US-China Assignment

Hello Reader,

In this post I present to you one of the essays I completed as part of my coursework. Please note that this essay was turned in on 18th March 2010, so some of the remarks in the conclusion are already a bit dated. For example, "the current political gridlock" in Washington has moved beyond the national healthcare debate; however, it has yet to actually reach a culminating point on climate change and energy! On the other hand, a new version of legislation is gaining some traction and the EPA has released its new rules for greenhouse gas emissions permits.

I hope you enjoy my academic musings...

“Compare the roles of China and the USA in the development of global climate policy”

I.    INTRODUCTION

The United States and China are consistently recognized as the world’s leading emitters of greenhouse gases. Thus, they will necessarily play an integral role in the success or failure of the development of any global climate policy efforts. However, a cursory inspection of either country’s economic, political, and social structures and issues will make it evident that for either country to successfully draft (and subsequently ratify and enact) a domestic climate change policy would be no small measure. Let alone the effort required to develop a useful global climate change policy that would simultaneously satisfy both countries and the rest of the world. Therefore, it should come as no surprise that attempts to do so have been fraught with difficulty.
This essay compares the roles that the People’s Republic of China (PRC) and the United States of America (US) have played and will likely play in the development of global climate change policies.

To do so coherently, the topic has been broken into a contextual section, a contemporary section, and a conclusion section. The contextual section looks at the internal structure of each country, the role that each country has played in the Kyoto Protocol process (from its initial agreement through to its implementation in 2005), and the issue of embodied emissions in international trade, which has been largely avoided in global climate negotiations to date. The contemporary section is split into two subsections. The first addresses the Asia-Pacific Partnership on Clean Development and Climate (APP) to which both countries have been active partners since its inception in 2006. The second focuses on the events leading up to and since the Copenhagen conference. Finally, the conclusion section briefly speculates on upcoming developments surrounding the US and China with regard to global climate change policies.

II.    CONTEXTUAL

1.    US INTERNAL CONSTRAINTS & INFRASTRUCTURE

Up until very recently the United States has long held the title of the world’s largest GHG emitter with net annual emissions well over 6 GT of CO2e with the vast majority (>85%) of emissions coming from the energy sector (UN FCCC 2008). This is not surprising based on the breakdown of primary energy sources in the US: petroleum 37.1%, natural gas 23.8%, and coal 22.5% (EIA 2008). Thus, any climate change policy developments must be designed to contend with a US infrastructure that is largely developed and reliant upon fossil fuels.

The structure of the US federal government, notably the separation of powers amongst the legislative, executive, and judicial branches, combined with the bipartisan nature of the American political system means that the negotiation, ratification, and ultimate implementation of any (global or domestic) climate change policy will necessarily be a difficult process. In the case of a global rather than a domestic policy, an extra layer of complication is introduced in that the President (or likely members of the State Department) is responsible for negotiating the policy, while the ratification of the policy (enacting it as law) is the responsibility of Congress, before responsibility is handed back to the executive branch (likely the Environmental Protection Agency and several other departments) for enforcement. All the while, other political discussions and quarrels in Congress have the potential (proven empirically time and again) to derail or delay meaningful action with regard to climate change policy.

While the US federal government has yet to enact any statutorily binding climate change policy (international or otherwise), it does offer a number of financial incentives that promote the implementation of renewable energy and energy-efficient technologies (e.g. incentives offered in the Energy Policy Act of 2005). Also, significant progress has been made on other levels (e.g. state, corporate, and NGO).

In fact, according to the U.S. DOE (2009), “24 states plus the District of Columbia that have [legally binding Renewable Portfolio Standards] policies in place”, which require renewable energy to account for 10-33% of the energy produced in the enacting state with deadlines ranging from 2015-2030. At a corporate level, the Chicago Climate Exchange (CCX) offers a legitimate GHG emissions trading forum for companies operating in North America (e.g. Ford Motor Company, Rolls-Royce, DuPont, and Sony Electronics, Inc.). The CCX members “make a voluntary but legally binding commitment to meet annual GHG emission reduction targets” (CCX 2007, quotation in original formatting). Furthermore, entire sectors in the US, notably that of higher education, have begun to champion the cause of stabilizing GHG emissions through their own actions without waiting for regulation. A prime example of this is the 675 higher education institutions that are signatories to the American College & University Presidents Climate Commitment, which obligates its members to establish a methodology and deadline for achieving climate neutral operations (ACUPCC 2010).

Thus, despite the United States’ apparent floundering in the international policy arena of climate change, the country is relatively well positioned to take action on the issue. However, without coherent federal leadership, the US will likely have a difficult time fostering the diplomatic prestige that the EU appears to have in the climate policy arena.

2.    CHINESE INTERNAL CONSTRAINTS & INFRASTRUCTURE

With estimates of the exact date varying, it is widely accepted that the People’s Republic of China has recently overtaken the US as the world’s largest emitter of greenhouse gases. The Pew Center on Global Climate Change (2007) estimates that China’s emissions have grown by about 80% since 1990. Similar to the US, this is not surprising considering that 65% of China’s energy consumption is met with coal (Pew 2007) and China is the second largest consumer of oil behind the US (EIA 2009). It is especially unastounding given China’s record economic growth over the past decade.

Unlike the multi-branch nature of the US federal government, the Chinese national governance of energy and climate policy has a complexity of its own variety. The National Development and Reform Commission (NDRC) of the PRC is at least ostensibly the primary controller of China’s climate change policies and published China’s National Climate Change Programme (NDRC 2007), which is a comprehensive overview of China’s national stance regarding and response to climate change issues.

However, Downs (2008) explains that policy direction from the NRDC by no means ensures action with interference from external and internal parties (e.g. private energy  industry companies and high-ranking members of the Chinese Communist Party respectively) being a regular occurrence. Furthermore, the introduction of the purportedly understaffed National Energy Administration (NEA) in the PRC government muddles the issue of responsibility regarding enacting and enforcing energy- and climate-related policies (Downs 2008).

NEA, which was established in March 2008, is now supposed to be responsible for key areas (e.g. development and planning, international cooperation, and general administration of energy policy) related to negotiating any international climate change policy. Yet, the NEA does not have the authority to adjust energy prices, an authority which is still held by the NRDC (Downs 2008). Thus, the PRC seems to be mired in bureaucratic turf battles that have an overall derailing and delaying effect that could be likened to the United States’ issues at the federal level.

Finally, it is important to note that as a non-Annex I country China has no formal obligation to reduce its emissions under the Kyoto Protocol to which it is a ratified signatory. However, in China’s National Climate Change Programme (CNCCP), the NRDC (2007) repeated refers to China as a country of responsibility, which means that it will work toward reducing the carbon intensity of its economy. In other words, China is actively attempting to increase its quantity of economic output measured in GDP per ton of CO2e emitted annually through a variety of energy, transportation, forestry, and industrial management schemes (Pew Center 2007). Also, the wording of the CNCCP makes it fairly clear that China expects much of its future mitigation to be driven by technological advancement rather than major economic shifts (NRDC 2007). Of course, with China’s economy growing at roughly 10 percent per annum over the past two decades with little signs of slowing, it is likely that China’s overall GHG emissions will continue to grow in spite of its efficiency efforts (Wang and Watson 2008).

3.    HISTORICAL (KYOTO – 2005)

For better or worse, the negotiation of global climate change policy over the past decade has been centered around the clarification and implementation of the Kyoto Protocol. The primary tenants of Kyoto involved securing reductions in greenhouse gas (GHG) emissions from Annex I countries (i.e. developed or industrialized nations) while allowing non-Annex I countries freedom to develop as a form of equity (Bolin 1998).

Since the initial agreement, virtually all of the roughly 200 nations that participated in the negotiations have ratified the Kyoto Protocol with the notable exception of the US. The protocol has spurred the EU to develop a mandatory GHG emissions trading scheme. It also fostered approximately 1400 cost-effective Clean Development Mechanism (CDM) projects to reduce GHG emissions in non-Annex I countries, of which half are hosted by China (Taplin and McGee 2010). Despite these generally encouraging successes, Kyoto has many criticisms.

As Bolin (1998) pointed out, the targets and timelines for action in the protocol were set out by the policymakers with a limited understanding of the inertia of the climate system; therefore, even in 1998 Bolin expected that additional international efforts would be required prior to 2010.
Instead of relying upon science for strict guidance, Kyoto was developed based largely around political feasibility and international acceptability. It offered generous allowances to the transitional economies (e.g. the former USSR) and offered special exceptions to Australia, Iceland, New Zealand, and Norway (Bolin 1998). Furthermore, Kellow (2010) explains that by choosing the 1990 baseline for emissions countries such as the United Kingdom and Germany were asked to make smaller commitments than might have otherwise been chosen, which were indirectly passed onto the rest of the EU under the European Burden Sharing Agreement.

Regardless of the merits and shortcomings of the Kyoto Protocol at the time of the signing, the end result is that neither the US nor China have realized any attributable, real reductions in GHG emissions due to the agreement. In 2001 the US under the Bush administration fully withdrew from its commitment to Kyoto, which was at least partly due to lack of reductions commitments from non-Annex I countries. Meanwhile, China, which was not required to make any GHG reduction commitments as a non-Annex I country, has only nominally participated in the agreement by participating in the CDM program, and it has been argued that much of China’s dubious CDM participation is likely not actually beneficial with regard to mitigating climate change (Kellow 2010).

4.    EMBODIED EMISSIONS IN TRADE ISSUES

Though the topic of GHG emissions embodied in internationally traded goods has been generally avoided by policymakers and policy negotiators attempting to gain a consensus, it has received attention from the academic community (e.g. Wang and Watson 2007, 2008 and Peters and Hertwich 2008), and its inclusion in policy discussions has the potential to radically shift the tone of global climate change policy efforts. In fact, Peters and Hertwich (2008) suggest that international trade may be one of the most decisive issues in climate policy.

Furthermore, at least as far back as the Reagan administration in the 1980s, the US has put an emphasis on trade in its foreign policy by working with various degrees of alacrity to open up global and regional trade with partners in the Western hemisphere, the Pacific, and Asia through free trade agreements (Barfield 2009). Also, China’s net exports account for around 23% its total annual GHG emissions for 2004 (Wang and Watson 2007).

Thus, emissions embodied in trade seem to warrant special attention of its own, particularly in the context of US and Chinese influence on global climate policy. Unfortunately, with the US being a net importer (imports accounted for 7.3% of annual GHG emissions) and China being a net exporter (exports accounted for 17.8% of annual GHG emissions) of GHG emissions simultaneously (Peters and Hertwich 2008) it is likely that the two countries will disagree regarding whom should take responsibility for emissions: the producer or the consumer. Yet, Wang and Watson (2007) and Peters and Hertwich (2008) indicate that leaving the issue unresolved in global climate change negotiations will likely lead to an inefficient and/or ineffective  policy with the potential for “carbon leaking” (i.e. industries moving from regulated to unregulated, carbon-intensive economies). This outcome could be damaging to both the environment and economic stability in the long-term.

III.    CONTEMPORARY

1.    ASIA-PACIFIC PARTNERSHIP (2006 – PRESENT)

In July of 2005 Australia, India, Japan, the Republic of Korea, China, and the US, which were later joined by Canada in 2007, developed a vision statement for a non-binding partnership focused on promoting sustainable development and addressing climate change issues (Kellow 2010). The result was formation of the Asia-Pacific Partnership on Clean Development and Climate (APP) at a ministerial meeting in January of 2006 in Sydney (APP 2006a).

The APP (2006a) Charter describes an organization designed to share technical and policy information through public-private partnerships such that each of the member countries can build their own capacity to implement clean development technologies and environmental programs. The APP (2006b) Work Plan explains that the work of the APP will be done through industrial/governmental task forces that will research and explore bottom-up approaches. The task forces are divided into eight key sectors: (1) cleaner fossil energy; (2) renewable energy and distributed generation; (3) power generation and transmission; (4) steel; (5) aluminium; (6) cement; (7) coal mining; and (8) buildings and appliances (APP 2006b). The concept of task forces appears to be particularly novel to the APP in comparison to other international climate change policy alternatives, and its research and development focus has the potential to open up new connections between industry professionals and researchers in different countries (Aldy et al 2003).

Academically, there seem to be two primary schools of thought regarding the APP: those that see the APP as a distraction that detracts from the Kyoto Protocol (e.g. Taplin and McGee 2010) and those that see the APP as a useful alternative or supplement to the short-comings of the Kyoto Protocol (e.g. Kellow 2010). Taplin and McGee (2010) argue that – despite the clause inserted at the request of Japan within the APP Charter indicating otherwise – the structure of the APP is irreconcilable with one of the primary tenants of the UN FCCC (i.e. common but differentiated responsibilities) and is designed to undermine current climate governance. However, it could easily be argued that the APP was created due to the poor design of Kyoto.

Kellow (2010) believes that the APP is an excellent exercise in ‘mini-lateralism’ that avoids the least common denominator effect of global negotiations by limiting the discussion to a few key countries. Some of the least common denominator effects that the APP avoid include the lack of action by major developing nations and binding international commitments that are extremely difficult to enact and enforce (i.e. abutting against the infrastructural constraints described in the contextual section above).

While it is clear that the APP’s focus on improving carbon intensity rather than absolute GHG emission reductions is a weaker means of mitigating the causes of climate change (Taplin and McGee 2010), the APP by no means precludes – in fact it at least nominally encourages – nations to develop climate change policies that result in absolute reductions. Also, Taplin and McGee’s (2010) suggestion that the APP promotes a sense of inequity by forcing major developing nations (e.g. China) to take action now seems to be largely missing the point. This is especially the case considering China is voluntarily participating in the APP and the US federal government was able to address climate change through a back door during a time period when it was politically unfeasible to enter through the front. And, even though it was probably not designed with this in mind, the APP also allowed the US some freedom toward the end of the Bush administration when according to Barfield (2009) many political figures would not consent to any program associated with the out-going president.

2.    PRE/POST-COPENHAGEN

This section is designed to look at the adjustments, political wrangling, preparations, and fall out of the Copenhagen conference in December of 2009 and address the impacts that the US and China have had on the process and each other. It should be noted that due to the extremely recent nature of this topic the spread of academic literature to date is relatively sparse, and this section should be read as such.

Almost any sampling of national US press coverage in 2009 will likely make it clear that newly-seated President Obama was the center of attention. The lead up to the Copenhagen conference was hardly different though the president naturally shared the limelight with the Environmental Protection Agency (EPA), Congress, and surprisingly the US Supreme Court. In Congress, the Waxman-Markey bill, which is otherwise known as the American Clean Energy and Security Act and proposes a ‘cap-and-trade’ system along side a national 20% renewable energy standard, was introduced in the house in July of 2009 (Pelosi et al 2009).

Though the bill was not signed into law prior to the Copenhagen conference – and actually has yet to do so – the US federal government did begin to act to address climate change in 2009. This was made possible thanks to a finding by the EPA, in response to a 2007 ruling by the Supreme Court, that GHGs were a threat to public health and the environment and were therefore subject to regulation under the Clean Air Act, which was initially developed to combat the causes of acid rain and other types of air pollutants (EPA 2007). Unfortunately, this finding did not carry enough momentum to warrant a total shift in United States’ negotiating policy at Copenhagen or lead directly to setting GHG emissions reductions targets. However, the EPA (2007) does recognize it as a pivotal first step in forcing the US federal government to acknowledge and address climate change.

Since Copenhagen, the US news media have not focused significantly on developments in US climate change policy. Instead the primary focus has been on the reform of healthcare legislation, which has been championed by President Obama throughout the beginning of 2010. China on the other hand has been the center of attention with regard to climate change policy since Copenhagen.

Building upon its efforts in the run up to Copenhagen, such as the research, clean coal, and energy efficiency goals outlined in the joint statement by NEA and the IEA (2009), China has made the news for its climate policies a number of times since Copenhagen. The Associated Press (2010) reported in early March that China is in the process of drafting a 10 year green energy plan. The report included a goal of 15% renewable energy by 2020, similar to its earlier commitment in the NEA and IEA (2009) joint statement; however, the report cited an additional goal of decreasing the carbon intensity of the Chinese economy by 40-45% by 2020 (Associated Press 2010).

IV.    CONCLUSION

With the recent Chinese announcement about its forthcoming 10 year plan and recognition that China has overtaken the US as the world’s largest investor in renewable energies (van Loon 2010), the US is swiftly losing the arguments that led to the stagnation of the Kyoto Protocol. These developments could have a range of implications for United States climate and clean energy policies. Factor in the EPA ruling mentioned above, and it is likely that Congress will have little choice to act before the end of 2010. Otherwise, the EPA will be compelled to regulate GHG emissions without further guidance and even the most staunchly conservative Republicans may have difficulty explaining why China is taking the lead on global energy policy while the US is falling behind. At this point the main inhibitor to addressing climate change policy in the US may be the current political gridlock surrounding the national healthcare debate.

Once the US takes some domestic action, and assuming that the NEA and NRDC continue along their predetermined path, it is possible that the two countries that were previously doing the least to address climate change will end up doing the most even it is simply a matter of scale. China has been on a research and development dependent path even prior to the release of the CNCCP (NRDC 2007). The US has a smattering of potential advantages as outlined in the contextual section and is currently on a path toward some version of a Cap-and-Trade based system of governance (Pew Center 2010).

It seems that both countries could stand to benefit from additional emphasis on and funding toward the APP. If this occurs in combination with one (more likely the US) or both countries setting targets for actual GHG emissions reductions or even especially stringent measures to improve carbon intensity, the need for a global climate change policy may fall by the wayside much to the chagrin of EU leaders. Thus, the rest of the world would have to make due with the US and China doing something rather than everything promised in Kyoto and patch together several regionalized policies.

This vision may not sound like a global ideal, but it certainly does seem more reasonable and pragmatic given the current circumstances outlined throughout this essay. Furthermore, a regionalized approach and a breakdown of the post-Kyoto mindset may allow other issues such as emissions embodied in international trade to creep into the global climate policy forum. It certainly seems like such an issue is more pertinent to a global climate regime than universal (or OECD-based) emissions targets since it deals with the interplay between countries and cannot be built upon multiple domestic policies.

In summary, US and China have differing superficial needs, constraints, and goals in the climate policy realm, but ultimately their mutual drive for economic growth and current reliance on fossil fuels result in a similar set of policy aims. As such, it is likely that the US and China (and the competition and cooperation between them) will continue to push global climate change policy towards a more fragmented and regionalized system of governance in the near future.

For reference list please see the accompanying post.

US-China Assignment - References

These are the references I used for my assignment comparing the roles of China and the US in development of global climate policy, which can be found in the accompanying post.


ACUPCC (American College & University Presidents Climate Commitment) 2010: American College & University Presidents Climate Commitment Website, , Last Accessed 16 March 2010.

Aldy, J.E., S. Barrett, and R.N. Stavins, 2003: “Thirteen Plus One: A Comparison of Global Climate Policy Architectures”, KSG Working Paper Series No. RWP03-012; FEEM Working Paper No. 64, , 1-39.

APP (Asia-Pacific Partnership on Clean Development and Climate), 11-13 January 2006a: Charter, Sydney, 1-7.

APP (Asia-Pacific Partnership on Clean Development and Climate), 11-12 January 2006b: Work Plan, Sydney, 1-8.

Associated Press, 2 March 2010: “Report: China drafts 10-year ‘green energy’ plan”, Business Week, Bloomberg L.P., Shanghai, , Last Accessed 17 March 2010.

Barfield, C., 2009: “Politics of Trade in the USA and in the Obama Administration: Implications for Asian Regionalism”, Asian Economic Policy Review, 4, 227-243.

Bolin, B., 1998: “The Kyoto Negotiations on Climate Change: A Science Perspective”, Science, 279, 330-331, .

CCX (Chicago Climate Exchange, Inc.), 2007: “Overview”, Chicago Climate Exchange Website, , Last Accessed 16 March 2010.

DOE (Department of Energy for the United States), 2009: “States with Renewable Portfolio Standards”, Energy Efficiency & Renewable Energy State Activities and Partnerships Website, , Last Accessed 16 March 2010.

Downs, E.S., 2008: “China’s “New” Energy Administration: China’s National Energy Administration will struggle to manage the energy sector effectively”, The China Business Review Online, The US-China Business Council, November-December Issue,42-45.

EIA (U.S. Energy Information Administration), 2008: “Figure 2.0: Primary Energy Consumption by Source and Sector”, Annual Energy Review 2008, , Last Accessed 16 March 2010.

EIA (U.S. Energy Information Administration), 2009: “China: Oil”, Country Analysis Briefs Website, , Last Accessed 16 March 2010.

EPA (U.S. Environmental Protection Agency), 7 December 2009: “EPA: Greenhouse Gases Threaten Public Health and the Environment / Science overwhelmingly shows greenhouse gas concentrations at unprecedented levels due to human activity”, U.S. EPA Website: News Releases issued by the Office of Air and Radiation, , Last Accessed 17 March 2010.

Kellow, A., 2010: “Is the Asia-Pacific Partnership a viable alternative to Kyoto?”, WIREs Climate Change, 1, 10-15.

NEA (National Energy Administration of the People’s Republic of China) and IEA (International Energy Agency), 2009: “Joint Statement by the National Energy Administration of the People’s Republic of China and the International Energy Agency”, Paris, 1-5.

NRDC (National Development and Reform Commission of the People’s Republic of China), 2007: China’s National Climate Change Programme, 1-62.

Peters, G.P. and E.G. Hertwich, 2008: “CO2 Embodied in International Trade with Implications for Global Climate Policy”, Environmental Science & Technology, 42(5), 1401-1407.

Pelosi (Offices of Speaker Pelosi), Leader Hoyer, the Energy and Commerce Committee, and the Select Committee on Energy Independence and Global Warming, 2009: “Building the Clean Energy Economy”, , Last Accessed 17 March 2010, 1-44.

Pew Center (on Global Climate Change), 2007: “Climate Change Mitigation Measures in the People’s Republic of China”, 1-4.

Pew Center (on Global Climate Change), 2010: “Carbon Market Design & Oversight: A Short Overview”, 1-15.

Taplin, R. and J. McGee, 2010: “The Asia-Pacific Partnership: implementation challenges and interplay with Kyoto”, WIREs Climate Change, 1, 16-22.

UN FCCC (United Nations Framework Convention on Climate Change), 2008: Report of the individual review of the greenhouse gas inventory of the United States of America submitted in 2007, 1-37.

United States, House of Representatives, 109th Congress, H.R. 6: Energy Policy Act of 2005 (introduced in the U.S. House of Representatives; 5 August 2005), 109th Congress, , Last Accessed 16 March 2010.

van Loon, J., 17 March 2010: “Renewable Energy Investment May Reach $200 Billion in 2010”, Business Week, Bloomberg L.P., , Last Accessed 17 March 2010.

Wang, T. and J. Watson, 2007: “Who Owns China’s Carbon Emissions?”, Tyndall Briefing Note No. 23, Tyndall Centre for Climate Change Research, 1-7.

Wang, T. and J. Watson, 2008: “Carbon Emissions Scenarios for China to 2100”, Tyndall Working Paper No. 121, Tyndall Centre for Climate Change Research, 1-23.

A US-China Solution to Climate Change & the Trade Deficit

I. Introduction

After reading a recent news article about President Obama meeting with the president of the People’s Republic of China, I was not surprised to discover that, although somewhat amiable, the two presidents and the two countries were still at an impasse regarding both climate change and economic issues. From my understanding, neither country is willing to fully pursue an appropriate climate change policy that may cede any economic ground to the other country. Furthermore, as China looks to quickly modernize or develop its economy, it is in perhaps a weaker position to address climate change than the US. Conversely, as the US is currently in debt to China on the order of approximately $800 billion and has simultaneously been running a trade deficit with China that has grown on average by 17% per year for the past decade[1], it is in a somewhat weaker position to make economic demands. Seeing these two disparities, I questioned whether the two issues could be combined in order to solve both issues while allowing both countries and the world to benefit.

II. Exchange Rate

The key to a solution lies in China’s current policy that fixes exchange rate between the Chinese Yuan (CNY) and the US Dollar (USD), which currently stands at approximately 6.83 CNY to 1 USD. By holding the CNY at this ratio, China is able to make its goods cheaper on international markets and make imports more expensive. This financial tactic is often cited as one of the factors exacerbating the US-China trade deficit.

III. The Proposal

Similar to the dual problem being addressed, my proposal contains two primary components. The first is for China to agree to incrementally lower the value of its currency over the next decade. The second is that in exchange the US agrees to take on some China’s responsibility to address climate change. Specifically, my proposal is that over the next decade the US will agree to offer domestic renewable energy subsidies equivalent to value that it saves on the trade deficit due to the adjusted rate of exchange. This strategy could allow the US to annually offset (or prevent) a significant amount (approximately 1.8x1010 MT between 2010 and 2039) of greenhouse gas emissions compared to the current, combined annual emissions of the US and China.[2]

IV. Rate Adjustment

Just as the USD-CNY exchange rate is the key to the solution, the adjustment rate of the exchange rate is the key to determining the viability and impact of the program. While a variety of models are possible, I have chosen a relatively simple model to calculate my results. The model I am proposing calls for China to decrease the exchange rate by a certain percentage each year over the coming decade. Doing so would result in an exchange rate at the beginning of 2020 that is in the range of 6.18:1 to 4.09:1 (CNY:USD) for adjustment rates of 1% to 5% annually.

V. Potential Costs to China

Without question, this program would cost China money. Table 1 shows the cumulative value of costs (based solely on US-China trade deficit figures) to China over the course of the program (from the beginning of 2010 to the end of 2019) in billions of 2010USD at different adjustment rates (rows) and discount rates (columns). While the costs listed in Table 1 only reflect the loss in value from US-Chinese trade, China would also incur additional costs in trade with other countries for which I have not yet accounted. However, assuming that this is seen by the international community as the cost of China continuing to grow its economy in the face of the looming climate change impacts, the costs may be justifiable.


Just how much China would be willing to pay may be a matter of negotiation. As such, this program should merely be one of many tools used to solve the issues put forward in the introduction section rather than an all-inclusive set of actions. Further, the scale of these values should be put into perspective. For example, the 2008 annual US-China trade deficit was $268 billion (not discounted) or in other words 16% of the most costly scenario in Table 1 or 250% of the cheapest scenario in Table 1. Another point of reference is that the US’s debt to China as of September 2009 was about $800 billion (not discounted). With these points of reference in mind, all of the potential costs seem fairly reasonable if not negligible.

VI. Hurdles for the US

In order for this program to be as successful as possible, the US must be willing to use truly renewable energies with the highest possible MWh/$ ratio with the greatest potential to rapidly scale-up over the coming decade. As such, my primary suggestion is to fully invest in large-scale (2 MW or greater) wind turbines, which to my knowledge offer the greatest MWh/$ ratio currently available (approximately $1.6 million per MW of installed capacity) for low-GHG emission energy sources.[3] In this scenario, I suspect that the biggest hurdles to overcome would be NIMBYism (Not-In-My-Backyard objections) and ensuring that the utility grid infrastructure can support the variable energy generation provided by wind turbines.

VII. Assumptions

In order to perform calculations, I was forced to make several assumptions and estimations. In this section I will explain many of these assumptions and estimations and justify my reasoning for each of them.

1. Trade Deficit Growth

The first assumption was that although the US-China trade deficit varies greatly from year to year, it has tended to increase by an average of 17% per year over the past decade. Therefore, I assumed that over the next decade it is likely to do the same. Of course, due to the semi-chaotic variability of international markets, this may not be a safe assumption, so I also looked at some practical limitations to this assumption.

Firstly, if the trade deficit grows more rapidly than 17%, then the result will be that more savings will be realized by the US due to a reduction in the exchange rate. Therefore, although economic relations between the US and China may be further strained compared to current conditions, the greenhouse gas emissions program would receive greater funding. As such, so long as the rate of growth does not surpass some critical value that causes the US economy to disintegrate, from an overall benefits perspective this seems to be a neutral outcome. Furthermore, considering the fact that the disparity between the USD and the CNY will be shifting in favor of the US, it seems more likely that the trade-deficit growth will slow rather than accelerate. However, so long as the growth does not slow by more than 13% per year (at which point the US-China trade deficit will be essentially non-existent by 2020), which seems rather unlikely, the program will still be viable. In fact, even if the average trade-deficit growth decreases by 6% annually (meaning that the trade deficit will peak during 2011 and start decreasing during 2012), the benefits of the program are still substantial.

2. Discount Rate

Another matter that needs to be considered in the case of a long-term venture such as this is the discount rate. With no discount rate applied, the program is extremely viable for all proposed adjustment rates. For any of the proposed adjustment rates, a discount rate of up to 2.75% allows for emissions reductions that are about half of those for a 0% discount rate, and a discount rate of up to 5.5% yields emissions reductions that are about one quarter of those for a 0% discount rate.

3. Technology Rate

Due to the nature of renewable energy research and deployment, it is also important to anticipate a decrease in the cost of renewable energies due to advances in technology, which for simplicity’s sake I have termed the technology rate. While the viability of the program would only be increased by a positive technology rate (causing decreasing costs over time) and is therefore not a concern, estimating a reasonable technology rate allows for a more accurate estimate of the total impact of the program and the degree to which the effects of discounting can be offset. I have assumed a technology rate of 3.5%.[4]

One caveat to the technology rate assumption is that an effectively negative technology rate could be experienced if supply could not be scaled up to meet the newly created demand for renewable energies in a timely fashion. However, I believe that an essentially reliable source of funding and demand over the next decade will merely persuade more suppliers to appear and for current suppliers to invest more heavily in scaling up and improving technology to remain competitive. Therefore, if anything, I suspect that this technology rate may be too low.

4. Wind Turbine Limitations

In the particular case of wind turbine deployment, the capacity factor is crucial in determining the amount of energy produced (and the emissions prevented). For all cases I have assumed a capacity factor of 25%, which means that on average each turbine will be producing 25% of its name plate capacity. In other words for each MW of installed generation capacity, 0.25 MWh will be produced each hour on average. Obviously higher capacity factors will yield greater reductions in emissions just as lower capacity factors will yield lesser reductions in emissions. However, predicting such figures exactly is not practical. Therefore, I have chosen to use a reasonable (although arguably low) capacity factor.[5] In addition to capacity factor, the operating lifetime of installed wind turbines will also be a factor in determining the total electricity generated as a result of this program. To be conservative, I have assumed that each wind turbine will have to be decommissioned twenty years after its installation.

VIII. Results

Based on the assumptions stated in the previous section, I calculated a variety of potential outcomes. Figures 1-5 below depict some of the trends in values that can be expected for different currency adjustment rates and a discount rate of 2.75%.

Figure 1 shows the potential wind capacity that could be installed each year during the program. Note that the last year in Figure 1 is 2019 since this would be the last year that China would be obliged to adjust its exchange rate and that the US would be obliged to continue funding the subsidy. While Figure 2 shows the cumulative capacity that would be available as a result of the program. Given the assumption that I have made about wind turbine lifetimes, the direct impact of the program would not exceed the end of 2039.


Figures 3 and 4 show annual electricity generation and annual avoided greenhouse gas emissions respectively. Note that the trends depicted are identical in shape, because I calculated the avoided greenhouse gas emission by simply multiplying the electricity generation by a factor of approximately 0.609 eCO2 per MWh.[6] The generation and avoided emission do not start until 2011, because presumably the turbines would still be under construction during 2010 and not producing substantial amounts of energy. There is also a decline in the trends after 2031 as the first set of turbines are decommissioned. Although, in reality some turbines may fail prior to this date and others may still be useful well past the predicted lifetime, which would mean that the trends would start to decrease sooner but trail off much more slowly. Admittedly, the values in Figure 4 do not take into account for greenhouse gas emissions associated with production and installation of the turbines. However, in reality this impact would only impact the years in which installations occur (2010-2019), and I suspect it would be relatively negligible if it were amortized over the lifetime of the turbines. Furthermore, any emissions associated with maintenance would likely pale in comparison to the emissions associated maintaining and providing fuel for most other generation types.


Figure 5 shows the value (in millions of 2010USD) of annual energy production. This estimate uses an average US electricity rate of 9.5¢/kWh. Unfortunately, I do not know how to predict with any amount of certainty how much this rate will fluctuate over the course of the lifetime of this program. Therefore, I have simply left it constant. These values also do not account for secondary values that may be associated with installation such as Renewable Energy Credits. The trend shown in Figure 5 depicts an increase in value during the installation period (2010-2019), followed by a slight decrease as energy generation remains constant (2020-2031) and the effects of the discount rate dominate, and ends in a sharp decrease after 2031 as the effects of the discount rate combine with the loss of generation capacity as turbines are decommissioned.



IX. Conclusions

If this program is successfully implemented, wind energy could annually generate an amount of electricity equivalent to 4.8% to 36% of the total amount of electricity generated in the US during 2008[7] for the decade of the 2020s. Furthermore, if the renewable energy subsidies required a 2:1 or 3:1 match on the part of investors, the impact of this program could be double or triple the values that I have calculated. Concurrently, the disparity between value of the US Dollar and Chinese Yuan could be lessened, and the “you first” climate change deadlock between the US and China could be resolved. During negotiations, this solution could be taken a few steps further if (1) China agrees to peak its greenhouse gas emissions during the 2020s and (2) the US agrees to start actively reducing its debt to China during the 2020s.

Finally, while this entire proposal may seem like wishful thinking to some, I feel that its scope is realistic and achievable even if the timeline might need to be adjusted one or two years into the future. However, I recognize that for this program to be successfully implemented, it will take a great deal of action in a lot of areas where rhetoric may be a more common response to problems. Therefore, I remain hopeful but unoptimistic.