Climate Finance And Geopolitics: The China–US Factor – Analysis

 November 30, 2023 

By Dr Jiayi Zhou and ​​​​​​​Zha Daojiong

Climate action is caught in the increasingly volatile push-and-pull between cooperative global governance and great power competition, a fraught dynamic readily apparent in relations between China and the United States. China–US bilateral relations are widely acknowledged as a keystone for international efforts to address climate change. But the actions that both countries put forward to address climatic changes ‘indifferent to geopolitical rivalries’ are inevitably impacted by that very rivalry. There is, of course, optimism over the more constructive climate relations that the two have demonstrated since the resumption of formal China–US climate diplomacy this summer, after an 11-month halt following US House Speaker Nancy Pelosi’s visit to Taiwan in August 2022. But the hiatus itself also demonstrated just how vulnerable this engagement is to unrelated bilateral tensions over issues ranging from fierce technological and geostrategic competition to the prospects of military confrontation in the Indo–Pacific region. 

How and whether the world’s two largest emitters of carbon and two largest economies choose to cooperate in this area will also impact the developing countries that are least culpable for climate change but most vulnerable to its negative impacts. In this regard, one increasingly important area to watch in terms of how the competitive–cooperative dynamic between China and the USA evolves is climate finance. Climate finance can refer to any financial resources deployed by public or private sources towards local, national or transnational climate-related projects. However, it is more frequently used to specifically denote flows from industrialized countries to the developing world—where by one estimatethe financing needs for climate mitigation and adaptation will amount to nearly US$800 billion by the end of this decade. 

To date, climate finance has featured only tangentially in the China–US climate conversation, with general statements aimed at raising ambitions in several of their joint communiqués. The amounts of Chinese and US climate finance currently reaching the developing world are also far from impressive. However, the two powers are in active competition for leadership as development donors, with each having pledged billions to the developing world in increasingly climate-friendly terms. Meanwhile, developing countries’ expectations that China and the USA will demonstrate leadership through the delivery of climate assistance projects are also growing. As argued below, the two powers have an opportunity to rise to the occasion in the climate finance space, not only despite but perhaps even because of their strategic rivalry—and to channel even the turbulence of China–US relations into positive spillovers for the rest of the planet. 

Much room for improvement as climate donors

Despite declarative commitments to climate finance, neither China nor the USA has demonstrated significant leadership in concrete terms. The lack of a universal methodology for classifying, measuring and reporting on climate finance makes it difficult to assess the flows of climate finance with much precision. However, the wide discrepancy between the two donors’ commitments and their disbursement of climate financing is undeniable. 

The USA—the world’s largest economy and largest cumulative contributor to carbon emissions—is the most responsible for what is a massive climate financing gap globally. According to one study, the USA has provided only 5 per cent of what would be a ‘fair share’ of the $100 billion in climate finance that developed countries promised to mobilize annually for developing countries. US President Joe Biden’s International Climate Finance Plan, announced in January 2021, has also gone largely unrealized. His administration’s more ambitious pledge to quadruple contributions to an annual $11.4 billion by 2024 has faced Congressional opposition, with only $1 billion approved so far. Meanwhile, China insists that as a developing (non-Annex II) country under the United Nations Framework Convention on Climate Change (UNFCCC) any contributions it makes to climate finance are voluntary. In 2015 it established a South–South Climate Cooperation Fund as part of its voluntary contributions towards climate finance, but it has only delivered a small fraction of the $3.1 billion it originally promised. UN Secretary-General António Guterres pointedly did not invite either China or the USA to the Climate Ambition Summit he convened in September 2023.

There is both official and unofficial consensus that climate financing could be an area of China–US cooperation, however. Joint statements, one in the run-up to the COP26 meeting in Glasgow in 2021 and another when it was underway, call for an increase in climate finance. A desire for more joint work in this domain was also affirmed during US Treasury Secretary Janet Yellen’s visit to Beijing this summer, when she stated that ‘continued US–China cooperation on climate finance is critical’. Yellen specifically called for China to support multilateral institutions such as the Green Climate Fund (GCF) and the Climate Investment Funds. 

There is some contradiction in China’s status as a developing country that is eligible to receive such multilateral funds, while also being one of world’s largest bilateral donors for development. Promisingly, however, the GCF and the China Development Bank have been in dialogue and have even signed cooperation agreements. Ideas for bilateral climate finance cooperation that have been floated include a joint financing platform, alignment of standards, cooperation on debt (re)financing for recipient countries, and greater information sharing to help coordinate if not synergize their approaches. Progress on any or all these dimensions could plausibly occur in third countries, in conjunction with local priorities, as concrete projects are delivered by US and Chinese public and private actors. Conversations through the newly established US–China economic and financial working groups, under the US Treasury and the Chinese Ministry of Finance, as well as the re-established joint Working Group on Enhancing Climate Action in the 2020s, will ideally open up greater space for bringing the two together on climate finance as a global challenge. 

Meanwhile, engagement by both countries with multilateral forums such as the UN and the G20, and in key international financial institutions like the World Bank, will also provide a more collaborative rather than fragmented environment for the prioritization of climate finance. Any China–US joint engagementin this space would also help to stimulate wider global ambitions, placing pressure on other developed and emerging economies to close the wide gap between obligations, responsibilities and action. 

A race to the top? Jockeying for leadership 

Any future cooperation between China and the USA in the climate finance space will depend in part on the larger context of their bilateral relations, which in recent years have reached their lowest ebb in half a century. Continued and expanded collaboration between China and the USA requires, at least in part, a willingness to separate off climate change from wider tensions—a willingness that should not be taken for granted. But although tensions between China and the USA do divert resources and policy attention away from climate action, the rivalry can also generate positive externalities for developing countries by increasing the flow of bilateral assistance, which is more and more often earmarked for climate-friendly projects. 

In the developmental space, for instance, whether as a cause or as an accelerant, China’s Belt and Road Initiative (BRI) has spurred concerted efforts by the USA and several others, including the European Union (EU) and Japan, to match China’s infrastructure financing in the Global South and elsewhere. The USA-led Build Back Better World (B3W) initiative and the related Partnership for Global Infrastructure and Investment (PGII) are direct rejoinders to the BRI. Further newly announced initiatives, including the India–Middle East–Europe Economic Corridor (IMEC), the Trans-African Corridor, and an investment platform for sustainable infrastructure in the Americas to be established by the US International Development Finance Corporation and Inter-American Development Bank, are also in this vein. 

While this competition has seemingly exacerbated geopolitical tensions, it also has positive externalities for developing countries suffering from a deficit in infrastructure, including energy infrastructure. Funds deployed in the framework of these grand development initiatives cannot all be categorized as climate finance, but are very likely to become greener. The PGII, for instance, aims to mobilize funding for ‘climate-resilient infrastructure’ and its first investments to be announced include renewable energy projects. The EU’s Global Gateway initiative, designed to be ‘mutually reinforcing’ together with the PGII, has also expressed a commitment to ‘infrastructure development that is clean, resilient and consistent with a net-zero future’. Finally, President Biden’s recent request to Congress for greater climate and infrastructure funding for the World Bank was also framed in terms of an ‘essential’ need to offer ‘a credible alternative to the People’s Republic of China’s coercive and unsustainable lending and infrastructure projects’ in developing countries. 

Meanwhile, China has largely upheld its 2021 promise not to build coal-fired power plants abroad, and the share of clean and renewable energy projects it funds abroad can therefore only be expected to increase. Platforms such as the BRI International Alliance for Green Development, the BRI Ecological and Environmental Protection Big Data Service Platform and the Technology Transfer South–South Cooperation Center may play an additional role in promoting much higher environmental standards from Chinese actors, as well as assisting developing countries with clean energy governance, planning and capacity building. 

As this greener investment trajectory continues, the developing world could very plausibly see a ‘race to the top’—both in terms of the financing available for climate action and in terms of the environmental standards to which development projects are held. This is not least because the developing world remains a battleground for the two countries’ strategic competition for influence. Indeed, China is quite actively utilizing climate cooperation in its public diplomacy and foreign policy in both bilateral and multilateral formats. By June 2023, China had signed 46 memorandums of understanding with 39 developing countries on climate change cooperation. 

Other platforms where climate cooperation or climate finance-related discussions are taking place include the China–Arab States Cooperation Forum (CASCF), the Forum on China–Africa Cooperation (FOCAC), the China–Community of Latin American and Caribbean States Forum (China–CELAC Forum), China–ASEAN dialogues and the Shanghai Cooperation Organization (SCO). There are also declarative agreements such as the China–Africa Declaration on Cooperation in Addressing Climate Change, as well as new structures established such as the China–Pacific Island Countries Cooperation Center on Climate Change. These myriad initiatives, including China’s announcement of a new Global Development Initiative (GDI), can be seen as extensions of a larger Chinese strategy to extend its global influence. China’s Global Clean Energy Cooperation Partnership and a range of clean energy cooperation agreements across Central Asia, Latin America, the Asia–Pacific region and the Middle East are also packaged under the GDI heading.

As with the BRI, China’s climate- and clean energy-related cooperation in third countries—and its exertion of what it calls ‘great power responsibility’—is likely to receive increasing attention from US policymakers in the two countries’ battle for global influence. Without cooperation, there will be strategic pressure for the USA to outcompete or attempt to match Chinese efforts, not in spite of but rather due to wider tensions around dominance of foreign markets and global supply chains for advanced technology and manufacturing, including for clean energy and the green economy. 

Notably, a key impetus and justification for Biden’s clean energy-centred Inflation Reduction Act was geostrategic competition with China. Although the act is largely a domestic-oriented industrial initiative, pressure to compete in third-country markets is very likely to persist; even under the administration of President Donald J. Trump, early opposition to the creation of a US International Development Finance Corporation (DFC) to facilitate private-sector engagement in foreign aid gave way due to concern over the inroads China has made in developing countries. As US companies become more globally competitive with regard to Chinese counterparts, this will likewise generate cheaper and better alternatives for climate mitigation and adaptation in the rest of the world. 

Bumps ahead: Aligning domestic pressures with global expectations 

China–US cooperation on climate policy is made precarious not only by bilateral tensions but also by domestic pressures that could reduce the ambitions of either country. For obvious reasons, there remain very concerning questions about how the election of politicians less interested in climate action during the 2024 elections would affect the USA’s international engagement in this space. 

China’s contributions to international climate finance are also in part determined by national conditions—political, economic and bureaucratic. Chinese leaders are keen to avoid the perception that any climate action they take is the result of US pressure, as was demonstrated by President Xi Jinping’s remarks this year that the path, pace and intensity of China’s climate actions would ‘absolutely not be determined by others’. 

Hence, just as a virtuous circle of climate finance leadership is plausible, so is a downward spiral of mutual irresponsibility. Part of the US Republican argument against increasing the country’s climate finance contributions, and indeed against climate action in general, is a claim that China—as the world’s largest polluter—is not doing enough. In this respect, the future of climate finance will also necessarily depend on how far politicians in both countries are able to acknowledge their interconnectedness with the rest of the world: in terms of transnational climatic impacts but also politically. With respect to the latter, it will be the rest of the world that will be the ultimate judge of whether the two powers—separately or together—can credibly claim the global leadership over which they purport to compete.  

About the authors:

• Dr Jiayi Zhou is a Researcher in the SIPRI Conflict, Peace and Security Programme.
• ​​​​​​​Zha Daojiong is Professor of International Political Economy at the School of International Studies and Institute of South–South Cooperation and Development, Peking University.

Source: This article was published by SIPRI

SIPRI is an independent international institute dedicated to research into conflict, armaments, arms control and disarmament. Established in 1966, SIPRI provides data, analysis and recommendations, based on open sources, to policymakers, researchers, media and the interested public. Based in Stockholm, SIPRI also has a presence in Beijing, and is regularly ranked among the most respected think tanks worldwide.