China, the US and clean energy cooperation

Photo: istockphoto.com

Presidents Hu and Obama created buzz earlier this week in Washington when they met on pressing bilateral issues, including US-China business and investment regulation, trade, currency imbalances and security concerns. US-China clean energy cooperation is an important part of that bilateral dialogue (see transcript of my intervention at a January 18 US-China Strategic Forum hosted by Brookings).

Why?
Cooperation between the two countries can yield big economic benefits.  The world is recovering from the worst economic crisis since the Great Depression. In this context, taking advantage of clean energy opportunities is crucial to fueling a sustained global recovery. 

A primary challenge for a sustained global recovery is the existence of large, underutilized capacity in the capital goods sector (and the housing sector) in high-income countries, including in the United States.

Excess capacity in these countries has left many people out of work and has decreased incentives for private investment. Because of this, investment, including in new cleaner energy production, is essential to recovery.

What I have in mind is both domestic and international investments in new projects, since they can generate demand for capital goods, increase capacity utilization, and generate growth, jobs, and (indirectly) demand for housing.

The development of such projects requires sustained efforts in technology development and investment in clean energy. 

So I see a win-win, especially as the costs of clean energy come down: Clean energy investments can potentially increase U.S. exports of capital goods and knowledge capital related to the country’s strengths in energy technology.  China’s rapidly growing demand for energy supplies, particularly environmentally sound energy supplies, provides a big opportunity for suppliers of capital goods needed to generate low-carbon, low-polluting energy.

While much of the current investment in clean energy depends on supportive government policies, the scale of investment required is massive, which in turn means that the clean energy market can grow into an attractive opportunity for increased trade in capital and knowledge goods.  But the development of that opportunity requires sustained efforts in technology development and scaled-up diffusion into the market.

According to Bloomberg, global clean energy investments in 2010 were $243 billion, up 30% from 2009, 200% from 2006, and five times the investments made in 2004.  This is a very impressive growth trajectory.  China was a major player in this: its roughly $51 billion clean energy investment reflects an increase of 30% over 2009 and constituted the largest national share of global investment. 

Second, there are also major long-term global benefits from clean energy cooperation between the U.S. and China.  Costs of clean energy investment would fall throughout the world, making such investment more financially sustainable.  Clean energy is also a crucial part of providing energy access to better meet basic needs, to enhance growth, and to reduce poverty. 

Making clean energy more available and more affordable won’t be easy. It entails making new and improved low-carbon technologies more cost-competitive on a global scale, and supporting developing countries as they strive to expand energy availability. Here, the capacities in both China and the U.S. for innovation and increased diffusion of clean energy technology come to the fore. 

Achieving the needed cooperation will take work – in organizing scientific exchanges and shared research ventures, as well as in re-examining national investment and trade policies. 

China and U.S. have the means, and I hope the continued will, to take necessary leadership roles in this sphere.  The success of China-U.S. clean energy cooperation could mean a win-win for China, the U.S., and the world.

Such joint efforts could also conserve the planet’s resources and safeguard future generations from the damaging effects of climate change.

As Chief Economist of the World Bank, I would like to see such cooperation succeed.  The Bank is already promoting the use of clean energy for poverty reduction and environmental sustainability in developing countries and we support enlightened action by the US and China in this regard.