Climate Finance and Geopolitics: The China-US Dynamic

Climate action is a complex dynamic between cooperative global governance and great power competition, as seen in the China-US relationship. While there is optimism over the constructive climate relations since the resumption of formal China-US climate diplomacy, the hiatus has exposed the vulnerability of this engagement to unrelated bilateral tensions. The choice of cooperation between the world’s two largest emitters of carbon and two largest economies will impact developing countries, which are least culpable for climate change but most vulnerable to its negative impacts.

Climate finance, which refers to financial resources deployed by public or private sources towards local, national, or transnational climate-related projects, is an increasingly important area to watch in terms of how the competitive-cooperative dynamic between China and the USA evolves. The financing needs for climate mitigation and adaptation are estimated to amount to nearly US$800 billion by the end of this decade. To date, climate finance has only tangentially featured in the China-US climate conversation, with general statements aimed at raising ambitions in several of their joint communiqués. However, the two powers are actively competing for leadership as development donors, with each having pledged billions to the developing world in increasingly climate-friendly terms.

Developing countries are increasing their expectations of China and the USA to demonstrate leadership in climate assistance projects. The two powers have an opportunity to rise to the occasion in the climate finance space, despite their strategic rivalry, and channel the turbulence of China-US relations into positive spillovers for the rest of the planet.

The USA, the world’s largest economy and largest contributor to carbon emissions, is responsible for a massive climate financing gap globally. According to a study, the USA has provided only 5% of the $100 billion in climate finance promised by developed countries for developing countries. US President Joe Biden’s International Climate Finance Plan has gone largely unrealized, with only $1 billion approved so far. China insists that its contributions to climate finance are voluntary, and in 2015, it established a South-South Climate Cooperation Fund as part of its voluntary contributions. UN Secretary-General António Guterres did not invite either China or the USA to the Climate Ambition Summit convened in September 2023.

China-US cooperation on climate financing is widely agreed upon, with joint statements urging for increased funding, as affirmed by US Treasury Secretary Janet Yellen during her visit to Beijing. China’s status as a developing country eligible for multilateral funds and one of the world’s largest bilateral donors for development raises some contradictions. However, the GCF and China Development Bank have been in dialogue and signed cooperation agreements, proposing ideas for bilateral climate finance cooperation such as a joint financing platform, alignment of standards, cooperation on debt financing for recipient countries, and greater information sharing. Progress on these dimensions could occur in third countries, in conjunction with local priorities, as concrete projects are delivered by US and Chinese public and private actors.

Engaging with multilateral forums such as the UN and the G20, and key international financial institutions like the World Bank will provide a more collaborative environment for prioritizing climate finance. Any China-US joint engagement in this space would also stimulate wider global ambitions, placing pressure on other developed and emerging economies to close the wide gap between obligations, responsibilities, and action.

The future cooperation between China and the USA in the climate finance space depends on the larger context of their bilateral relations, which have reached their lowest ebb in half a century. Continued and expanded collaboration requires a willingness to separate off climate change from wider tensions. However, the rivalry can also generate positive externalities for developing countries by increasing the flow of bilateral assistance, which is more often earmarked for climate-friendly projects.

China’s Belt and Road Initiative (BRI) has spurred concerted efforts by the USA, the European Union (EU), and Japan to match China’s infrastructure financing in the Global South and elsewhere. The Build Back Better World initiative and the Partnership for Global Infrastructure and Investment are direct rejoinders to the Belt and Road Initiative (BRI). Other initiatives include the India-Middle East-Europe Economic Corridor, Trans-African Corridor, and an investment platform for sustainable infrastructure in the Americas. These competition has positive externalities for developing countries with infrastructure deficits, such as energy infrastructure. Funds deployed in these initiatives are likely to become greener, and platforms like the BRI International Alliance for Green Development may promote higher environmental standards.

As this greener investment trajectory continues, the developing world could see a “race to the top” in terms of financing available for climate action and the environmental standards to which development projects are held. China is actively utilizing climate cooperation in its public diplomacy and foreign policy in both bilateral and multilateral formats.

China’s climate and clean energy cooperation in third countries, a key aspect of its “great power responsibility,” is expected to gain more attention from US policymakers as they battle for global influence. Without cooperation, the USA may face strategic pressure to outcompete or match Chinese efforts due to wider tensions around foreign market dominance and global supply chains for advanced technology and manufacturing, including clean energy and the green economy. Biden’s Clean Energy-Centred Inflation Reduction Act was largely driven by geostrategic competition with China, and pressure to compete in third-country markets is likely to persist. As US companies become more globally competitive, cheaper and better alternatives for climate mitigation and adaptation will be generated.

China-US cooperation on climate policy is precarious due to bilateral tensions and domestic pressures that could reduce the ambitions of either country. The election of politicians less interested in climate action during the 2024 elections raises concerns about the USA’s international engagement in this space. China’s contributions to international climate finance are also determined by national conditions, and Chinese leaders aim to avoid the perception that any climate action is the result of US pressure.

The future of climate finance will depend on how far politicians in both countries acknowledge their interconnectedness with the rest of the world, both in terms of transnational climatic impacts and politically. The rest of the world will be the ultimate judge of whether the two powers can credibly claim global leadership over which they purport to compete.

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