Back Into the Black: Profiting on a Green China

Ogden and McDonough note that the U.S.-China economic dialogue would give the White House a chance to prove its commitment to clean energy.

When Treasury Secretary Henry Paulson traveled to China last week for a meeting of the newly formed U.S-China Strategic Economic Dialogue, he brought with him an entourage that included much of President Bush’s cabinet, as well as the chairman of the Federal Reserve. The delegation’s high profile reflected the high stakes of the trip: with a new Congress poised to consider such measures as increasing the tariff on Chinese goods by 27 percent, Paulson needed to make clear progress toward resolving some of the tough issues plaguing the U.S.-Sino economic relationship.

To this end, Secretary Paulson and his delegation were right to push for a firm commitment from China to strengthen its currency and to crackdown on piracy of software and other products. Resolving these important issues will help to reduce America’s near $200 billion trade deficit with China this year.

However, the delegation failed to take advantage of one area that is ripe for progress: the United States’ energy relationship with China. The Bush administration has signaled recently that it is interested in finding innovative ways to reduce carbon emissions and promote clean energy, and if it is serious about its intentions then the Strategic Economic Dialogue — which counts energy and the environment among its planks — would provide a good launching pad.

Paulson — not to mention Secretary of Energy Samuel Bodman, who was a part of this delegation — is well aware of the challenges posed by China’s voracious appetite for fossil fuels. A recent report by the International Energy Agency projects that China will overtake the United States as the world’s worst carbon emitter by 2009, thanks in large part to its reliance on environmentally caustic coal-fired power plants for electricity. Last year, China built approximately 75 such plants, and it will continue to build new ones at a rate of almost one per week for years to come. The carbon shadow of these plants stretches for decades into the future and their pollutants already reach across the Pacific.

China, like the United States, is not bound by any international commitment to reduce its carbon emissions, but there are signs that it has begun to recognize the dangers of fossil fuel dependence and the resulting environmental damage. China¿s latest Five Year Plan on national priorities and goals places unprecedented emphasis on environmental sustainability. Moreover, there is growing awareness that its energy security will be enhanced by diversifying away from fossil fuels.

China¿s interest in clean energy presents an enormous business opportunity as well as an environmental one. Unfortunately, it is an opportunity that the United States has not yet fully seized. A study released in October by former World Bank Chief Economist Nicholas Stern on the economic impact of climate change calculated that the markets for low-carbon energy projects will be worth at least $500 billion by 2050. In other words, combating global warming is not only an environmental necessity, but a vast economic opportunity.

Some U.S. investment companies are beginning to take notice — Morgan Stanley recently announced that it plans to invest some $3 billion in the carbon trading market and other clean energy related projects — but if the United States does not do more to promote the development of our domestic clean energy sector industry, it will find that its international competitors will be the ultimate beneficiaries of this new market.

Secretary Paulson could pave the way for green technology to become as successful of a U.S. export to China as airplanes and software by striking an agreement with his Chinese counterpart to facilitate such transactions. For instance, Paulson could commit to negotiating the necessary changes to the existing OECD financing arrangement in order to extend the loan repayment time for clean energy projects. The Chinese government in return could offer greater access to its clean energy market by agreeing to abide by the terms of the World Trade Organization’s Government Procurement Agreement for alternative energy projects. This would make American companies eligible to provide significant inputs for China’s burgeoning wind farm and solar power industry, among other things.

Had Paulson set this in motion, he would have returned from China with not only a major deliverable but a challenge that would compel the Bush administration and Congress — Republicans and Democrats alike — to work constructively together on an issue that should make both the business and environmental communities pleased: how best to promote the sale to China of green technology that is made in the U.S.A.

Even in the absence of such leadership by the Bush administration, however, Congress can still do its part by requiring that the U.S. Export-Import Bank (which currently provides billions of dollars each year of financing and credit to export American products) allocate a fixed percentage of all of its financing solely to clean energy projects. Furthermore, the Export-Import Bank could offer extended loan repayment time, reduced requirements for local financing, and the opportunity to forge joint partnerships with private banks to leverage additional assistance.

The global market for green technologies is not waiting for the United States to act. Now is the time to invest in the development of a domestic clean energy industry that can outperform its international competitors and capture a large share of this rapidly growing market. This is how America gets itself back into the black, and how it helps China to get into the green.

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Pete Ogden

Senior Fellow