Decarbonising in a fractured world: Will the energy transition stall?

"When it comes to China, I want to be clear and consistent," US President Joe Biden said on September 19 before the 78th Session of the United Nations General Assembly in New York, US.

“The threads of globalisation that began fraying a few years ago have been unravelling more rapidly as national security takes precedence over the efficient flow of goods and services,” Morgan Stanley.

“The threads of globalisation that began fraying a few years ago have been unravelling more rapidly as national security takes precedence over the efficient flow of goods and services,” Morgan Stanley.

"We seek to responsibly manage the competition between our countries, so it does not tip into conflict," he said.

That competition entered a new phase in 2023, the sixth year of the US-China trade war. And the second of Russia's invasion of Ukraine.

China emerged from the wave of the early 2020 to late 2022 era of pandemic lockdowns and border closures increasingly isolated from the West and with a slower economic growth rate than before. It was also on a path to strengthen ties with Russia despite its aggression toward Ukraine.   

The US, meanwhile, with its own set of economic woes and hyper-focused on supply chains after being reminded what war and pandemic can do, sought to reduce its dependence on China for critical materials and bring its allies closer where it can; both in terms of trade and militarily.

Middle powers rich in minerals and materials critical to the energy transition took an ever-growing presence on the world stage and sought to leverage their positions and redraw trade maps to their greater advantage.

The arc of the international trajectory bent further off the course towards global integration and closer to a fractured world.

As US multinational investment bank, Morgan Stanley, put it on August 22, "The threads of globalisation that began fraying a few years ago have been unravelling more rapidly as national security takes precedence over the efficient flow of goods and services".

But what does all this mean for the global energy transition - which was already under enormous pressure and struggling to keep pace with climate change?

The green energy transition will stall

As things stand, analysts believe the energy transition will stall and the world will fail to meet the Paris Agreement goals.

Those are to limit the rise in global temperatures to well below 2 degrees Celsius, and preferably to below 1.5°C, compared to pre-industrial levels.

And for greenhouse gas emissions to peak before 2025 at the latest and decline by 43% by 2030.

UK-based energy consultancy, Wood Mackenzie, on August 24, forecast net zero to arrive around 2070 and for global temperatures to rise by about 2.5°C before the end of the century.

This would be devastating for the planet.

US-based management consultancy, McKinsey, paints a similar picture.

"Even with the current decarboninsation trajectory trending toward 2.4°C, the supply of many minerals and metals embedded in key lower-carbon technologies will face a shortage by 2030," the group said on July 5.

The World Meteorological Organisation expects global warming to be even more extreme, closer to 3C.

The 1.5°C Paris Agreement target could be breached, on a 20-year average, by as soon as the early 2030s and the current mitigation policies will lead to an estimated global warming of around 2.8°C over this century, the WMO said on September 14 in a multi-agency report which it coordinated.

Global cooperation is crucial

"Keeping alive the goal of limiting global warming to 1.5°C requires the world to come together quickly," the International Energy Agency's Executive Director, Faith Birol, said on September 26.

If governments around the world do change course and sufficient cooperation is quickly secured, the world could see a "limited overshoot" of the 1.5°C target in the 2030s before bringing the temperature back below the limit by 2100, WoodMac said.

This scenario would require global cooperation and coordination to enter "all aspects of economic activity" including governments, businesses, industry, and consumers, it said.

The world would be interconnected, electrified, increasingly circular, and resources would be maximised, not wasted, it added.

The metals sector is at the core of this

"The energy transition begins and ends with metals," WoodMac said.

"All countries seeking to secure critical minerals must work in closer collaboration with resource holders to ensure an equitable share of proceeds so that future supply is delivered at the pace and scale required.

"Without this, the transition will stall," it said.

The IEA notes that breaching the 1.5°C limit not only brings with it additional climate risks but also that once it's happened, the genie is out of the bottle, and it'll fight like hell before it'll go back in.  

"Removing carbon from the atmosphere is costly and uncertain. We must do everything possible to stop putting it there in the first place," Birol said.

"Nearly 5Gt CO2 would have to be removed from the atmosphere every year during the second half of this century.

"If carbon removal technologies fail to deliver at such scale, returning the temperature to 1.5°C would not be possible," it said.

War to the east and fire to the south

With war raging to its east and its south devastated by wildfires, Europe is acutely aware of the dangers of both geopolitics and climate change.

The trouble is that moves to extinguish geopolitical threat/s can enflame the risks of global warming, and vice versa.

The EU's warning shot earlier this month for a trade war with China over electric vehicles serves as a potential example of this.

Europe is trying to juggle its concerns regarding Beijing's support for Russia and China's tightening strangle hold over EV and battery supply chains with the need to cooperate with Beijing in tackling climate change.

"Global markets are now flooded with cheaper Chinese electric cars," EC President, Ursula von der Leyen, said while launching the anti-subsidy probe into the Chinese sector in her State of the Union address on September 13 in Strasbourg, France.

The EU's car manufacturers are being "undercut by competitors benefitting from huge state subsidies," she said.

"We have not forgotten how China's unfair trade practices affected our solar industry.

"Europe is open for competition. Not for a race to the bottom," she said.

‘Expect the politics to get ferocious'

Tobias Gehrke, Global Fellow at the Wilson Centre and Senior Policy Fellow at the European Council on Foreign Relations said von der Leyen's address was a doubling down on a more geopolitical Commission.

"Once again, she framed the green transition as a distinct growth opportunity and geoeconomic agenda for the EU to compete in the global race for industries and supply chains and secure supply chains," he said on September 18.

"Indeed, von der Leyen could point to a number of industrial policy building blocks of this agenda: the Net Zero Industry Act, the Critical Raw Materials Act, and the economic security communication.

"How to effectively fund these policies remains a headache though," he said.

Gehrke pointed to the defeat of the proposal for new joint financial resources, via debt or taxes, which was replaced by "merely shifting around some existing budgets" via a new tool called STEP.

"It is perhaps for this defeat of a promotive tool that von der Leyen's announcement of a protective tool instead caused controversy: investigation whether Chinese EVs are subsidised and thus may be subjected to import tariffs (similar to the US import tariffs of Chinese EVs of 27.5%)," he said.

"The move will not only rattle China. Many European (read: German) carmakers are producing in China to export from there to global markets and could see this business model disrupted.

"The outcome of this investigation on EU-China relations could be significant: expect the politics of it to get ferocious long before that," he said.

Mr Dombrovskis goes to Beijing

It was amid the subsequent heightened tensions between Brussels and Beijing that EC Executive Vice-President, Valdis Dombrovskis, travelled to China for four days of diplomatic talks from September 22-26.

At a press conference in Beijing on the last day of the trip, he said, "I have been very clear in all my engagements that responding to Russia's aggression against Ukraine is not just an EU priority - it's a decisive factor in virtually all EU priorities at the present time".

Likewise, for the US, decision making is shaped by the active challenges to the existing international order from both Russia and China. The tensions regarding Taiwan and the South China Sea are ever present between the US and China. And what little cooperation existed between Moscow and Washington was decimated by Russia's invasion of Ukraine.

In a keynote speech at Tsinghua University in Beijing, Dombrovskis told his Chinese audience that Russia's war has forced the EU to rethink its economic security, including its dealings with China.

"We want to maintain an open approach to trade and investment, but we cannot ignore the risks we face," he said.

"And there is also a reputational risk to China. Its position on the war in Ukraine is affecting the country's image, not only with European consumers, but also businesses," he said.

The ties that bind

The trouble is, though, that pursuing the energy transition while playing tit-for-tat with Beijing over trade is a doomed task.  

While von der Leyen may not have forgotten how China's trade practices affected Europe's solar industry, nor has the World Trade Organisation's Director-General, Ngozi Okonjo-Iweala, forgotten how the global supply of panels benefited.

"WTO economists estimate that 40% of the dramatic cost decline for solar panels over the past three decades was due to scale economies made possible in part by international trade and value chains," she said on September 12.

In 2023, China is expected to produce about 80% of the world's solar panels.

"In contrast, fragmentation could make renewable energy more expensive than it otherwise would have been, disincentivising the replacement of fossil fuels and slowing down the low-carbon transition," Okonjo-Iweala said.

An EU-China EV trade war

Likewise, China's EV industry is the driving force behind the global rollout.

Currently, the EV battery supply chain relies on China for some 90% of its components and manufacturing, Morgan Stanley said.



And Beijing has already warned of consequences if it is restricted access to the EU EV market - the world's second largest. And they could be severe. And effective.

UK-based broker SP Angel said on September 19, "This will likely involve restrictions on the critical raw materials and components on which [European] industries depend for their survival".

"China's speed of adoption and near-total domination of supply chains has beaten the West with no other nation capable of preparing supply chains and dominating a sector as China.

The broker thinks the EU will eventually relent and China's dominance will continue into other green sectors.

"Chinese manufacturers are about to debut a huge range of new EVs across Europe, potentially crushing local manufacturing before it has even begun.

"We expect a lot of sabre-rattling, much soft lobbying, and a series of increasingly harsh restrictions on critical raw materials until the EU agrees to allow full access to EU markets.

"China's manufacturers are also innovating and making claims on new types of battery cells which may give it an ongoing leading edge as Europe struggles to get going.

"Once China has gained global domination of the EV market, we wonder what sector it will go after next - electric flight maybe?" SP Angel said.

Fastmarkets battery raw materials analyst, Pheobe O'Hara, said on September 19 that EV unaffordability in Europe - with average prices more than twice the average wage in many countries - means already that it'll be "incredibly difficult" for the central and eastern regions to meet the EU's 2035 internal combustion vehicles sales ban.

The UK on September 21 may have served as a sign of what's to come for mainland Europe when it pushed back its sales ban on international combustion vehicles, from 2030 to 2035.

Solar and EVs are bright spots of the transition

The solar and EV sectors have been two of the bright spots in the world's push to transition to clean energies. And stemming trade on the technologies could be disastrous.

"Since 2021, record growth in solar power capacity and electric car sales are in line with a pathway towards net zero emissions globally by mid-century, as are industry plans for the roll-out of new manufacturing capacity for them," the IEA said.

"This is significant, since those two technologies alone deliver one-third of the emissions reductions between today and 2030 in the pathway," it said.

The all-important lithium sector

The all-important lithium sector also serves as an example of how interdependent the world has become with China.

Australia, which is responsible for about half of the globe's lithium extraction, exported 96% of the spodumene to China in 2021-2022, according to data from Australia's Department of Industry, Science, and Resources.


Miners have few other options than to do so.  

"We're balancing the fact that the whole lithium industry pretty much looks to China for the processing of raw materials, so we can't sever that tie, nor do we want to," Dale Henderson, the CEO of Australian Pilbara Minerals, said in KPMG's 2023 Global Mining and Metals Outlook.

"It's always been a healthy relationship, but of course we watch the geopolitical utterings between the US and China," he said.

There are only two lithium refineries in Australia. One is owned by China's Tianqi Lithium (51%) and Australian miner IGO (49%). The other is owned by US-based Albemarle (60%) and Australian miner Mineral Resources (40%). A third is being built by Chilean miner SQM and Australian conglomerate Wesfarmers.

While in Canberra on September 5, Tesla chair, Robyn Denholm, said Australia would need 30 more refineries to compete on the world stage.

"Let that number sink in," she said.

Even still, Australia is one of the world's largest lithium refining countries in the world. China just dwarves the competition.

By 2025, China is expected to maintain a share of about 60% of global refining output, while Argentina, Australia, and the US are forecast to take market shares of 8.8%, 6.2%, and 2.2%, respectively, making them the third, fourth, and fifth largest in the world, Australia's Department of Industry, Science, and Resources said in the June edition of its Resources and Energy Quarterly.

Chile is the world's second largest lithium refiner with a share of 26% in 2022, it said.

An urgent story of heatwaves, wildfires, drought, and flooding

Current in-power Western world leaders largely do not doubt the urgency of the green energy transition to combat climate change - or even how critical cooperation with China is in dealing with the matter.

Russia's war against Ukraine may be an overwhelming factor in EU priorities, but Dombrovskis said there is no larger issue than global warming.

"On climate change, China plays a critical role in what has emerged as the major 21st century challenge facing mankind," he said on September 23 at the Bund Summit in Shanghai.

Biden told the UN General Assembly that working with Beijing on the accelerating climate crisis is critical.

"We see it everywhere: record-breaking heatwaves in the US and China; wildfires ravaging North America and Southern Europe; a fifth year of drought in the Horn of Africa; and tragic, tragic flooding in Libya.

"Together, these snapshots tell an urgent story of what awaits us if we fail to reduce our dependence on fossil fuels and begin to climate-proof the world," he said.

And yet, the US-China trade war intensifies. And the EU and China are at a crossroads which may see them drift further apart.

Meanwhile, despite China's dominance in the rapidly growing energy transition sectors, the country's economy has slowed sharply.  This led Biden, at a campaign fundraiser at Salt Lake City, Utah, on August 10, to say that China was "a ticking time-bomb".

"They got some problems," he said.

"That's not good because when bad folks have problems, they do bad things," he said.

The four D's of the (apparent) Chinese economic apocalypse

The effective end to China's zero-COVID strategy on December 7, 2022, was the high-water mark of the 2020-2022 era pandemic wave; the point where it finally started to roll back so the world could properly assess the damage and see what had washed up.

Since then, the state of the world's second-largest economy has been a matter of debate - with consensus views swinging dramatically for the year so far.

Initially, the market chatter was largely that China, unleashed from zero-COVID and ravenous from pent-up demand, would roar back to life and provide demand growth for world markets.

A lot has changed since then.

By the middle of this year, analysts and commentators were debating whether China's economy should be compared to Japan's burst asset bubble of the early 1990s or the 2008 US property crisis.

Meanwhile, five weeks prior to the December 7 high-water mark, Zongyuan Zoe Liu gave in the title of an analysis for Foreign Policy a view that would take much of the world many more months to see: Zero-COVID is the Least of Xi's Economic Problems.  

Liu, the Maurice R Greenberg Fellow for China Studies at the Council on Foreign Relations, said the real damage had been done prior to the end of zero-COVID.

And one of the core factors is the US-led pull away from China.

"The fundamental challenges holding back the Chinese economy are related to the four D's: demand, debt, decoupling, and demography," she said.  

Liu has since spoken in terms of decoupling and/or de-risking as the situation has evolved.

‘De-risking is not decoupling'

With the new phase of the US-China trade war comes new semantics. The use of the terms decoupling and de-risking have become points of global contention.

Dombrovskis said at the Bund Summit, "In almost every sector, arena and debate forum, we are seeing - and reading - what seems to be a whole new vocabulary".

"Onshoring, re-shoring, near-shoring, friend-shoring. Decoupling, de-globalisation," he said.

The West has been eager to frame its moves as de-risking, rather than decoupling.

"We are for de-risking, not decoupling with China," Biden said.

"Let me stress: de-risking is not decoupling," Dombrovskis said.

De-risking is packaged as something akin to simply diversifying supply chains to make them more robust.

"Our recent strategy on economic security aims to maximise the benefits of openness, while minimising our strategic dependences and vulnerabilities," Dombrovskis said.

‘Their song remains the same'

Beijing, meanwhile, sees the two terms as different brandings for the same policy: freeze China out of trade wherever possible and contain its growth and influence.

The Chinese Communist Party's mouthpiece, the People's Daily, put it bluntly in an editorial on August 24.

"The China hawks in Washington, on Capitol Hill in particularly, would ideally like to kick China completely out of US supply chains," the paper said.

"Although the slogan has changed from ‘decoupling' to ‘de-risking', their song remains the same," it said.

Dombrovskis said he understands that in China "de-risking is sometimes viewed as a synonym for ‘protectionist' or ‘China-sceptic'".

Whatever you call it - it's treading that line between potentially helping to extinguish a geopolitical threat while enflaming the risks of global warming.

No end in sight for the US-China trade war

When pressed on September 10 about his "ticking timebomb" comment and whether China's economic slowdown could cause greater Chinese aggression towards Taiwan, the President responded to the contrary.

"I don't think it's going to cause China to invade Taiwan. And matter of fact, the opposite - it probably doesn't have the same capacity that it had before," he said.

If Liu is right and de-risking is a core issue of China's economic slowdown. And Biden is right that China's slowdown reduces the risk of China invading Taiwan. And, the IEA, WTO, UN, WoodMac, etc, are right and cutting off trade with China risks the energy transition. Then de-risking might serve as another example of enflaming climate dangers while extinguishing geopolitical threats.

Given it was former President Donald Trump who started the trade war in 2018, and that Biden has kept it going, it seems unlikely that the US is going to abruptly change course any time soon. The two Americans are the front running candidates for the Republicans and Democrats for next year's November Presidential election.

China could also be expecting to be in it for the long haul.

‘Prepare for further isolation'

Liu argued that the CCP's "obsession" with zero-COVID served as an opportunity for Beijing to prepare for more decoupling/de-risking.

"By sticking with zero-COVID, Xi and his loyalists can control China's interactions with the rest of the world and prepare the Chinese people and economy for further isolation if the West imposes stricter economic sanctions against China," she said in November.

"US financial leaders have promised to exit China if it attacks Taiwan, which would effectively expel China from the US-led global economic and financial system.

"By focusing on improving China's self-sufficiency and expanding its dominance in strategic sectors, Xi hopes to raise the cost of sanctioning China to unbearably high levels for the West while developing China's capacity to absorb the economic shock of sanctions," she said.

The past year has also brought some additional clarity on the Taiwan situation.

In February, CIA Director William Burns told CBS' Face the Nation that China's President Xi Jinping has instructed the country's military to be ready to invade Taiwan by 2027.

And late last year, Biden broke from the US' policy of strategy ambiguity over what it would do in the event China invaded Taiwan by saying the US would come to the island's defence.

Taking brinkmanship to the Gates of Hell

It's not certain how much time is left for geopolitical brinkmanship, but the environmental brink must be close.

"Humanity has opened the gates of hell," the UN Secretary-General, Antonio Guterres, told world leaders in New York on September 20 during his opening remarks for the Climate Ambition Summit.

"If nothing changes we are heading towards a 2.8°C temperature rise - towards a dangerous and unstable world. But the future is not fixed. It is for leaders like you to write it.

"We are in many aspects even moving backwards," he said.

In his closing remarks, he said, "geopolitical divides are still not allowing for what must be an historic compromise".

Likewise, Birol said the IEA has a very clear message: "Strong international cooperation is crucial to success".

"Governments need to separate climate from geopolitics, given the scale of the challenge at hand," she said.

The WTO's Okonjo-Iweala said, "Open trade is indispensable for getting to net-zero GHG emissions".

"In a fragmented economy, lower knowledge spillovers not only diminish worldwide productivity, but also increase the costs of climate mitigation," she said.

A green armistice and an economic statecraft doctrine

Australia's richest man, iron ore miner Fortescue's chair, Andrew Forrest, said on August 30 that political leaders in the US and China, as well as India, have privately told him that global warming is a bigger threat to their peoples than a war involving China.

"These three countries are in a geopolitical struggle. It's blocking the flow of green technologies, critical minerals, collaboration, and investment," he said at the Boao Forum for Asia in Perth, Australia.

The solution, he said, is a green armistice.

"Match policy setting to risk. Risk is immediate. Risk is massive. So must our policy settings be," he said.

"Announce law intention to render illegal any action that would prevent mitigation of global warming," he said.

Former Deputy National Security Advisor for International Economics in the Biden administration, Daleep Singh, said he expects the rise in the use of economic statecraft to continue and is calling for a US-led doctrine on its use so that the situation doesn't spiral out of control.

It would be a Geneva Convention of sorts, for economic statecraft.

He includes sanctions, export controls, price caps, tariffs, investment restrictions, assets seizures, and more, under the umbrella term of economic statecraft.

"It's an environment in which cross-border cooperation is more difficult on cross-border risks like pandemics and climate change and debt and distress and migration," he said on September 4 in an interview with Bloomberg.

"But it's also a backdrop in which we should expect more frequent conflict," he said.

And the path of least resistance is a theatre of conflict in the economic and technological realms, rather than war, he said.

"That's why I say it's going to be increasingly a fixture of foreign policy in this geopolitical environment. So that's the entire premise for why I'm saying we have to get on with the work of institutionalising how, when, and why we use these tools," he said.

He said the guiding principles on a doctrine for economic statecraft should be:

  • Use sparingly, only when core international principles are at stake
  • Use responsibly to avoid unnecessary spillovers to civilian populations of the targets
  • Calibrate to maximise chance of coordination with allies/ partners
  • Allow flexibility to ratchet up or down
  • Ensure it's sustainable to reduce long term effect

"The purpose of doing so is two-fold," he said.

"One, taken seriously, it would constrain ourselves, meaning those in the US government, and prevent overreach.

"But number two, it would give comfort to the world that we're not firing economic weapons in an arbitrary or capricious way," he said.

He said the plan must start with the US. It could then spread to its closest allies in the G-7, and ultimately to the G-20, and eventually to Russia, China, North Korea, Iran, and others.

The thawing of a diplomatic freeze

In recent weeks and months, there has been a procession of senior Western figures visiting China in what could be a thawing of what has been something of a deepfreeze in diplomatic relations. Many of the talks marked three-to-five-year firsts.

While a positive sign, the talks have often highlighted just how entrenched the rifts have become, how treacherous the geopolitical landscape is, and how locked-in insular and inward-looking policies have become.

There is a deep distrust between China and the US, and the West more broadly. Both sides have been calling upon the other to take concrete steps to show sincerity in rebuilding the relationships.

The trips showed how much work needs to be done on this front.

Gina Raimondo on August 27-30 became the first US Commerce Secretary to visit China in five years - since the early days of the trade war.

While there - to discuss the two nations' commercial relationship and potential cooperation - the most tangible outcome was agreements for more talks.

Once back in the US, Raimondo told local media that trust had been eroded before the trip had even begun due to her emails being hacked by Chinese actors. Beijing also took offence to Raimondo during the trip for saying US firms were increasingly seeing China as uninvestable.

James Cleverly, the first UK Foreign Secretary to visit China in more than five years, took an open-handed approach to his August 30 trip to Beijing, saying it would be wrong to isolate the country.

Shortly after returning home, the UK's parliament was rocked by the Chinese spy scandal, which threw another spanner in the works of what was already a confused UK approach to Beijing. For example, it was less than a year ago, that Liz Truss was the Conservative Party's leader, and the country's Prime Minister - who calls for China to be designated a threat, views cold war as inevitable, and wants an "economic NATO" to challenge Beijing.

The sky hasn't fallen

Singh said, "I am not one of those people that says the sky is falling".

"I think we are just now in a new era in which economic and technological tools are the new theatre of conflict," he said.

If a green armistice, or doctrine on economic statecraft is the answer, let's just hope, and urge where possible, for some rules of conduct to be agreed upon before too long.

A growing series of reports, each focused on a key discussion point for the farming sector, brought to you by the Kondinin team.

A growing series of reports, each focused on a key discussion point for the farming sector, brought to you by the Kondinin team.


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