2 per cent of China’s total export value to the EU in 2022 was in CBAM-covered
categories (steel, aluminium, fertilizers, and cement).132
Although the initial impacts of the EU CBAM on China’s exports appear to be limited, the further expansion of the CBAM’s
scope and coverage will drive up these costs. Before the transitional phase ends in 2026, the Commission will review thescheme and assess whether to extend the scope to other goods at risk of carbon leakage, including organic chemicals andpolymers, with the goal to include all goods covered by the ETS by 2030. It will also evaluate whether to extend the scope toindirect emissions and to more products down the supply chain.
Using 2022 trade data as a proxy, it can be estimated that, if the CBAM expands to cover organic chemicals and polymers, 132
export goods from China to the EU will be affected, which will account for US$54.3 billion (or 9.7 per cent) of China’s totalexports to the EU. China’s exports of organic chemicals and polymers to the EU are valued at US$20.75 billion and US$15.42
billion, respectively. Assuming an average EU ETS allowance price of €80/tCO2, these two goods will face an additional carbon
cost of €304 million and €341 million, respectively. These carbon tariff costs will balloon further if more downstream products
are included in the CBAM later this decade, such as electrical machinery and appliances.

132 Ministry of Commerce of China (March 2023), ‘EU CBAM and its impacts on EU-China trades’ [欧盟“碳边境调节机制”及其对中欧经贸的影响],

http://www.ccceu.eu/2023-03/02/c_2852.htm.

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A recent report calculated three scenarios for the CBAM’s impacts on China’s exports, based on various assumptions about
sectoral coverage, default values, free allocation phase-out, and the inclusion of indirect emissions.133 One scenario indicatedthat adding low-value manufactured products containing emission-intensive basic materials further down the value chain could
lead to an increase in total CBAM fees from an estimated €485 million to €827 million, assuming an EU ETS price of €60/tCO2
and 2019 import volumes and emissions intensities.
China’s official response: criticism of EU CBAM
Even though the objective of the CBAM is to create a ‘level playing field’ and drive decarbonization efforts globally, it inevitably
draws critiques from non-EU trading partners since it applies carbon costs at the border. China has been one of the most vocal
opponents of the CBAM since this policy got more traction in the EU. China’s official response from various ministries has been
consistent, criticizing the EU CBAM as a unilateral and discriminative trade measure and barrier.
In April 2021, in a video call with the French and German leaders,134 Chinese President Xi Jinping said:
Responding to climate change is the common cause of all humanity. It should not be a bargaining chip for
geopolitics, a target for attacking other countries, or an excuse for trade barriers. . . . China will adhere to theprinciples of equity, common but differentiated responsibilities and respective capabilities, promote theimplementation of the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris
Agreement, and actively develop South-South cooperation on climate change.
This emphasis on common but differentiated responsibilities and an internal climate negotiations framework is persistentthroughout the official responses by Chinese government. On 26 July 2021, shortly after the EU officially proposed the CBAM,
the Ministry of Ecology and Environment’s spokesperson responded to the CBAM in a press conference.135 The ministry
reiterated that
CBAM is essentially a unilateral measure that unprincipledly extends the climate issue to the trade field, which not
only violates the rules of the World Trade Organization (WTO), but also the UNFCCC and Paris Agreement. . . .
China has always believed that multilateralism is the only way to solve global problems.
The tone in the response from China’s Ministry of Commerce in March 2022136 was similar: ‘China hopes that the relevant
legislative measures on the European side should be in line with WTO rules and avoid the formation of new trade barriers.’
During the COP27 global climate talks, Brazil, South Africa, India, and China critiqued the CBAM directly in a statement on 15
November 2022. It said, ‘Unilateral measures and discriminatory practices, such as carbon border taxes, that could result inmarket distortion and aggravate the trust deficit amongst Parties, must be avoided.’ 137
In March 2023, at the meeting of the WTO Committee on Trade and Environment, China proposed to use the Committee as aplatform and suggested members start with discussions on the EU CBAM at the June meeting of the Committee on Trade andEnvironment. The Chinese proposal pointed out that the WTO is an important venue for monitoring and considering trade
policies, and that trade policies aimed at achieving environmental objectives should be consistent with the basic principles andrules of the WTO and avoid constituting protectionist measures and green trade barriers. 138 In June at the WTO Trade andEnvironment Week, China hosted an event ‘Energy Transition and the Role of Trade Policy’ and circulated a communication
calling for ‘further elaboration on dedicated multilateral discussions on the trade aspects and implications of certain
environmental measures’.139

133 Sandbag E3G and Energy Foundation (August 2021), A Storm in a Teacup: Impacts and Geopolitical Risks of the European Carbon Border

Adjustment Mechanism, https://sandbag.be/wp-content/uploads/E3G-Sandbag-CBAM-Paper.pdf.
134 ‘Xi Jinping holds video summit with French and German leaders’ (16 April 2021),
https://www.fmprc.gov.cn/mfa_eng/gjhdq_665435/3265_665445/3291_664540/3293_664544/202104/t20210419_9169303.html.
135 China responded to EU CBAM (26 July 2021)[中方回应“碳关税”], https://www.chinanews.com.cn/cj/2021/07-26/9528890.shtml.
136 China Ministry of Commerce regular press conference (March 2022), http://www.mofcom.gov.cn/xwfbh/20220331.shtml.
137 ‘BASIC Ministerial joint statement at the UNFCCC’s Sharm el-Sheikh Climate Change Conference (COP27/CMP17/CMA4)’ (15 November2022), https://www.dffe.gov.za/mediarelease/basicministerialmeeting_cop27egypt2022.
138 ‘China calls for discussion of EU carbon tariffs under WTO framework’ (17 March 2023)[中国要求在WTO框架下讨论欧盟碳关税],https://cacs.mofcom.gov.cn/article/flfwpt/jyjdy/cgal/202303/176046.html.
139 ‘China submitted trade and environment policy proposals to WTO’ (20 June 2023)[中方在世贸组织提交贸易与环境政策相关提案],http://www.news.cn/world/2023-06/20/c_1129707504.htm.

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It can be expected that China will continue its hostility towards the CBAM officially, and stress the multilateral approach whilst
potentially challenging the CBAM in international trade courts. The EU designed the CBAM very cautiously to ensure it iscompatible with WTO rules,140 so these disputes will likely be symbolic and end without concrete opposition to theimplementation of the CBAM.
Behind the scenes: Chinese enterprises gear up
While China’s official international stance thus criticizes the CBAM as a trade barrier and calls for a multilateral approach,domestic discussions regarding the CBAM’s effect on China and how both the government and private sector should respondhave been intense. There are various reports and research projects disentangling the CBAM mechanism from the policy
process. Enterprises and industry associations have also kicked off a wide range of projects to help the CBAM-affected sectors
deal with the new scheme.141 The recommendations typically focus on improving the production process, changing the energy
mix, building robust emissions accounting and monitoring of products in line with EU standards, boosting the consumption ofgreen electricity, and implementing more advanced technology.
This huge interest from enterprises behind the scenes of the government’s official response could be due to concern about the
CBAM’s longer-term effects. The broad view is that, under its current scope, the CBAM will only have limited impacts on China’s
exports, and enterprises might shift their production lines, exporting the cleaner and greener products to the EU and the carbonintensive ones to regions without a carbon tariff. But the stakeholders are aware that the fallout will increase following the
expansion of the CBAM, especially the potential inclusion of more downstream products. Some enterprises may hold the viewthat they can have a competitive advantage in global markets if their products are greener, with more countries likely
implementing similar green trade barrier policies.
In addition, the CBAM could be an external factor to help the authorities to push Chinese energy-intensive enterprises to speed
up decarbonization and deploy more green electricity. The latter will also help China to integrate the vast deployment of
renewables and reduce curtailment. China’s energy-intensive industries are expected to phase down output under the carbon
peak and neutrality pathway. Pressure from an external factor such as the CBAM will add impetus and accelerate this trend.
Some sectors, notably steel and aluminium, are already experiencing stress due to the slowdown in real estate andinfrastructure stimulus.142
To tackle the challenge from the EU CBAM, there are also calls to speed up the expansion of China’s national carbon market tomore industry sectors. If importers can prove that a carbon price has already been paid during the production of an imported
good, the corresponding amount of carbon costs can be deducted from its CBAM costs. China launched its carbon market in
2021, although it currently only covers the power sector. The regulator already plans to expand the carbon market to moreindustry sectors. The CBAM could add pressure to accelerate this sectoral expansion, both in terms of carbon costs deduction
and robust emissions monitoring and verification. That said, the allowance prices in the EU and China are significantly different,with the former being €90/tCO2 and the latter only €8/tCO2. In addition, all the allowances in China’s national ETS are handed
out for free, and the intensity-based trading system means that the ETS does not necessarily impose carbon costs on covered
enterprises.
Nevertheless, if China speeds up to include more industry sectors in the carbon market, it will provide more leeway in futurebilateral negotiations regarding the CBAM. One possible scenario is that China tracks the expansion of the EU CBAM andmirrors its pathway to expand the national ETS accordingly, starting with the aluminium sector, then iron and steel. So, even as
China is denouncing the CBAM—and will likely align with other countries that seek to limit its impact—there are already signs
that the CBAM is accelerating efforts to decarbonize industries within China, even though implementation is slow.

140 ‘EU carbon border adjustment mechanism: implications for climate and competitiveness’ (13 June 2023),

https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2022)698889.
141 ‘How can China steel sector tackle the EU CBAM?’ (June 2023)[CBAM即将实施，钢铁行业如何应对],
http://www.mpi1972.com/xwzx/yndt/202306/t20230612_100344.html.
142 ‘China’s property sector set to be persistently weak for years, Goldman Sachs says’ (12 June 2023),
https://www.reuters.com/world/china/chinas-property-sector-set-be-persistently-weak-years-goldman-2023-06-12/.

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THE NORMALIZATION OF CHINESE INFRASTRUCTURE LENDING IN AFRICA
Dan Marks
Many myths have emerged about China’s involvement in infrastructure in sub-Saharan Africa in recent decades. In Western
capitals, the rapid expansion of Chinese infrastructure investment, mining, and other sectors is often seen as part of a grandstrategy that must be met with a similarly grand agenda, such as the Global Gateway and Power Africa.143 Western projects
have appeared promising but ultimately disappoint in terms of new public funds actually available. However, they are important
diplomatic assets which have been used effectively as policy and convening tools. In this conception, the reduced flow ofChinese money into African infrastructure more recently must be a strategic shift.144 The reality is likely somewhat different andlikely to extend, also, beyond China’s economic slowdown.
Chinese finance for Africa’s infrastructure emerged as an alternative to conventional Western development finance. Private
investors, especially from the United States, frequently complain that while returns can be good in Africa, on a risk-adjusted
basis they are often worse than in ‘easier’ markets. They argue that this is because the basis for adjusting returns is government
bonds, which in Africa frequently offer double-digit rates, with inflation and exchange rate depreciation too frequently tipping into
double digits as well. The argument is not uncontested, even within the business community; but added to these challenges,
illiquid and unfinanceable markets, the very high risk of delay, long development times, political, regulatory, legal, andreputational risks, challenges accessing sites, too frequent payment challenges, and infrastructure and port blockages meanthat private investment in African infrastructure typically requires credit enhancement and concessional support. Unsurprisingly,
private capital is therefore not available at the scale required to keep up with rapidly expanding populations and bridge thedaunting infrastructure gap.
To overcome the shortage of private capital and their own relatively limited resources, African governments have experimented
with a variety of risky strategies. International bond markets have been an outlet in recent years, but very loose conditions on
the use of funds have too often resulted in funds being diverted from their intended purpose. Substantial portions of theEurobonds issued by Zambia and Ghana were earmarked for the power sector but did not always find their way there, or were
invested poorly. When combined with sovereign debt crises, this has led to defaults. Ethiopia pioneered the use of diaspora
initiatives and the general public to fund its giant dams, but the reality sometimes appeared closer to expropriation of part of thesalaries of public-sector workers.145
Failure to identify effective alternatives has left sub-Saharan Africa unable to escape its unusually high dependence on Westerndevelopment finance and the multilateral institutions for infrastructure funding. Development finance has had some extremely
important and under-appreciated successes and is behind many of the continent’s electricity sector success stories in particular.
It has similarly played an important role in a massive and achingly slow process of sector reform over the past two decades
across much of Africa. But Western institutions are also accused of overreach in the way programmes are designed andimplemented, while developers complain about onerous, prescriptive, and lengthy processes and excessive risk aversion which
can undermine development impact. In the end, the main shortcoming of concessional finance is that there is not enough of it
compared with global private capital pools and government balance sheets in other parts of the world.
As such it is not surprising that the 2000s and 2010s saw many African governments embrace Chinese funding as it became
available. Not only was it quicker and less prescriptive in terms of government policy and behaviour, but Chinese money was
the only alternative to development finance available at scale at all. The willingness of Chinese financiers to invest in riskier
projects or projects which had become challenging for Western funders, such as coal power plants, was appealing.

143

Global Gateway, https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/stronger-europe-world/global-gateway/eu-africaglobal-gateway-investment-package_en; Power Africa, https://www.usaid.gov/powerafrica; Yu, S.Z. (4 November 2022), ‘What is China’s
investment end game in Africa?’, London School of Economics, https://blogs.lse.ac.uk/africaatlse/2022/11/04/what-is-chinas-investment-endgame-in-africa/.
144 Pilling, D., and Hille, K. (30 November 2021), ‘China cuts finance pledge to Africa amid growing debt concerns’, Financial Times,
https://www.ft.com/content/b7bd253a-766d-41b0-923e-9f6701176916; Bociaga, R. (25 March 2023), ‘China's Africa Belt and Road investment
drops as West spends more’, Nikkei Asia, https://asia.nikkei.com/Spotlight/Belt-and-Road/China-s-Africa-Belt-and-Road-investment-drops-asWest-spends-more.
145 Verhoeven, H., ‘The Grand Ethiopian Renaissance Dam: Africa’s water tower, environmental justice & infrastructural power’,
https://direct.mit.edu/daed/article/150/4/159/107371/The-Grand-Ethiopian-Renaissance-Dam-Africa-s-Water.

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Chinese lending to infrastructure appears in many cases to have been more opportunistic than strategic. Chinese contractors
are not always fussy about where the project is based or who the client is, as long as funding can be found. This author
remembers being shown the long active project list for one of the biggest Chinese contractors on the continent, featuring a
number of unlikely projects, and being told by the company’s head of business development that the strategy was to sign
nonbinding agreements and wait to see if the money turned up. Chinese lenders were keen to play their part, fulfilling theirmandate to support Chinese businesses abroad and keep order books full.
The upshot has been that China’s record in infrastructure financing in Africa is by no means the humbling display of power
politics and successful political economy it is sometimes portrayed as in the Western media and some political circles. Someexperienced bankers who have worked with Chinese financial institutions on African projects argue that risky loans weresometimes the result of a lack of experience with project finance structures and with African counterparties, particularly African
utilities. Consequently, Chinese lenders have faced the same payment challenges hindering everybody else and a similar
migration to more profitable regions as high-quality opportunities have dried up.
These trends appear to be significant factors in the retrenchment of Chinese infrastructure investment on the continent, which
was apparent even before the Chinese economy ran into trouble during the Coronavirus pandemic and subsequently. Looselending practices have been tightened up, and financing terms from many Chinese lenders increasingly resemble those of other
lenders. Funding patterns also appear to have shifted towards more commercially oriented institutions rather than export credit
or development agencies.
The shine has also worn off Chinese money for some African governments, which have occasionally been caught by surprise by
the high cost of buried loan clauses and rocked by the political backlash to practices such as importing Chinese workers rather
than hiring locals. Some projects have proven to be bad commercial propositions, not having been backed up by effective
feasibility studies beforehand, and have become a fiscal drag. Others—such as Morupule B coal power plant in Botswana, thecountry’s largest ever public investment, and the Karuma dam in Uganda—have experienced serious construction faults (aproblem which, it should be noted, is not restricted to Chinese projects).146 More recently, the well-publicized standoff between
Chinese and Western lenders in Zambia and Ghana has shown China to be willing to inflict significant pain on African countries
where it suits its interests.147
At the same time, infrastructure funding on the continent has dropped off more generally, notably in the power sector, whichpeaked in 2018 in terms of new capacity added before dropping precipitously in 2020 and 2021 and failing to recoversignificantly in 2022.148 The continent was hard-hit by inflationary engineering, procurement, and construction costs and tightmargins, which, coupled with rigid procurement processes and tight margins, have caused lengthy delays. With macroeconomic
and political crises proliferating on the continent, all infrastructure investors are struggling to find suitable projects in which topark their cash. More bustling sectors in off-grid and captive electricity and micro-mobility see a much more limited Chinesepresence.
China has encountered the same challenges as other lenders to the continent, with its willingness to lend not always
reciprocated by a willingness or ability to pay. African governments appreciate that being able to secure funding for large-scale
infrastructure is not necessarily a reason to go ahead with it, and that Chinese money is not a silver bullet for thedevelopmental, geographic, and demographic challenges that make infrastructure development so difficult in many parts of thecontinent. This has already resulted in a degree of ‘normalization’ of Chinese infrastructure lending to Africa, with Chinese
institutions weighing their lending more carefully. African governments view China as a useful source of additional funding withconditions which can be different, for better or worse, than alternatives, as well as a useful strategic foil for slow-moving andclunky but still extremely important Western lenders.

146 The Botswana Gazette (3 April 2020), ‘BPC’s unending troubles at Morupule B’, https://www.thegazette.news/business-2/bpcs-unending-troubles-at-morupule-b/; 256 Business News (17 May 2016), ‘Sinohydro concedes to defects in Karuma Dam concrete works’,https://www.256businessnews.com/sinohydro-concedes-to-defects-in-karuma-dam-concrete-works/.
147 Marks, J. (25 May 2023), ‘Ghana agrees debt restructuring deal: history in the making or Groundhog Day?’, https://www.africaenergy.com/news-centre/article/ghana-agrees-debt-restructuring-deal-history-making-or-groundhog.
148 African Energy Live Data (2023), https://www.africa-energy.com/live-data.

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The likely trajectory is a steadier relationship where Chinese infrastructure lending more closely relates to the challenges ofexecuting projects and getting paid for them on the ground. China will need to adapt its strategy to the changing nature ofopportunities in Africa, which have drifted away from big-ticket, high-risk prestige hydropower and coal plants towards smallerscale, incremental solar and wind projects. These do not offer the level of return during construction or comparable scale whichhave attracted large Chinese engineering, procurement, and construction (EPC) contractors over the past decade. Whilefinancing margins for renewables have also been squeezed by tightly structured procurement programmes, there are attractive
opportunities. Signs that an EPC-plus finance approach may be emerging—used effectively and at reasonable scale for solar
power in Ghana and Angola in recent years—could suit a Chinese approach which is able to move much more quickly to lend to
public utilities than Western counterparts and has access to greater funds than local capital markets can currently provide.
Chinese financing for infrastructure, particularly electric infrastructure, was never the panacea it was sometimes made out to be.
It has been a significant additional source of funding, but ultimately faces the same developmental challenges to investment andprojects as other lenders. Bridging the infrastructure gap has always been a much more complex task than simply accessing
more sources of capital and depends, ultimately, on the political stability, vision, and will of African states.

NAVIGATING GEOPOLITICAL COMPLEXITY THROUGH COLLECTIVE ACTION ON CLEAN
ENERGY TRANSITION IN SOUTH-EAST ASIA
Muyi Yang, Xunpeng Shi, and Weihua Wang
The window of opportunity for humanity to mitigate the worst impact of climate change is rapidly closing. As highlighted in thelatest State of the Global Climate report by the World Meteorological Organization, concentrations of the three main greenhousegases—carbon dioxide, methane, and nitrous oxide—reached a record high in 2021, pushing the global average temperature
1.15°C above pre-industrial levels.149 This puts the world in perilously close proximity to the 1.5°C threshold that scientists argue
could initiate a climate crisis.
To reverse this alarming trend, prompt and concerted global action is crucial, particularly in facilitating a more rapid and deep
decarbonization of the energy sector, commonly referred to as clean energy transition. This energy transition, however, faces
numerous challenges. A key challenge is how to foster cooperation to address the shared challenge of climate change in an eraof geopolitical competition.
Some suggest that if major powers share a common interest in leading the world to address critical global challenges likeclimate change, it may be possible for international cooperation in a specific area, effectively separating it from geopoliticaltensions. Unfortunately, such compartmentalization seems to be unlikely in practice. In September 2021, Wang Yi, then the
Chinese foreign minister, warned US climate envoy John Kerry during his visit to China that US-China climate cooperation could
not be an ‘oasis’ surrounded by a desert.150
In such settings, a possible approach to shape geopolitics in a cooperative, rather than competitive, manner is to useinterdependency as a more organic path to the cooperation and dialogue needed to peacefully manage competition. This article
demonstrates why South-East Asia’s clean energy transition provides good opportunities to implement this approach.
Specifically, it shows that the transition could serve as a bridge for fostering cooperation between major powers or, at the very
least, establishing channels of communication between them, a modest but essential step towards managing geopolitical
divides.

149 World Meteorological Organization (2023), The State of the Global Climate 2022, Geneva: WMO, https://public.wmo.int/en/media/press-

release/wmo-annual-report-highlights-continuous-advance-of-climate-change.
150 The State Council (2021), ‘Wang Yi meets with U.S. president’s special envoy for climate issues John Kerry via video conference at request’,Beijing, https://www.gov.cn/guowuyuan/2021-09/02/content_5634838.htm.

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The convergence of interests in South-East Asia’s clean energy transition
The energy mix in South-East Asia historically has been dominated by fossil fuels, which accounted for more than 80 per cent of
the region’s primary energy supply in 2020.151 This dominance has contributed to the provision of cheap and reliable energy inthe region and consequently to its socio-economic prosperity. It has, however, also contributed to escalated air pollution andcarbon emissions, highlighting the unsustainable nature of the current, fossil-fuelled development.
It is reported that nearly all people in South-East Asia live in areas with particulate pollution levels higher than the World HealthOrganization’s guideline of 5 µg/m3.152 These particles—mainly originating from industrial emissions, power generation, vehicle
emissions, and forest fires—are one of the deadliest forms of air pollution and could significantly heighten the risks of lungcancer and heart disease. South-East Asia, one of the regions most vulnerable to climate change, is also experiencing fastgrowing carbon emissions at an average annual rate of 5 per cent, from 1,039 million tonnes (Mt) CO2-eq in 2005 to 1,815 Mt
CO2-eq in 2020.153
Recognizing these sustainability challenges, countries in the region are showcasing a strong commitment to the clean energy
transition as a means to propel their future development. Facilitating this transition is, however, not an easy task, especiallyconsidering the need, in the context of fast-growing economies, to secure a sufficient and reliable supply of clean energy tosupport their developmental aspirations while advancing decarbonization goals.154 As South-East Asian countries grapple withthe challenge of charting their paths to a clean energy future, international support that can assist their energy transition ishighly critical.
One particular area for support is to mobilize the large investment required to progress the transition along 1.5°C-aligned
pathways. This need for support is substantiated if one notes that total energy investment by the region’s public sector,
historically the largest source of funding for energy sector development, was about US$20 billion over the period 2016–2020.155
This amount is insufficient to meet even one year’s investment needs, estimated by the International Renewable Energy Agency
at approximately US$40 billion per year to 2030 for the power sector alone.156
It is also challenging for the public sector in South-East Asia to increase its budgetary allocation to clean energy projects andsystems, especially considering the region’s high level of public debt, which is partly due to substantial fiscal spending to protect
the vulnerable from the harsh socio-economic impacts of the Covid-19 pandemic. General government debt-to-GDP ratio
increased from 40 per cent to 57 per cent in South-East Asia over the period 2015–2021.157
China, one of the largest investors in the region’s energy sector, can certainly help South-East Asian countries fulfil their climate
obligations while meeting their development and clean infrastructure needs. 158 Indeed, Chinese and South-East Asian leaders
have made a strong commitment to enhancing cooperation in clean energy transition, either under the aegis of the Associationof Southeast Asian Nations (ASEAN) or bilaterally. The ASEAN-China Strategic Partnership Vision 2030, adopted at the 21st
ASEAN-China Summit in 2018, emphasized the importance of taking a regional approach to clean energy development. In
2022, the Plan for Action to Implement the ASEAN-China Strategic Partnership for Peace and Prosperity (2021–2025) was
released as a guiding document to further enhance ASEAN-China cooperation in areas of mutual interest. Attracting investment151

ASEAN Center for Energy (2023), Outlook on ASEAN Energy 2023, Jakarta: ACE, https://aseanenergy.org/outlook-on-asean-energy-2023/.

152 Energy Policy Institute, University of Chicago (2022), ‘Southeast Asia fact sheet’, Air Quality Life Index, https://aqli.epic.uchicago.edu/wp-

content/uploads/2021/09/SE-Asia-2022.pdf.
153 ASEAN Centre for Energy (2022), The 7th ASEAN Energy Outlook, Jakarta: ACE, https://aseanenergy.org/the-7th-asean-energyoutlook/#:~:text=In%202020%2C%20ASEAN%20achieved%20an,target%20of%2032%25%20by%202025.
154 Shi, X. (2016), ‘The future of ASEAN energy mix: a SWOT analysis’, Renewable and Sustainable Energy Reviews 53, 672–680,
https://scholar.google.com.au/citations?view_op=view_citation&hl=en&user=BKH-KhUAAAAJ&citation_for_view=BKHKhUAAAAJ:kRWSkSYxWN8C.
155 International Energy Agency (2022), Southeast Asia Energy Outlook 2022, Paris: IEA, https://www.iea.org/reports/southeast-asia-energyoutlook-2022.
156 International Renewable Energy Agency (2022), Renewable Energy Outlook for ASEAN: Towards a Regional Energy Transition, Abu Dhabi:
IRENA, https://www.irena.org/publications/2022/Sep/Renewable-Energy-Outlook-for-ASEAN-2nd-edition.
157
Economic and Social Commission for Asia and the Pacific (2023), Economic and Social Survey of Asia and the Pacific: Rethinking Public
Debt for the Sustainable Development Goals, Bangkok: UNESCAP, https://www.unescap.org/kp/2023/economic-and-social-survey-asia-andpacific-2023-rethinking-public-debtsustainable#:~:text=The%20Survey%20for%202023%20examines,long%2Dterm%20sustainable%20development%20prospects.
158 Yao, L., Andrews-Speed, P., and Shi, X. (2021), ‘ASEAN electricity market integration: how can belt and road initiative bring new life to it?’,
The Singapore Economic Review, 66 (1), 85–103, https://scholar.google.com.au/citations?view_op=view_citation&hl=en&user=BKHKhUAAAAJ&cstart=20&pagesize=80&sortby=pubdate&citation_for_view=BKH-KhUAAAAJ:P7Ujq4OLJYoC.

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in clean energy and network infrastructure was identified as a priority area for action. Later that year, the ASEAN-China Joint
Statement on Strengthening Common and Sustainable Development was made at the 25th ASEAN-China Summit, reaffirming
the importance of cooperation in clean energy transition.
To turn these high-level commitments into actual cooperation, China can support necessary policy and regulatory reforms andfinancial innovations in South-East Asian countries to facilitate large-scale investment in their clean energy transition. This
would result in mutually beneficial outcomes. China would gain access to new markets for its clean energy technologies andservices, as well as investment opportunities. These would, in turn, provide avenues for market expansion and economic
growth. Meanwhile, South-East Asian countries would receive the much-needed financial and technical support to enhance theirclean energy supply and manufacturing capacity, thereby fostering a new, more sustainable mode of development driven byclean energy.
Cooperation between China and South-East Asia on clean energy transition also provides a platform that could enable
collaboration with Australia, European countries, the United States, and other major countries. These countries have shownstrong willingness to support South-East Asia’s transition towards a clean and more sustainable energy future, as evidenced by
the signing of the Just Energy Transition Partnerships with Indonesia and Vietnam, as well as various ongoing cooperative
programmes in clean energy transition supported by Western donor agencies, such as the Clean, Affordable and Secure
Energy programme and USAID’s Smart Power Program.
The case for China’s cooperation with other major countries in supporting clean energy transition in South-East Asia arises fromthe necessity to increase private participation and leadership in driving the transition process and to deepen clean energy
investment from ‘billions to trillions’.159 This necessitates actions that go beyond standard business and financial strategies.
Indeed, it requires more fundamental changes to improve the region’s underpinning architecture, to lower the risks and costs ofclean energy projects, and to support large-scale private investment in clean energy technologies and systems. Thisarchitecture encompasses planning practices, permitting processes, regulatory frameworks, market mechanisms, and financial
facilities.
China, a global leader in clean energy technologies, has substantial experience in mobilizing large investments in clean energy
projects and innovations. Collaborating with Western donor agencies and multilateral development banks would provide
valuable channels for effectively translating Chinese experience and good practice into tailored lessons and insights that are
more applicable to the specific local contexts of South-East Asia.160 The value of collaboration with these organizations is further
reinforced by their long-established relationships with South-East Asian countries in policy development and capacity building.
South-East Asia’s adeptness in managing geopolitical complexity
South-East Asia has, over the years, demonstrated a strong capacity to pragmatically manage diverse interests and demands,
maintaining a delicate balance between major powers. The region’s close economic relationship with all major countries, despite
their internal differences and divergent interests, is a testament to this capacity.
When ASEAN was established in 1967, it was strongly criticized by China as an American creation intended to containcommunism.161 But in recent decades, since China started to open up its economy in the 1980s, the regional bloc has forged astrong economic relationship with China, and its bilateral trade with China approached US$1 trillion in 2022, marking a
15 per cent year-on-year increase.162 This growth solidifies China’s position as the region’s largest trading partner for over a
decade.163

159 World Bank (2022), Unleashing Sustainable Finance in Southeast Asia,

https://openknowledge.worldbank.org/server/api/core/bitstreams/7ff934ad-de0a-5fd0-bed1-42e1de4f5717/content.
160 Xu, Q., Yu, J., Shi, X., and Collinson, E. (2022), ‘The potential of energy cooperation between China and Australia under the Belt and Road
Initiative’, Economic and Political Studies, 10(4), 369–386, https://scholar.google.com.au/citations?view_op=view_citation&hl=en&user=BKHKhUAAAAJ&cstart=20&pagesize=80&sortby=pubdate&citation_for_view=BKH-KhUAAAAJ:-mN3Mh-tlDkC.
161 Chatterji, R. (2021), China’s Relationship with ASEAN: An Explainer, Observer Research Foundation,
https://www.orfonline.org/research/china-relationship-asean-explainer/.
162 Global Times (2023), ‘Trade between China and ASEAN grows 15% in 2022, first year of RCEP’s enforcement’,
https://www.globaltimes.cn/page/202301/1283779.shtml.
163 Xinhua (2022), ‘China remains ASEAN’s largest trading partner’, China Daily,
https://www.chinadaily.com.cn/a/202208/30/WS630d74bda310fd2b29e74f93.html.

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Meanwhile, South-East Asia has successfully maintained strong economic and trade relationships with the United States, which
remains the region’s largest source of foreign direct investment.164 Bilateral trade in goods between the two reached US$364
billion in 2021, making the United States the second largest trading partner of South-East Asia.165 The region also boasts strong
economic and trade connections with Australia, European countries, Japan, and South Korea, supported by a range of bilateraland multilateral trade and investment agreements.
South-East Asia’s adeptness in managing geopolitical complexity, as demonstrated by its success in forging close economic
ties with almost all major powers, will be critical for ensuring clean energy transition becomes a catalyst for collaboration andtrust-building, rather than another arena where major powers compete with each other for influence.
Final remarks
While it may be unrealistic to expect South-East Asia to solve the current geopolitical puzzle, the region can still play animportant role in promoting discussions on collective action that will support its clean energy transition. Such discussions could
identify areas where Australia, China, the United States, and other major countries can work with each other, based on mutual
understanding, accommodations, and tacit agreements.
A possible starting point for this collaboration could be programme- and project-level activities centred on de-risking clean
energy investment. Clean energy projects in South-East Asian countries, like in many other developing countries, are affectedby a range of issues—such as complex and non-transparent permitting processes that involve multiple institutions withoverlapping and sometimes unclearly defined roles and responsibilities, the unavailability of commercial arrangements (e.g.
power purchase agreements) that can provide sufficient and predictable revenues for capital-intensive investments, and lack ofcredible off-takers of renewable output, due to the provision of electricity subsidies that significantly affect the financial health of
the national electric utilities.
These electricity-specific issues could undermine risk-adjusted returns for investors and hence the availability of bankableprojects, which are often compounded by broader issues—including restrictions on foreign direct investment, weak governance,
currency risks, and weaknesses in local banking systems and capital markets.
In such settings, South-East Asia is very likely to experience substantial investment shortfalls in deploying renewable generation
projects and grid infrastructure, as the flows of private investment tend to concentrate on renewable energy projects in low-risk,
mature economies. This situation would render many perceived socio-economic benefits associated with clean energy
investment unattainable in South-East Asia, thereby posing a significant development financing challenge—a challenge that
Chinese Premier Li Qiang called for the international community to jointly address at the Summit for a New Global Financing
Pact.166
The Global Development Initiative is the proposal made by China to rectify the situation. Here, de-risking clean energy
investment in developing countries is not only about creating a safety net for private investors in clean energy assets, protecting
their profits from various electricity-specific and broader risks. More importantly, it is about providing stimulus for upgrading local
industries, creating job opportunities, and ultimately, fostering a more sustainable development driven by clean energy. After all,de-risking is merely the means to achieve the higher ends.
This initiative serves as a multilateral platform that can mobilize resources, expertise, and knowledge from China, partneringcountries, and international organizations, to support the complex and interconnected changes required to facilitate large-scaleclean energy investment in South-East Asia. This initiative has found some resonance among South-East Asian countries, withthe hope that it would bring prosperity to the region. It also provides opportunities for collaboration with major powers insupporting the region’s clean energy transition and green development, offering new markets for their clean energy technologies
and services, as well as investment opportunities.
Such collaboration could help create an ambition loop, where clean energy investment in South-East Asia spurs development
and job creation. These positive outcomes would give policymakers in the region confidence that they can go further and faster164 U.S. Department of State (2022), ‘The United States-ASEAN relationship’, https://www.state.gov/the-united-states-asean-relationship/.
165 ASEANstats (2023), ASEAN Statistical Year Book 2022, https://www.aseanstats.org/publication/asyb2022/.
166 Cao, D. (2023), ‘Action urged on financing gap’, China Daily,

http://global.chinadaily.com.cn/a/202306/24/WS649640a3a310bf8a75d6b52b.html.

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by setting more ambitious targets for driving the transition. These outcomes could also send a positive message to the worldthat cooperation between major powers is possible and beneficial. This would foster hope and inspire other countries andorganizations to join in, leading to ever-widening circles of cooperative efforts in building a clean, sustainable, and prosperous
future.

US–CHINA RELATIONS AND THE GLOBAL ENERGY TRANSITION
Jane Nakano
The energy transition has become the latest arena for competition between the United States and China, as the two countries
are making significant investments in the development and deployment of clean energy technologies. They seek to seize theeconomic opportunities and industrial strength that could arise from being a leader in the ongoing transition away from fossil fueldominance in the global energy system. In 2022 alone, clean energy technology sectors—such as renewables, nuclear, carbon
capture, and hydrogen—attracted over US$1.1 trillion in investments.167
Bilateral competition in global energy transition is playing out on two fronts: manufacturing and innovation. On the manufacturing
front, China leads the world in capacity expansion. In terms of year-on-year global growth in manufacturing capacity in 2022,
China’s share accounted for 90 per cent in solar photovoltaic (PV), 75 per cent in batteries, 60 per cent in onshore windturbines, and 40 per cent in electrolysers. In comparison, the US share was less than 3 per cent in solar PV, 7 per cent inbatteries, 10 per cent in onshore wind turbines, and 20 per cent in electrolysers.168
The competition on the manufacturing front also entails the supply chain for many minerals that are key for the energy transition.
China has a commanding presence along the global mineral supply chains, particularly in their processing segment. Although
the extraction of various energy transition minerals is robust in multiple countries—including Australia, Chile, and Indonesia—
China’s share in global processing stands at two-thirds for lithium and one-third for nickel. When it comes to rare earth, China
has about 60 per cent of global mining, but accounts for nearly 90 per cent of processing. In contrast, the US supply chains arehighly vulnerable to external supply disruptions. Today, the nation depends on imports to meet over 50 per cent of its
consumption for 47 minerals, including 100 per cent for 17 of them on a net-import basis. Notably, China is the largest source ofimports for 26 of the 50 minerals that are classified as critical by the US Geological Survey.169
On the innovation front, China is fast emerging as a global leader. A good proxy for global trends in innovation capacity is whofiles patents for what technologies and how central the patent is to that technology supply chain. Chinese patent filing trends
have shown both quantitative and qualitative growth. For example, Chinese firms hold patents to a rising number of core solar
PV technologies.170 Even for less mature clean energy technologies, such as hydrogen, patent applications by Chinese entities
are on a strong rise. In the last decade, international patents were led by the European Union, Japan, and the United States, but
China’s patent applications grew at 15.2 per cent annually—albeit from a modest baseline—while US filings decreased during
the same decade.171
In an effort to rectify lagging US competitiveness, the US Congress has passed several important laws in the recent years. The
Infrastructure Investment and Jobs Act (IIJA) of November 2021 provides US$7.9 billion to strengthen clean energy supply
chains, and US$9.5 billion for hydrogen programs, including US$1 billion for research and development. The Inflation Reduction
Act (IRA) of August 2022 provides US$369 billion for climate and clean energy, including the Advanced Manufacturing
Production Tax Credit, which aims to facilitate the domestic production of clean energy components, such as PV cells andwafers, solar grade polysilicon, wind energy components, battery cells, and critical minerals. Additionally, the IRA Clean Vehicle
Credit seeks to expand US electric vehicle (EV) supply chains through sourcing requirements for critical minerals and battery
components.

167

BloombergNEF (January 2023), Energy Transition Investment Trends 2023, https://about.bnef.com/energy-transition-investment/.

168 International Energy Agency (May 2023), The State of Clean Technology Manufacturing, p.17-19.

Zongyuan Zoe Liu, ‘How to Secure Critical Minerals for Clean Energy Without Alienating China,’ Council on Foreign Relations, May 25,
2023. https://www.cfr.org/blog/how-secure-critical-minerals-clean-energy-without-alienating-china
170 Zhou, Y., et al. (2018), ‘Comparing the international knowledge flow of China’s wind and solar photovoltaic (PV) industries,’ Sustainability,
Volume 10, Issue 6. [NB: no specific page number as my statement derived from the entire article]
171 International Energy Agency and European Patent Office (January 2023), Hydrogen Patents for a Clean Energy Future, p.10.
169

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Bilateral relations in clean energy development and deployment are not necessarily a zero-sum competition. In a few sectors,
collaboration is persisting. Carbon capture, utilization, and storage (CCUS) is one such area. The United States is the mostexperienced with CCUS technology. China has become home to around 100 CCUS demonstration projects. These include
some of China’s firsts, such as the integrated megaton-scale Qilu-Shengli project, and the offshore carbon dioxide storage
project by the China National Offshore Oil Corp. To further their technological expertise through testing and demonstration
opportunities in China, US companies are pursuing engagement with Chinese companies. For example, Chevron is partneringwith PetroChina, together with a few other non-Chinese companies, to evaluate and advance large-scale CCUS through a
project in Singapore.172 Also, ExxonMobil China has agreed with the China National Offshore Oil Corp., Guangdong
Development and Reform Commission, and Shell China to jointly study a large-scale CCUS hub in Daya Bay.173
The auto sector is another example. Accounting for about 60 percent of global EV sales in 2022, China is the largest EV market
in the world and an important market for American automakers. Also, China is currently the main source of competitively priced
EV batteries, including for US automakers. For example, Tesla’s EV factory in Shanghai, which procures EV batteries
manufactured and assembled by China’s Contemporary Amperex Technology Co., Limited (CATL), has been its largest export
base, supplying cars to markets outside North America.174 In 2022, the Shanghai factory delivered over 710,000 vehicles,
accounting for over half of Telsa’s global deliveries that year.175 The emerging EV market in the United States is attracting
Chinese companies, too. For example, CATL has shown interest in participating in US EV value chains through partnership with
Ford Motor Co. CATL may be the first, but it is unlikely to be the last Chinese company to seek a presence in the United States.
Additionally, bilateral trade remains strong in liquefied natural gas (LNG), a low-emission hydrocarbon that has become an
important energy source in China. Despite its debut as a global LNG importer only in 2016, China has risen to be the world’s
leading importer in 2021, and US LNG has become a key source of imports. Notably, Chinese buyers have signed a number oflong-term LNG contracts with US sellers since 2021.
Despite these synergies, the nature of bilateral competition seems rapidly leaning towards zero-sum in the energy transition
arena as China has become a bipartisan focus of concern. Chinese actions in recent years, ranging from military build-up toeconomic coercion, have turned Washington’s mistrust of Beijing into distrust.
Nowhere is this more indicative than in the context of critical minerals supply chains. Since the 2010 Chinese embargo of rareearth supplies to Japan over a territorial dispute, Washington has begun evaluating the security of its access to rare earth andother critical minerals. The US policy emphasis is on helping to expand global supply chains and diversifying stakeholders andsources to safeguard the global energy transition. However, shifting domestic supply chains away from China appears to US
policymakers to be a pressing task, in light of the establishment of the state-owned China Rare Earth Group through a megamerger in December 2021 and the introduction of an export-control law which likely applies to rare-earth supplies.176
In fact, Washington has come to view China as a cause of many issues that the United States faces. The Chinese models of
industrialization and state capitalism have distorted the level playing field for private enterprises, which are at the core of US
economic leadership in the world, for example.
Faced with a rival whose success has been guided by industrial policies, Washington has re-examined the role of government in
its economy, including incentivizing clean energy technology development and manufacturing, as well as subsidizing criticalmineral projects. The Biden administration has been particularly articulate that the United States needs an industrial strategy to
guide investment, facilitate innovation, drive down costs, and create jobs to build a clean energy economy, calling it ‘one of theBloomberg News (21 September 2022), ‘Air Liquide, Chevron, Keppel Infrastructure, and PetroChina form consortium to explore CCUS
solutions in Singapore’, https://www.bloomberg.com/press-releases/2022-09-21/air-liquide-chevron-keppel-infrastructure-and-petrochina-formconsortium-to-explore-ccus-solutions-in-singapore?sref=B2BBHw9t.
173
Global CCUS Institute, et al. (March 2023), CCUS Progress in China, p.13.
174 Electrive (8 January 2022), ‘CATL delivers first LFP cells to Tesla Giga Shanghai’, https://www.electrive.com/2022/01/08/catl-delivers-first-lfpcells-to-tesla-giga-shanghai/#:~:text=CATL's%20new%20battery%20factory%20near,at%2060%20per%20cent%20capacity.
175 China Daily (5 January 2023), ‘Tesla’s Shanghai gigafactory delivers 710,000 vehicles in 2022’,
https://www.chinadaily.com.cn/a/202301/05/WS63b6d7eea31057c47eba7ea4.html.
176 Xie, J. and Li, X. (30 November 2020), ‘Export control law to affect rare earths, UAVs’, Global Times,
https://www.globaltimes.cn/content/1208529.shtml.
172

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most significant growth opportunities of the 21st century’.177 Today, there is greater support in Washington for government
engagement in revitalizing US industrial competitiveness—even from political conservatives, albeit at a more moderate level
and in a nuanced manner.
Illustrative of the highly tenuous environment for bilateral cooperation on the development and deployment of clean energy
technologies is how China is largely barred from benefitting from government subsidies and incentives under the IIJA and IRA.
The best example is the IRA Clean Vehicle Tax Credit program (IRA Section 30D). Under this consumer tax credit structure,
half of the US$7,500 credit is available if battery components (by value) are manufactured or assembled in North America. The
other half of the credit is available if battery minerals are extracted or processed in the United States or a country with a free
trade agreement, or recycled in the United States. Notably, this section also includes provisions that prohibit the application oftax credits where any components or critical minerals are sourced from a ‘foreign entity of concern’—i.e., an entity that is owned
by, controlled by, or subject to the jurisdiction or direction of a government of a foreign nation that is a covered nation. According
to the Section 2533c(d) of title 10 of the United States Code, ‘covered nations’ are North Korea, China, Russia, and Iran. While
the provisions do not single out China, it’s no secret that China is the primary concern, as the country accounted for most of theannounced manufacturing capacity expansion plans to 2030 for EV battery components, including 98 per cent for anode and93 per cent for cathode materials, around the time of the IRA’s passage.178 This remarkable Chinese lead likely means that US
domestic EV deployment would slow under the current IRA approach to expanding the domestic EV battery supply chain.
Balancing the climate-driven objective to deploy EVs and the security- and economics-driven objective to onshore EV supply
chains is no easy task.
There is no indication that China’s emergence as a global clean energy leader was driven by some desire to dominate theglobal economy, or outcompete the United States. Rather, China’s commanding presence was largely driven by the economic
opportunities that were informed, not only by growing renewable energy interests in Europe, but also by China’s own interest in
decarbonization. China leveraged its policy consistency and lower-cost capital to make renewables technologies an exportindustry.179 As a reaction to the growing push-back on Chinese participation in US green industrialization, however, China’s
future investment in energy transition sectors may be increasingly driven by its desire to stay ahead of the United States. Since
the IRA’s passage, China has announced that it is considering adding some manufacturing methods for advanced solar wafer
production to its export control list and nationalizing advanced mineral equipment.180
Distrust and fear might help mobilize resources to undertake major initiatives, but they could cloud one’s judgement. They could
also fuel the echo of questions, such as which country will win the competition in the energy transition arena, that might render
the idea of zero-sum competition self-fulfilling. A more meaningful question, instead, is if the two countries can seize theirrespective economic opportunities and industrial strengths in the ongoing energy transition. Its answer would be much moreconsequential to the welfare of each population as well as global decarbonization efforts.

White House (27 April 2023), ‘Remarks by National Security Advisor Jake Sullivan on Renewing American Economic Leadership at the
Brookings Institution’, https://www.whitehouse.gov/briefing-room/speeches-remarks/2023/04/27/remarks-by-national-security-advisor-jakesullivan-on-renewing-american-economic-leadership-at-the-brookings-institution/.
178
International Energy Agency (January 2023), Energy Technology Perspectives 2023, p.22.
179 Chia, T. (26 October 2022), ‘How China is Winning the Race for Clean Energy Technology,’ Harvard University Fairbanks Center for ChineseStudies, https://fairbank.fas.harvard.edu/research/blog/how-china-is-winning-the-race-for-clean-energytechnology%EF%BF%BC/#:~:text=The%20Chinese%20government%20provided%20tax,more%20solar%20panels%20for%20less.
180 Murtaugh, D. (26 January 2023), ‘China mulls protecting solar tech dominance with export ban’, Bloomberg; Reuters (12 March 2023), ‘China
to consolidate, boost domestic strategic resources bases’, https://www.bloomberg.com/news/articles/2023-01-26/china-mulls-protecting-solartech-dominance-with-export-ban?sref=B2BBHw9t.
177

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THE EVOLVING ENERGY RELATIONS BETWEEN CHINA AND THE GULF COOPERATIONCOUNCIL
Dongmei Chen
China’s relations with the Gulf Cooperation Council (GCC) are evolving because of the energy transition and developments ingeopolitics. China and the GCC have become increasingly important partners, with that importance extending beyond oil andgas as the transition unfolds. China’s technological and industrial advantages are complementary to the needs of the GCC in
the areas of renewables, CCUS (carbon capture, utilization, and storage), and hydrogen. However, there are also difficulties toimproving policy, infrastructure, and industrial coordination at the GCC regional level and scaling up the deployment of thesetechnologies to reduce the investment cost. To achieve a win-win result, China and the GCC need to work innovatively toaddress the lack of financial incentives and market regulations. The US-China confrontation imposes risks on global supply
chains of net-zero technologies. It creates uncertainties about China’s future economic growth and demand for energy, which
will directly impact the backbone of the GCC-China energy relations—oil and gas.
A time with spiking geopolitical uncertainties
China has scaled up its engagement in the GCC since the inauguration of the Belt and Road Initiative (BRI) in 2013. According
to data from the Chinese Ministry of Commerce, both the bilateral trade between China and the GCC and Chinese non-financial
outward direct investment (ODI) in the GCC doubled during 2013–2021. Chinese ODI in GCC countries accounts for around
8 per cent of China’s total ODI under the BRI, according to Chinese official statistics, with 62 BRI countries in 2021. 181 All six
member states of the GCC have endorsed the agreements for BRI cooperation. The countries’ business presence in eachother’s markets has grown, and more integrated supply chains have started to form in the energy, petrochemical, infrastructure,and logistics sectors. Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) joined the Asian Infrastructure
Investment Bank, the China-led multilateral institute for BRI project financing, as founding members.
The importance of China-GCC relations has grown in both sides’ foreign and economic strategies. As of 2023, China has signed
comprehensive strategic partnership agreements with Saudi Arabia and the UAE, the highest level in China’s diplomatichierarchy. A partnering country at this level is usually seen as playing an important international role in both the political andeconomic realms, as well as having high existing levels of cooperation and trust with China.182 China also signed strategic
partnership agreements with Qatar and Oman, the second highest level of Chinese diplomatic agreement. The China-GCC
Summit held in Riyadh in December 2022 was the first between China and the GCC as a bloc. Both sides adopted a five-year
joint action plan to develop their partnerships in 15 key areas, from comprehensive political and security dialogues to deeper
economic partnerships and greater cultural engagement. This is a big step forward based on the China-GCC Strategic
Dialogue, which was introduced in 2010 to improve communication and cooperation on trade, investment, and technology.
This progress is largely attributable to the alignment of economic agendas between China and the Gulf states. President Xi
Jinping clearly illustrated China’s interest in the region in his speech at the China-Arab States Cooperation Forum in 2014. The
speech mentioned securing the oil and gas supply, increasing trade and investment, building infrastructure connectivity, andenhancing cooperation on nuclear energy, new energy, and space satellite technology. This is a nice fit with the Gulf region’s
desire to achieve economic diversification and sustainability. The Gulf states are well positioned to build advantages from theirgeographical locations connecting Europe, Asia, and Africa for global trade, finance, logistics, and tourism. They also expect tobuild higher-value industries and net-zero assets on the basis of existing oil and gas knowledge and infrastructure and abundantnatural resources. These are the core elements of visions for development by 2030–2035 for almost every Gulf state.
However, this relationship is also affected and shaped by the change in global geopolitics and economics.
As commented by the International Monetary Fund, the global economy faces perhaps its biggest test since the Second World
War—the sharply increased risk of geoeconomic fragmentation.183 Tensions over trade, technology standards, and security
181 Ministry of Commerce, National Bureau of Statistics, and State Administration of Foreign Exchange (2022), 2021 Statistical Bulletin of

China’s Outward Foreign Direct Investment.
182 Fulton, J. (2020), Strangers to Strategic Partners: Thirty Years of Sino-Saudi Relations, Atlantic Council,
https://www.jstor.org/stable/resrep26037.
183 Georgieva, K., Gopinath, G., and Pazarbasioglu, C. (22 May 2022), ‘Why we must resist geoeconomic fragmentation and how’, IMF Blog,
https://www.imf.org/en/Blogs/Articles/2022/05/22/blog-why-we-must-resist-geoeconomic-fragmentation.

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have been growing for many years, undermining growth and trust in the current global economic system. The Russia-Ukraine
war and US-China rivalry add risks of fracturing the global economy into competing blocs. Increasingly, policy choices withinthese blocs will be shaped by geopolitical considerations. Within this process, trade and supply chain linkages are likely to be
redirected, and the flows of capital, talent, technology, and commodities could be impeded. Economic recession and geopoliticaltensions may create downward pressure on crude demand and shift the gas flows in the near and medium term.
In response, the Gulf states need to broaden their foreign relations options to secure their growth. And China needs tostrengthen its ties with strategic partners so as to break the isolation from the US-led alliances. These, not surprisingly, haveelevated the importance of both parties in their foreign relations.
China is playing an increasingly important role in the Gulf region on political, economic, and security fronts. China’s mediation tode-escalate the rivalry between Saudi Arabia and Iran brings the prospect of building a new regional security framework. Weeks
after announcing a normalization in relations with Iran, Saudi Arabia decided to join the China-led Shanghai Cooperation
Organization as a dialogue partner, signalling its attempt to diversify foreign relations in order to preserve regional stability andpursue national economic goals. BRICS (Brazil, Russia, India, China, and South Africa) Plus, a framework designed to include
new countries in the BRICS dialogue with a view to promoting multilateralism and multiculturalism, also aims to integrate theGulf region into its evolving governance structures. The New Development Bank, the lender created by the BRICS group in
2014, has endorsed the membership of the UAE. Saudi Arabia is the latest to discuss joining the bank.
The GCC region is therefore becoming more important for China as a hedge against changes in the global environment.
Compared with the BRI’s strong momentum four years ago, the international space for China to promote the BRI is shrinking.
Higher barriers for investment, reconfigured supply chains, and US pressure on third countries to limit Chinese investments isnarrowing investment opportunities for Chinese companies. Nearly 60 percent of low-income countries are now in significant
debt distress, compared to fewer than 30 percent in 2015, because of limited domestic revenue mobilization and constrained
public financial management capacity,184 a trend aggravated by the Covid-19 crisis and the Russia-Ukraine war.
Energy: what has changed and what has not
Energy is a cornerstone of China’s relationship with the GCC. From the China-Arab States Cooperation Forum in 2014 to the
GCC-China Summit in 2022, President Xi has repeatedly pointed out the importance of energy in China’s cooperation with the
GCC. For GCC countries too, securing their market share of oil and gas in China is increasingly strategic as the world istransitioning towards cleaner low-carbon sources. China has become a major and increasingly important destination for GCC
crude and gas. China’s crude imports from the GCC have remained around 30 percent over the last decade. Even though the
Chinese economy has not yet fully recovered from the Covid-19 disruptions, China’s crude imports from the GCC reached arecord high of 4.23 million barrels per day in 2022. The share of GCC in China’s total LNG imports has also grown rapidly, fromonly 8 percent in 2009 to 26 percent in 2022. A series of long-term deals that China signed with Qatar in 2021 and 2022 hassecured Qatari LNG supply until the 2050s.

184 International Monetary Fund (2021), ‘Debt restructuring in LICs’, https://www.imf.org/en/About/FAQ/questions-and-answers-on-debt-

restructuring-in-lics.

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Chinese crude imports from the GCC

Source: CEIC, ISI Emerging Markets

Chinese LNG imports from major producers

Source: CEIC, ISI Emerging Markets

Energy relations built upon crude and gas will likely remain for GCC and China in the future. On the demand side, China’s oil
consumption by the transport sector is expected to rapidly decline, while oil demand from the petrochemicals sector will only
show a slight decline from a peak of 3.8 million barrels per day by 2035 to 3.6 million barrels per day by 2050 under the 1.5°C

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scenario.185 Demand for natural gas will likely continue to rise until 2040, before plateauing at 550 billion cubic metres.186 In themedium term and possibly beyond, China is expected to continue importing a large share of its domestic oil and gas demandeven renewables, energy efficiency and other carbon management technologies will play significant role. On the supply side,
political, economic or market change may shape the landscape of suppliers. For example, with Russian pipeline gas ramping up
since 2020 and the long-discussed Power of Siberia 2 pipeline nearing agreement, a historic rise of Russian gas to China could
be expected. However, this change may have higher impact on other energy producers than on the GCC due to deepened
partnership and aligned strategic importance between China and GCC, as discussed earlier.
As energy transition brings about significant structural change in global energy and economic system, it also changes therelations between GCC and China.
The development and deployment of net-zero technologies become prioritized in the GCC. Four of the GCC states havepledged to reach net zero by 2050/2060, Kuwait committed to reaching net zero for the oil and gas sector by 2050, and Qatar
announced its intentions to achieve a 25 percent cut of greenhouse gas emissions by 2030. Decarbonization efforts in the oiland gas sectors are becoming crucial to mitigating their negative environmental impact and aiding the transition to a sustainableenergy system. Massive investments in renewable energy, hydrogen, and CCUS technologies are expected to build newcompetitiveness in the GCC states as climate change becomes more prevalent.
As major energy consumer, China has successfully established its position as major global supplier of solar and windtechnologies. It has expanded capacity for manufacturing electric vehicles, batteries, and hydrogen electrolysers, and also
gained a strong presence in the global supply chain of critical minerals that are needed for clean energy transition. At the sametime, decarbonizing emissions from the use of coal and hard-to-abate sectors remains critical for China to achieve its net zerocommitment by 2060.
The transition towards clean-energy technologies has made China even closer to the GCC states. China’s technological andindustrial advantages are complementary to the needs of the GCC. A new, diversified energy equation is gradually taking shapein this partnership, especially in the area of renewables, CCUS, and hydrogen.
The growing efforts of GCC on renewable energy development presents promising opportunities for Chinese investors andindustrial manufacturers. Despite supply chain disruptions and project delays caused by the Covid-19 pandemic, the installedcapacity of solar and wind in the GCC reached 5 GW in 2022, almost 30 times higher than 10 years ago. As the largest
contributor, the UAE aims to increase the contribution of clean energy (renewables and nuclear) in the total energy mix to
50 per cent by 2050 and reduce carbon emissions from the power sector by 70 per cent. Qatar’s renewable capacity increased
34-fold in 2022 compared to the previous year, due to a strong push from the World Cup. Oman targets 30 percent of its
electricity to be generated from renewable sources by 2030; its renewable capacity jumped to 687 MW in 2022.187 Saudi Arabia
has developed policy frameworks and identified key segments for localization in the near, medium, and long term, to maximize
the benefit from the deployment of renewable energy. This can explain why Saudi Arabia was the top destination for energy
engagement among the BRI countries in 2022, and solar projects have a strong presence. 188 Broadly speaking, creating a
regional market with sufficient size and stable demand is essential to warrant the investment in production facilities for wind andsolar products, which fits the needs of both China and the GCC.
China and the GCC are also complementary in CCUS development, with the GCC being well-versed in subsurface work andChina being advanced in carbon capture technology.
The GCC is technically competitive with other attractive regions of the world for storage presence. This region has significant
subsurface potential for storage, with an estimated 127.5 billion tonnes(Gt) of CO 2 in saline aquifers and ophiolite and a further
41.5 Gt of CO2 in depleted gas fields.189 Clusters of high-purity, low-cost capture industries coupled with nearby geological

Energy Research Institute, Chinese National Development and Reform Commission, (2019), Research on Pathway and Measures to Cap China’s Oil
Consumption.
186
Sinopec Economic & Development Research Institute (2021), China Energy and Petrochemicals Industry Development Report.
187
International Renewable Energy Agency (2023), ‘Statistics data’, https://www.irena.org/Data.
188
Nedopil, C. (2023), China Belt and Road Initiative (BRI) Investment Report 2022, Green Finance & Development Center, Fanhai International School of Finance,
Fudan University, https://greenfdc.org/china-belt-and-road-initiative-bri-investment-report-2022/.
189
AFRY and GaffneyCline (2022), CCUS Deployment Challenges and Opportunities for the GCC, report for the Oil and Gas Climate Initiative,
https://www.ogci.com/wp-content/uploads/2023/04/Gulf-CCUS-challenges-and-opportunities-Mar-2022_compressed.pdf
185

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storage make it possible to develop world-class hubs. Saudi Arabia and the UAE are already advanced with plans for hubs thatcan match carbon sources from petrochemicals, fertilizers, natural gas processes, and future hydrogen production.
China is an important player in CCUS. It has 59 CCUS projects currently in operation with a capturing capacity of 4 million tons
(MT)/year and an injection capacity of more than 2 MT/year, an increase of 35 per cent and 65 per cent, respectively, compared
to 2021. Another 40 CCUS projects are in various stages of planning and construction. The overall cost of CCUS technology for
different emission sources in China is the lowest globally.
Though the current policies are very much focused on supporting domestic project development, the Chinese government isalso considering incentivizing Chinese firms to develop CCUS projects abroad and encouraging Chinese oil companies todevelop CO2 storage sites overseas. It is beneficial to identify early CCUS opportunities in BRI countries, e.g. capture from highconcentration sources and applying CO2 for enhanced oil recovery. Chinese deployment of CCUS in fossil power generation,
chemicals, and cement, and for direct air capture, is expected to account for around 50–75 per cent of global CCUS capacity
across those sectors by 2060, and around 40 per cent in iron and steel.190 Its domestic deployment of CCUS provides anopportunity for China to export high-value knowledge and technical capacity.
Enhanced oil recovery is a cost-effective option to accelerate the deployment of CCUS projects in the GCC. However, in thelong run, financial incentives or the support of a carbon market are needed to improve the feasibility of CCUS investment until
its cost becomes competitive. There are opportunities for China and the GCC to explore possible public and private cooperation
models and create enablers to roll out the plan of CCUS hubs in the GCC region to exploit economies of scale and reduce
capital and operational expenditures.
The movement towards a hydrogen-based economy allows the GCC to play a significant role in the global energy transition.
The GCC presents one of the most attractive destinations for low-carbon hydrogen production due to its proximity to strategic
demand centres in Europe and Asia and low-cost resource availability. Oman has announced a green hydrogen strategy with aproduction target of 1 MT per year by 2030. Saudi Arabia and the UAE are in the process of developing a broader low-carbonhydrogen strategy. One of the world’s large-scale projects, the NEOM green hydrogen project in Saudi Arabia, is expected to be
operational by 2026. The UAE currently has 28 hydrogen projects in the pipeline, and 7 of them have passed the financing
stage.
China’s participation can help advance the establishment of the hydrogen supply chain in the region. China has been theworld’s largest producer and consumer of hydrogen since 2010. Hydrogen consumption reached around 33 MT in 2020,accounting for around 30 per cent of the global total. Though coal-based hydrogen takes a major share of the current domestic
market, the development of renewable hydrogen is increasingly emphasized as a vehicle for stabilizing an electricity system
based on variable renewable energy as well as broader decarbonization efforts. It has advantages established through theefforts of scaling up the hydrogen technology supply chain in the domestic market.
Though China’s hydrogen policies are very much domestic-focused at this stage, China has the desire to be part of the global
clean hydrogen supply chain, especially in the area of investment and construction of hydrogen infrastructure and export ofelectrolyser technologies. Advancing research and development in hydrogen-focused technologies and bringing down the costfor industrial deployment are critical to realizing the GCC’s ambition on hydrogen export. This is compatible with China’s
advantage. The development of domestic infrastructure and the use of hydrogen in hard-to-abate sectors could help build thestrength of the GCC in energy-intensive industries, such as export of green steel. There might be competition between China
and the GCC in the future in this aspect, but the scope and the level of competition are likely to be limited because Chinese
industries are more diversified and downstream integrated.

190 IEA (2022), An Energy Sector Roadmap to Carbon Neutrality in China, https://www.iea.org/reports/an-energy-sector-roadmap-to-carbon-

neutrality-in-china/executive-summary

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Looking into the future
China’s strategic partnership with the GCC was reaffirmed during the GCC-China summit in Riyadh in 2022, but it should not beinterpreted as adversely affecting the GCC’s relationships with others. In the search for regional and global security, stability,and prosperity, the GCC states, individually and collectively, are enlisting all those relationships for that purpose.191 The
partnership with China is one of the important building blocks for the GCC in achieving that goal.
China’s National People’s Congress has again emphasized the importance of BRI this year, signalling continued support for
China’s overseas investment in BRI countries. China’s investment in Asian economies has enjoyed robust growth, while its ODI
in North America and Europe has fallen significantly since 2017. The GCC states remain attractive for Chinese ODI due to theirsignificantly improved policy and business environment and new opportunities created from the energy transition.
However, many challenges and uncertainties cannot be ignored when looking at the future of energy relations. Both China andthe GCC need to balance relations with other strategic partners. Particularly, China needs to balance energy imports from the
GCC and Russia, and the GCC needs to balance its political and economic ties with China and the US carefully.
How can China ensure its economic growth and demand for energy against the backdrop of global geoeconomic fragmentation,
especially the US-China rivalry in almost every strategically important area, and what are the implications for its imports from the
GCC? The capacity and desire for engagement with China varies among different Gulf states. To what extent can the GCC
coordinate its relations with China as a bloc and at the individual state level? Renewables, CCUS, and hydrogen present
significant opportunities for future growth in the GCC, but can GCC countries improve policy, infrastructure, and industrial
coordination at the regional level to overcome the barriers of scaling up the deployment of these technologies? It remains to be
seen what role China will play in the future landscape of energy transition in the GCC.

MARRIAGE OF INCONVENIENCE—HOW THE WAR IN UKRAINE IS TYING RUSSIA TO
THE CHINESE MARKET
Sergey Vakulenko
The Russian invasion of Ukraine in February of 2022 has led to a major geopolitical conflict between Russia and the West. As aresult, Russia has pivoted to the East and sought to establish new relationships and strengthen existing ones with India andChina. Russian priorities have changed, and Russian concerns about giving China too much leverage and influence had toremain unaddressed given Russia’s lack of alternatives, which placed it in a weak negotiating position. In one year China has
become the major buyer of Russian oil and gas, and its share will only grow. While Russia has managed to sell its oil and LNG
to China at market-level prices, it had to agree to relatively low prices for pipeline gas. It is likely that China will keep asking for
further concessions and move upstream in the value chain, which Russia has so far resisted.
China is still reluctant to become too dependent on one supplier, but growing tensions with the US create concerns over securityof maritime energy supply routes for energy-deficient China and make a reliable overland supply from Russia more important
both politically and economically.
Russian dependence on China and Chinese interest in Russian resources may bring the two countries closer in political terms
and make China increasingly influential in Russia with the pragmatic goal of maintaining the security of supply of raw materials,
access to defence technologies, and the security of its northern flank. These considerations may make a regime change in
Moscow and normalization of Russian relationships with the West an undesirable outcome for China and create a rationale forsupport of the current Russian government.
History of the energy trade between Russia and China
The Sino-Russian energy partnership might seem the most natural. As China, one of the largest and most populous economies
in the world, shares several thousand kilometres of land border with Russia, one of the largest energy producers, the two
191 Aluwaisheg, A. A. (13 December 2022), ‘China and the GCC plan for a brighter future in the Gulf’, Arab News,https://www.arabnews.com/node/2215611.

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countries seem predestined for cooperation. Soviet planners had an eastern oil pipeline from west Siberia to the Pacific on theirdrawing board since 1977; a gas pipeline from east Siberia to China was discussed beginning in the early 1990s; and the
Yamal–China gas pipeline was under discussion since the early 2000s.
But Russian energy trade has long been heavily oriented towards Europe, and in the 1960s and 1970s this became one of the
major international energy trade links. Energy trade with China was seen as an addendum, not a replacement for the European
trade. Meanwhile, China cultivated Central Asia’s post-Soviet states as the main source of its overland energy supply.
In this vein, China was keen on having a footprint in the whole value chain spanning upstream and midstream elements, andwas able to achieve this in Central Asia. Meanwhile, Russia preferred to trade with China while keeping Chinese companies atarm’s length. It has been extremely apprehensive about Chinese companies making inroads into its strategic industries. Even
when Russia needed capital and China was able to provide it in the early 2000s, Russian stakeholders preferred to borrow
capital and avoid giving mainland Chinese companies stakes in major Russian energy companies.
The prime example of this approach was a series of loans taken by Rosneft and Transneft from various Chinese entities
between 2004 and 2017. These loans were used by Rosneft as its mergers-and-acquisitions war chest to buy Yukos assets and
TNK-BP, and by Transneft to build the ESPO pipeline. Sinopec and CNPC got only minority shares in two less-important
Rosneft upstream subsidiaries.
China was also more comfortable with the Central Asian states, with which it enjoyed a monopsonist relationship as a buyer andwhich offered no rivalry for superpower status.
What changed for Russia in 2022?
Vladimir Putin’s war with Ukraine and the ensuing radical change in the Russian stance vis-à-vis the Western world, which
made Russia a pariah state, led to an almost complete cut-off of trade ties between Russia and Europe, and changed the
dynamics between Russia and China altogether.
Russia has managed to divert the majority of its crude oil flows from European markets to Asia—mainly to India, with additional
volumes going to China—but at substantial shipping costs. As a result, India and China buy more than 80 per cent of Russiancrude oil, with China getting 35 per cent of its volumes via pipeline and the rest split evenly between deliveries from Kozmino in
the Far East and Atlantic basin ports. This development made Russia the largest import source for both countries, supplying halfof India’s total demand and 15 per cent of the Chinese demand (vying closely with Saudi Arabia).
On the gas front, Russia used to export 160 billion cubic metres of pipeline gas per annum to Europe, and a substantial share of
LNG exports from the 27 million tons per annum Yamal LNG project was also customarily sold westwards. In 2023, Russian
pipeline sales to Europe are less than one-fifth of historical volumes. LNG sales are still holding, and probably would hold until
the new plants in LNG and Qatar go online and create a viable replacement; but after that, Russia would most likely lose thismarket as well.
With such prospects, Russia does not have viable alternatives to the Chinese market.192 At the same time, Russia is dependent
on China for much of its imports, from cars and consumer electronics to drilling equipment and weapons components. Russian
society was long suspicious of Chinese ascendancy. There were tales passed around of Chinese farmers taking over prime
land in the Far East, Chinese lumber companies mowing clean thousands of hectares of Siberian taiga, and Chinese bottlingcompanies sending trainloads of Lake Baikal water to China. There was a feeling among the general population, the politicalclass, bureaucrats, and business people that cooperation with China should be undertaken carefully, to not allow too much
Chinese influence and control over the Russian economy—which might then convert into unequal trade, political arm-twisting,and massive immigration. These concerns did not go away, but now Russia does not have much choice.
Russia is apparently starting to invest in the Power of Siberia 2 pipeline before there is a firm purchase agreement with China,
eager to start exporting now-stranded Yamal gas eastwards as soon as possible, making announcements that the deal will be
inked by the end of 2023. Meanwhile, the only announcement from China on the expansion of its pipeline import capacity was
about the construction of the fourth strand of the pipeline from Turkmenistan. This does not necessarily mean that China has

192 Sergey Vakulenko “Can China Compensate Russia’s Losses on the European Gas Market?” 2023, Carnegie Politika

https://carnegieendowment.org/politika/89862

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made its choice—there will be demand for the additional 50 billion cubic metres of gas from Russia—but it might send Russian
gas further back in the queue. At the moment, China can afford to wait and play Russia and Turkmenistan against each otherfor the best price for the looming wave of LNG supply which is due to come online in 2025–2026.
What is the current Chinese perspective on energy supplies from Russia, and how might the new reality change
Chinese policies?
Russian oil and gas are the lowest-cost options for China.193 While Russian oil became cheaper than other options only after
February 2022—because of the Western strategy to keep Russian oil in the global energy balance but to reduce Russian staterevenues through embargoes and price cap mechanisms—China had managed to negotiate an extremely beneficial deal for
supplies via Power of Siberia 1 back in 2014, before the Russian negotiating position started to weaken. It is likely that Power ofSiberia 2, when and if materialized, would have a similar pricing arrangement. This sudden availability of large volumes of lowcost energy resources creates a conundrum for Chinese policymakers—the traditional approach of portfolio diversification would
dictate limiting the Russian share of the Chinese supply, while cost reasons might nudge towards an increase.
Much of the Chinese energy supply comes from the Pacific Ocean and via the Strait of Malacca and the Strait of Taiwan. With
growing tensions around Taiwan, Chinese strategic planners have to contemplate the security of supply, and overland routes
from Russia would play an important role in an escalation scenario. From this point of view, a widening rift between China andthe US would push China and Russia closer to each other and facilitate tighter links. But this would also mean that China would
be making a strategic bet on the stability and longevity of Putin’s (or his successors’) regime, while regime change in Russia
with a new pro-Western government in Moscow would be seen as a threat in a potential conflict with the West.
Regional separatism, and the potential break-up of Russia that some commentators see as a possible long-term outcome of
Russian defeat in its war with Ukraine, would also create a transit states issue for China. This is another reason China might
prefer not to commit to major new energy supply agreements with Russia but to adopt a wait-and-see approach. On the other
hand, a commitment to such schemes would make China invested in the stability of the Russian anti-Western regime andRussia’s territorial integrity, and would serve as a form of insurance for such a regime, albeit at the cost of increasing
dependency on China and loss of agency.
The long-term availability of cheap Russian hydrocarbons for China might change China’s approach to the energy transition. For
China, considerations of energy security and air quality were probably as high a priority as climate concerns, if not higher, in its
drive away from oil and coal to a renewables-based energy system. A low-cost traditional energy supply from Russia oversecure routes might alleviate these concerns and allow China to concentrate on exports of solar, wind, and power storage
hardware to more climate-concerned countries while enjoying the benefits of lower-cost energy. At the same time, the highcapacity of gas import pipelines would allow China to increase the share of wind and solar in its power system without investing
too much in costly energy storage, using gas generation for balancing instead. This approach would create a very
uncomfortable gas demand pattern for Russia, but it would have to live with it for the lack of alternatives.
Growing reliance on Russian energy supplies might also change the Chinese outlook towards the Persian Gulf. In the lastyears, China has actively built up its relationship with the Gulf states, culminating in brokering negotiations between Saudi
Arabia and Iran. With 40 per cent of oil imports and a large share of LNG imports coming from the region,194 this interest is quite
understandable. A higher share of Russian energy in China’s supply portfolio would still keep China importing substantial
volumes from the Gulf, but the relative importance of these imports, and as a consequence the region itself, might diminish.
What might be the broader implications of the new Sino-Russian energy alliance?
Exclusion of Russia from the Western-led global economic system might lead to a fracturing of global trade patterns. So far, theyuan has not been a major currency in international trade. But since 2022, Russia has been busy establishing alternative
payment mechanisms that would allow it to avoid money flows through US and European financial systems. China is alreadypaying Russia with yuan for its oil and gas. We might see an emergence of new Asian oil price markers, quoted in yuan. As
193 Sergey Vakulenko “What Russia’s First Gas Pipeline to China Reveals About a Planned Second One” 2023, Carnegie Politika

https://carnegieendowment.org/politika/89552
194 Steven Simon, “China and the Persian Gulf in the Aftermath of a U.S. Withdrawal“, 2021, Quincy Brief #17, Quincy Institute for Responsible
Statecraft
https://quincyinst.org/report/china-and-the-persian-gulf-in-the-aftermath-of-a-u-s-withdrawal/

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price cap enforcement mechanisms push Russia to seek non-Western providers for shipping and insurance, a separate market,
also quoted in currencies other than US dollars and euros, might emerge in Asia. Russia might try to extend these mechanisms
to its trade with India, currently conducted in United Arab Emirate dirhams. In general, the volume of trade between China andRussia is such that it might create a new regional standard and set of tools, with a working currency other than the currently
predominant US dollar.
Putin’s attack on Ukraine in February of 2022 has accelerated and fortified many developments that were already underway in
the Russian-Chinese relationship, but also created new dynamics, tipping the balance resolutely in China’s favour. The energy
trade between the two countries is turning from a purely transactional trading relationship to a major geopolitical factor, akin to
the long-standing US-Saudi relationship, and is creating new factors both in the energy universe and, as a consequence, in thepolitical and financial dimensions.

CHINA GAS: IS THE GAS DREAM OVER?
Neil Beveridge
Last year was the weakest year for gas consumption growth in China since the early 1990s, with demand contracting by
2 per cent mainly because of self-inflicted pain from draconian Covid policies. While there were hopes for a strong recovery
from Covid, the reality has been disappointing, Consumer confidence appears to be shattered given the decline in the property
market and economic de-risking which has negatively impacted China exports. As a result, gas demand growth in the first halfof 2023 is tracking below 5 per cent, which is far lower than the expected 6–7 per cent growth for the year. Demand should pickup in the second half of the year, but it depends in large part on government policies which encourage greater consumption.
While recent gas growth has undershot expectations, we believe that China’s long-term commitment to natural gas remains
undiminished. Given that coal still accounts for over 50 per cent of the energy mix, there remains considerable scope for coal-togas switching to bring down emissions. Anyone who doubts China’s long-term commitment to gas should look no further than
the recent 27-year supply agreements between China and Qatar, which will take LNG supply beyond 2050. By 2030, China
continues to target gas reaching 15 per cent of the energy mix, up from 10 per cent today. This implies gas consumption will
increase from 390 billion cubic metres (bcm) this year to roughly 600 bcm by 2030, an increase of 50 per cent or a 6–7 per centcompound annual growth rate through to the end of the decade. Gas demand is expected to increase further beyond then.
Despite China’s pledge for carbon emissions to peak on or before 2030, gas demand is projected to continue increasing to2040, whereupon it is expected to peak at or around 700–800 bcm or just under 20 per cent of the energy mix. Put another way,
gas demand could still double from current levels.
With rising geopolitical tensions, energy security is back to the fore for China’s energy planners. Self reliance is one of the key
mantras within Xi Jinping’s China, and gas supply will have to accord with China’s security needs. Today China’s gas imports
are around 40 per cent of consumption. Import dependence is expected to continue to rise. While China has tried to stimulatedomestic supply, results have been somewhat mixed. Shale gas has not been the panacea which was hoped for. Meanwhile,
pipeline reform has not unleashed a wave of private capital into upstream gas exploration and development. Domestic gas
supply in China is currently around 240 bcm and is expected to grow at around a 5–6 per cent compound annual growth rate to
the end of the decade to reach around 300 bcm.
This leaves China with a gap of about 300 bcm (600 less 300 bcm) for imported gas supply through to the end of the decade.
So far China has contracted about 100 bcm of pipeline gas supply and a further 120 bcm of long-term LNG supply, leaving a
gap of 80 bcm (or 60 million tons per annum) still to be contracted through to 2030. Increasingly, it looks like Central Asia LineD, with a capacity of 30 bcm, will be part of the solution. Construction has already started on this line from Turpan to Zhongwei,
and expectations are that the line will be completed towards the end of 2024. For the remaining 50 bcm, the options are LNG or
more pipeline gas. The most credible source of pipeline gas would be Power of Siberia 2 (PoS2). Russian has already secured
48 bcm in pipeline exports to China through PoS1 and Sakhalin. The addition of PoS2 would take Russian pipeline exports to
98 bcm or around 15–20 per cent of China’s supply. While Russia is keen to proceed with PoS2 to replace the European
market, China must balance energy security requirements with its trading relationship with Europe. It is unlikely that any deal will
be done on PoS2 until the Russia-Ukraine war is resolved and much depends on how it gets resolved.
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If China does reach an agreement with Russia on PoS2, then the opportunity for significant additional LNG contracts this side of2030 could be limited. But China will likely need a further 100–200 bcm of gas imports until demand peaks in 2040. As such,
China is still likely to be the largest incremental buyer of LNG over the next decade. Qatar is clearly well placed for such supply,
but it would be wrong to rule out additional supply from the US and Australia. Much will depend upon how relationships develop
from here; and while China is likely to be cautious, trade with the West will continue.
In summary, China has changed in many ways since the outbreak of Covid-19. Slower economic growth has been negative forgas. Moreover, an increased focus on self-reliance and energy security has pushed China towards favouring pipeline gas over
LNG. How far China goes with pipeline gas will partly depend on the outcome of the Russian-Ukraine war and how the
relationship between Xi, Putin, and the West evolves from here. While opportunities for LNG have to some extent been
diminished, a potential doubling of gas demand in China over the next 20 years still means that China will remain the mostimportant market for LNG exporters in the decade ahead.

COMPLEXITIES IN THE ENERGY SECTOR RELATIONSHIP BETWEEN INDIA AND CHINA
IN 2023
Mohua Mukherjee
The energy sector relationship between China and India, Asia’s two largest, fast-growing energy markets, is multidimensional.
Between 2012 and 2023, which roughly corresponds to the rise of the renewable energy revolution in Asia, shifting
circumstances have created both diverging and converging interests in different energy areas for China and India. The overall
energy relationship has therefore seen both collaboration and competition.
This article first considers some of the two countries’ overlapping interests, namely climate change and their stance on fossil
fuels as a necessary complement to renewable energy, plus the importance of the Paris Agreement’s Common but
Differentiated Responsibilities and Respective Capabilities. It is often overlooked that various multilateral geopoliticalassociations that both countries belong to—such as BRICS (Brazil, Russia, India, China, and South Africa), the Shanghai
Cooperation Organisation (SCO), the International Energy Forum, the G20, and the India-China Strategic Economic Dialogue
forum—all have joint working groups on energy, ensuring that an institutional energy dialogue mechanism is entrenched. 195
Multilateral energy meetings have therefore continued despite chilly diplomatic relations and the suspension of bilateral contact
after deadly border clashes in May 2020.196 Only the India-China Strategic Economic Dialogue, which is purely bilateral, has notconvened a biennial meeting since September 2019 (in Delhi); all other multilateral engagements remain on schedule.
The article then moves to areas of competition, which are primarily around access to fossil fuels, and notes that some of therivalry subsided in 2022 when both countries switched to Russia as a larger supplier of oil and coal, yet neither’s presence wasbidding up the price for the other due to unique market circumstances. The article concludes with a look at India’s recent efforts
to expand its domestic manufacturing sector for renewable energy hardware. This is a pivot away from nearly 90 per centreliance on Chinese solar imports between 2015 and 2019, which propelled the first phase of India’s energy transition.
Areas of overlapping interests
Both countries are highly vulnerable to climate change,197 and they share a view on the importance of coal as a strategic andcomplementary fuel, alongside renewables, to achieve their economic development targets for another decade or so, meaningthat coal use will peak around 2035.

195

As an example of the scope of the India-China Strategic Economic Dialogue forum, see the minutes from the 4th India China Strategic
Economic Dialogue Meeting,
http://164.100.94.191/niti/writereaddata/files/document_publication/Agreed%20Minutes%20on%204th%20SED.pdf.
196
Just one month prior to the deadly border clashes, which have halted communications at present, the Chinese government had published a
128-page booklet celebrating 70 years of the India-China relationship (1950–2020) and looking ahead to deeper ties among the twoneighbors— China-India @70, Scaling New Heights (http://in.china-embassy.gov.cn/eng/xwfw/zgxw/202007/P020210622244707034146.pdf).
The countries share a 3,800 km border that is ill-defined in certain stretches, at high-altitude peaks and through lakes.
197
https://www.indiatoday.in/environment/story/china-us-india-top-list-of-countries-most-vulnerable-to-climate-change-2337088-2023-02-20.

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India and China depend heavily on coal to power their economic development, though India has recently cut its fossil fuelsubsidies by 72 per cent. India and China agreed at the Glasgow COP to phase down coal. China’s domestic policy documents
state that it will limit coal additions until 2025 and then phase them down; however, at present, in view of unexpected recordheat waves and high electricity demand, it continues to build new thermal power plants at a rapid pace.198 India is pushing for aphase-down of all fossil fuels, not just coal, and was able to secure support from 39 small island countries as well as the EU andthe UK at COP27. Ultimately the language was not reflected in the final communique due to opposition from major oil- and gasproducing nations like the US, Russia, and members of OPEC.
India has also strongly resisted, with China’s full backing, the effort of developed countries to create new terminology such as‘major emitters‘ and ‘top emitters‘ and assign funding responsibilities that are not present in the Framework Convention of theParis Club. India additionally rejects what it calls an ‘attempt to forget about historic responsibilities of rich nations ‘.199 These
are the major aspects of climate diplomacy in which India’s and China’s interests converge.
Shortly before COP27, in September 2022, the SCO held its Samarkand Summit, which was attended by Xi Jinping andNarendra Modi.200 (This was their first in-person meeting since their last ‘informal summit‘ during Xi’s October 2019 visit toIndia,201 just six months before deadly border clashes halted all but defence ministry bilateral contacts).
The Samarkand Summit issued a statement endorsed by both China and India that pushed back against calls for a wholesale
move away from polluting fossil fuels in favour of cleaner renewable energy. ‘It is important to use the common andcomplementary advantages of fossil fuels and clean energy sources and, in this regard, to increase investment in the
exploration and production of fossil fuels,’ SCO members said. 202
In October 2022, a BRICS Energy Ministers’ Meeting chaired by the head of China’s National Energy Administration ‘reachedbroad consensus on further deepening BRICS energy cooperation, promoting green and low-carbon energy transition, andintensively participating in global energy issues’, just days before COP27.203
The G20 is currently chaired by India and is preparing for a heads of state summit in New Delhi in September 2023. India,
backed by China, is trying to build a consensus during 2023 at Energy Transition Working Group meetings within the G20 to let
countries choose a roadmap to cut carbon emissions instead of setting a common deadline to end the use of fossil fuels. China
supported India during the meeting, saying it cannot put a timeline on ending fossil fuel dependence and would want to put all its
available resources to optimum use. India is keen on introducing the phrase ‘multiple energy pathways’ in a communique to bereleased at the summit in September and has been supported by countries including China and South Africa. 204
Areas of competition: coal and oil
China and India are both large producers of coal. China is also consistently a large importer, whereas India seeks coal imports
only during emergencies, and in much smaller volumes. India has no organized coal-procurement agency aggregating orders.
On various occasions India has found itself having to pay hundreds of US dollars extra per ton of coal because of China’s
looming presence and buying power in the global coal market.
But this works both ways. China imposed an unofficial ban on Australian coal in November 2020 after that nation supported
calls for an international investigation into China’s handling of the coronavirus outbreak earlier in the year. India turned out to bea favourite destination for Australian coal. Shipments from Australia to India grew fivefold in the first three quarters of 2021,
198

https://india.mongabay.com/2022/11/many-nations-join-indias-call-to-phase-down-all-fossil-fuels/.
https://timesofindia.indiatimes.com/india/attempts-being-made-to-forget-rich-nations-historical-contribution-india-atcop27/articleshow/95572000.cms.
200
See Backgrounder—The 22nd Summit of the Shanghai Cooperation Organisation (https://www.idsa.in/backgrounder/the-22-summit-of-theshanghai-cooperation-organisation-jwahlang-141122; Leaders of SCO sign Samarkand Declaration (http://english.scio.gov.cn/topnews/202209/17/content_78424919.htm), which mentions deepening energy cooperation among member states; and another article with the same title,
Leaders of SCO sign Samarkand Declaration (https://www.chinadaily.com.cn/a/202209/16/WS63246137a310fd2b29e7826c.html), whichreferences the need to ‘stick to a coordinated manner to security threats and challenges in traditional and non-traditional fuels’.
201
http://www.xinhuanet.com/english/2019-10/13/c_138467153.htm.
202
https://www.reuters.com/business/environment/sco-leaders-call-balance-global-approach-climate-change-2022-09-16/.
203
http://brics2022.mfa.gov.cn/eng/zdhzlyhjz/MM/202210/t20221011_10781103.html#:~:text=On%20September%2022%2C2022%2C%20the,journey%20of%2016%20years%20together.
204
https://www.reuters.com/world/india-china-propose-multiple-pathways-cutting-use-fossil-fuels-sources-2023-05-02/.
199

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rising 503 per cent year on year, to 16.5 million metric tons in the January–September period. While China’s coal appetite
remained intact, it turned to other suppliers to fill the Australian coal vacuum—such as Indonesia, Russia, and South Africa—
until the ban ended in 2023.205
India’s total imports of thermal coal—used mainly for power generation—grew 14.7 per cent to 161.18 million tonnes in 2022, as
domestic coal production and delivery logistics fell short, mainly due to rail-transport constraints after removal of restrictions
following the pandemic (passenger and freight trains use the same railway network). Thermal coal imports rose due to a power
demand surge from rising industrial activity after easing of coronavirus-related restrictions, but primarily due to an intense
heatwave which arrived three months before temperatures were expected to rise. India’s thermal coal imports by power plants
increased 58.1 per cent to 47.6 million tonnes during the first 11 months, compared with the same period in 2021. Indonesia
cemented its place as India’s largest (and nearest) overseas supplier of thermal coal, with its share rising to two-thirds in 2022,
from over half the market in 2021. Indonesia’s share rose at the expense of Australia and South Africa, while Russia overtook
the United States to become India’s fourth-largest supplier.206
China and India are both large crude oil importers, although India’s 5 million barrels per day (bpd) are dwarfed by China’s 11
million bpd of crude oil purchases. China was already importing oil from Russia and has increased its orders to benefit fromdiscounts of $25 to $30 per barrel relative to Brent crude prices.207 Other sources put the discount even higher.208
India previously sourced less than 1 per cent of its needs from Russia due to high freight rates that made Russia an
uncompetitive supplier (relative to the Persian Gulf countries, located more favourably). The OPEC nations had a 72 per centshare of all crude oil India imported in April 2022. This share fell to 46 per cent by April 2023, according to energy cargo tracker
Vortexa. In March 2022, India imported just 68,600 bpd of oil from Russia, out of its total 5 million bpd. In 2023 the purchasesfrom Russia have jumped to 1,678,000 bpd. Indian market watchers believe that increased future competition from China for
Urals oil will limit the gains from India’s imports of Russian crude.209
As far back as 2005, India had proposed an Oil Buyers Club for joint sourcing of OPEC crude oil with China, Japan, and South
Korea.210 This was primarily to overcome the much-despised Asian Premium, which saw OPEC countries imposing (since the1980s) a discriminatory $3 per barrel surcharge (amounting to millions of dollars per day) on Asian buyers to offset thediscounts it was offering to North America and Europe.211 Finally, in April 2019, India and China were nearing agreement to forma buyers’ bloc,212 following the Wuhan summit of April 2018 when Prime Minister Modi travelled to China to meet President Xi,
and this was followed by mutual visits of their petroleum secretaries. The agreement did not materialize due to the rupture of the
India-China bilateral relationship soon afterwards, but it came very close and was considered a game-changer. If relations arerepaired in future, this could come back to the agenda.
India’s priority in 2019 was to seal the accord with China first and subsequently invite South Korea and Japan to join the buyers’
club. In fact, India had co-hosted the International Energy Forum meeting in Delhi in 2018 with China and South Korea,213 whenrelations were closer than ever, and the oil buyers’ club to dismantle the Asian Premium looked imminent.

205

https://www.spglobal.com/commodityinsights/en/market-insights/blogs/coal/121621-china-coal-australia-india-japan;
https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/coal/022223-china-starts-buying-australian-coal-as-unofficial-banends.
206
https://economictimes.indiatimes.com/industry/indl-goods/svs/metals-mining/indias-thermal-coal-imports-up-nearly-15-in2022coalmint/articleshow/96849584.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.
207
https://home.treasury.gov/news/featured-stories/the-price-cap-on-russian-oil-a-progressreport#:~:text=In%20recent%20months%2C%20official%20price,Russia%2C%20evidenced%20in%20public%20reporting (see the text below
the graph).
208
https://www.washingtonpost.com/business/energy/putins-few-oil-buyers-demand-deep-discounts/2022/11/27/0496cf60-6e32-11ed-86190b92f0565592_story.html.
209
https://economictimes.indiatimes.com/news/economy/foreign-trade/indias-imports-from-opec-at-all-time-low-as-russian-oil-buypeaks/articleshow/100048546.cms?from=mdr.
210
https://energy.economictimes.indiatimes.com/news/oil-and-gas/india-discusses-oil-buyers-club-with-china-seeks-us-crude-to-counteropec/64573673.
211
https://www.indiatoday.in/mail-today/story/india-is-losing-billions-of-dollars-as-opec-charges-extra-price-1254928-2018-06-08.
212
https://www.livemint.com/industry/energy/india-china-step-on-the-gas-on-oil-sourcing-plan-1556224759083.html.
213
https://www.indrastra.com/2018/04/Future-of-Asian-Premium-004-04-2018-0025.html.

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The growing self-reliance of India’s solar energy industry
China played a major role in the first phase of India’s energy transition, from 2012–2020, when imports from China fuelled
India’s rapid growth of installed capacity in the solar sector and falling hardware costs due to China’s economies of scale
allowed Indian developers to quote record low tariffs in highly competitive bidding scenarios. (This was after several Indian solar
manufacturing companies went into liquidation around 2014–2015, unable to survive without adequate government support. 214)
Indian solar developers (who were heavy importers from China) found themselves in direct opposition to Indian solar
manufacturing associations that were lobbying the government for World Trade Organization–permitted safeguard protections(tariffs). These were eventually imposed in the amount of 15 per cent on solar imports from China and Malaysia andsubsequently complemented with basic customs duties as high as 40 per cent, as well as a so-called Approved List of Modules
and Manufacturers. As the bilateral relationship with China worsened after 2020, names of Chinese suppliers were removed
from the Approved List and more stringent domestic content requirements were introduced to influence the demand for Indiansolar panels.
India is looking to distance itself from full reliance on Chinese imports of the large numbers of solar panels and other hardware it
will require to meet its solar targets. It is unlikely, given China’s decade-and-a-half head start, and the economies of scale andmarket dominance enjoyed by China, that India would become a serious competitor by 2030. Instead, India is likely to be merely
looking to create domestic manufacturing employment to meet a larger share of its own needs.
On the supply side, the second phase of India’s post-Covid stimulus package (known as Self-Reliant India), announced in 2021,
includes important government-funded financial incentives to domestic and foreign investors to set up facilities in India for the
manufacture of solar modules, cells, wafers, ingots, electric vehicle batteries, electrolysers, and other hardware to fulfil India’s
renewable energy transition. Around 15 companies have announced plans to invest around $3 billion in solar manufacturing
facilities in India.
Now solar developers assert that India is likely to require a three- to four-year transition period for its domestic capacity to catch
up with the rapid growth in demand for solar installations, and there is anticipation of some imminent readjustment in trade
policy to open the door again to imports from China, with lower customs duties during the transition,215 to reduce loss of
momentum in India’s solar capacity addition. At present, India is still importing some components (such as wafers and ingots)from China, since domestic upstream manufacturing capacity has not yet caught up with demand.
Conclusion
The energy relationship of India and China is multidimensional, and there is more that unites the two countries than divides
them. The glut of cheap Russian oil on the market has paradoxically removed a pain point in the relationship. India needs
Chinese hardware for the next few years while it builds up domestic manufacturing capacity. India and China are also importantdialogue partners in climate diplomacy to further their joint interests in using coal as a complement to their large investments inrenewables.

214
215

https://www.saurenergy.com/solar-energy-news/indias-solar-manufacturing-a-tale-of-failed-government-initiatives.
https://www.reuters.com/business/energy/india-may-cut-solar-panel-import-tax-make-up-domestic-shortfall-2023-05-30/.

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CONTRIBUTORS TO THIS ISSUE
Dr Philip Andrews-Speed, Senior Research Fellow, OIES and Is a co-editor of this Issue.
Dr Neil Beveridge, Managing Director, Bernstein Research
Dongmei Chen, Research Fellow, KAPSARC
Ji Chen, Executive Director, China International Capital Corporation Global Institute
Herbert Crowther, 2023 Schwarzman Scholar at Tsinghua University
Anders Hove, Senior Research Fellow, OIES and Is a co-editor of this Issue.
Dr Xiaohan Gong, postdoctoral research fellow, the Chinese University of Hong Kong
Shurui Jiang, Associate Researcher, China International Capital Corporation Global InstituteDan Marks, Research Fellow for Energy Security, RUSIDr Michal Meidan, Head of China Research Programme, OIES and Is a co-editor of this Issue.
Mohua Mukherjee, Senior Research Fellow, OIES
Jane Nakano, Senior Fellow, Energy Security and Climate Change Program, Center for Strategic and International Studies
Yan Qin, Lead Carbon Analyst, Refinitiv, Research Associate, OIESProf. Dr. Rainer Quitzow, Research Group Leader, Research Institute for Sustainability, Helmholtz Centre Potsdam;
Professor of Sustainability and Innovation, Technische Universität Berlin
Henry Sanderson, Executive Editor, Benchmark Mineral Intelligence and author of “Volt Rush: The Winners and Losers in
the Race to Go Green.”
Dr Patrick Schröder, Senior Research Fellow, Environment and Society Programme, Chatham House
Sergey Vakulenko, Nonresident scholar, Carnegie Russia Eurasia Center
Dr Muyi Yang, Associate Director of Clean Energy, Asia Society Policy InstituteThe views expressed here are those of the authors. They do not necessarily represent the views of the Oxford Institute forEnergy Studies or any of its members nor the position of the present or previous employer, or funding body, of any of theauthors.