Circuit Breakers: Securing Europe’s Green Energy Supply Chains

In April 2022, Italy’s first offshore wind farm went into operation at the port of Taranto, powered by turbines produced by Chinese firm MingYang. This marked a first win for the Chinese wind champion in Europe’s offshore market. Just a few months prior, the largest wind farm in Croatia opened in the coastal town of Senj, constructed and run by Chinese company Norinco International. This too was equipped with turbines imported from China. These were produced by Shanghai Electric, another of China’s champions in the wind sector and among the top ten companies globally in the sector.

European countries are investing heavily in the green transition. But projects such as the Italian and Croatian wind farms have taken on new relevance and urgency as Europe deals with the war in Ukraine and works to reduce its energy dependence on Russia. Both projects, however, illustrate the challenges ahead for the European Union in ensuring a future that is both green and energy-secure. In the Taranto project, a European turbine-maker’s failure to deliver products on time provided an opening for its Chinese competitor. At Senj, Norinco International, which is providing both capital and hardware, is not only a Chinese state-owned industrial giant, but also a major defence company and supplier of weapons and equipment to the Chinese People’s Liberation Army.

Though Europe’s oil and gas dependence on Russia is the more immediate chokepoint, its reliance on China for the energy technologies of the future poses a similar problem. China has become a global player across a wide range of green technologies, which makes it indispensable for the green transition that the EU is pursuing. As with Russia, this creates risks of over-dependence on an authoritarian power. Compared to Russia, however, China is a far bigger non-market economy and has much greater sway over global technology markets.

Navigating this situation will require European policymakers to make hard choices. This policy brief reviews some of the major supply chain risks linked to green energy technologies, especially as they relate to China. It proposes the following approaches to guide policymakers’ actions:

  • Reassess the geopolitical risks that affect supply chain resilience. European policymakers need to make green energy supply chains more resilient to any further deterioration in relations with China.
  • Right-size China exposure. Securing Europe’s green energy supply chains will come at a cost – but it is possible to address security concerns without resorting to full-scale reshoring.
  • Prioritise business-friendly policies. Europeans should work to enhance the competitiveness of domestic firms. Their policies should aim to ensure that those European industries that emerge from the transition are globally competitive in the long term.
  • Uphold high environmental and ethical standards to achieve long-term sustainability. Any effective green energy policy will require adherence to high standards of sustainability and ethics that fit with the EU’s values.
  • Work with partners. Building resilient green energy supply chains will demand an unprecedented degree of cooperation with like-minded partners.
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Chinese FDI in Europe: 2021 Update

This report, from Rhodium Group and MERICS, summarizes China’s investment footprint in the EU-27 and the United Kingdom (UK) in 2021, analyzing the impact of the pandemic as well as policy developments in Europe and China. Below are the main findings and a link to the full report:

Chinese outbound investment to the rest of the world stalled in 2021. While overall global FDI rebounded strongly, Chinese outbound FDI edged up by just 3 percent to USD 114 billion (EUR 96 billion). Meanwhile, China’s global outbound M&A activity slipped in 2021 to a 14-year low, with completed M&A transactions totaling just EUR 20 billion, down 22 percent from an already weak 2020.

China’s FDI in Europe (EU-27 and the UK) increased but remained on its multi-year downward trajectory. Last year, completed Chinese FDI in Europe increased 33 percent to EUR 10.6 billion, from EUR 7.9 billion in 2020. The increase was driven by two factors: a EUR 3.7 billion acquisition of the Philips home appliance business by Hong Kong-based private equity firm Hillhouse Capital and record high greenfield investment of EUR 3.3 billion. Still, 2021 was the second lowest year (above only 2020) for China’s investment in Europe since 2013.

The Netherlands received most Chinese investment, followed by Germany, France and the UK. Hillhouse Capital’s takeover of the Philips business made the Netherlands the biggest destination for Chinese investment in 2021. Germany, France and the UK accounted for another 39 percent of total Chinese investment.

The share of Chinese state-owned investors fell to a 20-year low in Europe. Compared with 2020, investment by state-owned enterprises (SOEs) decreased by 10 percent. Their share of total Chinese investment also reached its lowest point in 20 years, at 12 percent. SOE investment was concentrated in energy and infrastructure, particularly in southern Europe.

Consumer products and automotive were the top sectors. Due to the Hillhouse Capital acquisition, investment in consumer products surged to EUR 3.8 billion. Activity in automotive was driven by Chinese greenfield investments in electric vehicle (EV) batteries. Together, the two sectors accounted for 59 percent of total investment value. The next three biggest sectors were health, pharma and biotech; information and communications technology (ICT); and energy.

The nature of Chinese investment in Europe is changing. After years of being dominated by M&A, Chinese investment in Europe has become more focused on greenfield projects. In 2021, greenfield investment reached EUR 3.3 billion, the highest ever recorded value, making up almost a third of all Chinese FDI.

Chinese venture capital (VC) investment is pouring into European tech start-ups. In 2021, Chinese VC investment in Europe more than doubled to the record level of EUR 1.2 billion. It was concentrated in the UK and Germany, and focused on a handful sectors including e-commerce, fintech, gaming, AI and robotics.

Chinese investment in Europe is unlikely to rebound in 2022. The Chinese government is expected to stick to strict capital controls, financial deleveraging and Covid-19 restrictions. The war in Ukraine and expanding screening regimes and scrutiny of Chinese investment in the EU and the UK will create additional headwinds.

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Two Way Street – An Outbound Investment Screening Regime for the United States?

The intensifying competition between the United States and China is forcing changes in the way the global economy is governed. After a significant overhaul of inward foreign investment screening rules globally, legislative proposals are being considered in Washington that would create a regime to review US outbound investment to China and other countries of concern. This report by Rhodium Group for the National Committee on U.S.-China Relations provides background on the genesis of this legislation and discusses its implications. Our top findings are: 

At a time of intensifying competition between the US and China, lawmakers in Washington are taking a closer look at US investment in China and the risks that such investment could pose to national security: While US foreign direct investment (FDI) into China has elicited criticism in past decades, growing geopolitical tensions and the COVID-19 pandemic have amplified concerns. Critics argue that such investments, when not properly controlled, can lead to the transfer of potentially sensitive technologies, the outsourcing of critical production, and a loss of visibility into supply chains.

A bipartisan group of US lawmakers believe that existing tools are insufficient to address these concerns: Members of Congress and some parts of the executive branch now argue that the United States needs to go beyond existing policy tools—such as export controls, sanctions, industrial policies and supply chain security rules—to restrict the flow of technology and production capacity to China.

Proposed legislation would establish a mechanism to screen US outbound investment to China and other countries of concern: While the ultimate design of such a regime has yet to be decided, the leading proposal – the National Critical Capabilities Defense Act (NCCDA) – would establish an interagency committee led by the Office of the US Trade Representative. This committee, according to the language in the current NCCDA proposal, would be able to screen transactions by US businesses in “countries of concern” and where “national critical capabilities” are at stake.

If enacted, the proposed regime could have serious implications for the US-China investment relationship: While the final language of the bill and details around implementation are still pending, our analysis suggests that up to 43% of US FDI to China over the past two decades would have been covered under the broad categories set out in the NCCDA. In addition to slowing new investment, a new regime could also pressure US businesses to reassess existing operations in China because of potential effects on revenue, profits, and market share. The proposed mechanism could accelerate the already visible shift in US-China investment relations away from “active” channels (long-term direct investment) toward more “passive” channels (securities investment and the sourcing of non-sensitive inputs).

An outbound investment screening regime would represent a break from US foreign economic policy tradition: If the legislation is enacted, the US would be one of only a handful of advanced economies with industry specific outbound investment restrictions distinct from traditional sanctions regimes. If not designed in a targeted, predictable manner, this change could negatively impact not only the global competitiveness of US companies in affected industries but also the attractiveness of the United States as an investment location for firms that operate globally.

A new US regime could trigger more restrictive investment policies in other nations: A decision by the US to introduce an outbound FDI screening mechanism might encourage some US allies to consider similar steps. This could help coordination but in a worst-case scenario could also lead to another wave of investment policy reform that creates additional regulatory barriers for cross-border investment flows globally. There is also a possibility that other countries could view US outbound investment restrictions as going too far and refuse to follow suit. US allies could react negatively if the US operations of their companies are suddenly subject to such restrictions. This could complicate, rather than enhance, multilateral coordination in responding to China and put US companies at a competitive disadvantage.

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Comparing a Clean Electricity Standard and a Carbon Tax

As the United States commits to accelerating decarbonization as part of global efforts to combat climate change, the policies it enacts will govern its chances of success. These international ambitions are balanced against domestic realities: the effect of net-zero greenhouse gas strategies on households and the broader economy. Comparing different policy options against one another in terms of specific outcomes, such as emissions abatement and financial impact on consumers, is a useful exercise for policy makers. Because US congressional proposals have focused on two potential policy routes—an economy-wide price on carbon dioxide and other greenhouse gas emissions, and a sector-by-sector approach that starts with a clean electricity standard—this report models outcomes for these scenarios.

A carbon tax and clean electricity standard (CES) are similar policies in some ways. Both have the potential to drive large emissions reductions from the US power sector and beyond. If the CES is designed to be technology-neutral with tradable credits for clean electricity generation, both policies would operate as market-based mechanisms to encourage such generation. They also differ in significant ways, and this report, part of the Carbon Tax Research Initiative at Columbia University’s Center on Global Energy Policy, uses energy system modeling to zero in on those differences to enable policy makers to better understand the advantages and drawbacks of each policy tool.

A variety of constructions even within a single tool—particularly a CES—can be employed. What type of generation is eligible for credit in a CES and how much credit each resource receives, for example, are in part products of political and policy trade-offs. For comparison purposes with an economy-wide carbon tax, this report primarily focuses on a single crediting approach that most closely resembles the incentives new and existing electric power generators could receive under a carbon tax (and is similar to the CES included in the Clean Energy Innovation and Deployment Act of 2020). And for CES comparison purposes, the authors construct a carbon tax pathway that closely approximates the annual and cumulative electric power CO2 emissions of the CES.

Given the equal emissions-reduction ambitions of the two policies modeled in this report, the greatest trade-offs come down to price increases and revenues. The carbon tax raises consumers’ electricity price more than the CES does, but also raises significant revenues that could be used, among other purposes, to offset increases in consumers’ energy-related bills. Other findings from the report include the following:

  • It takes a lower carbon tax rate to get to the same CES emissions outcome when clean energy technologies are relatively cheap. Under a mid-tech-cost CES scenario, the equivalent carbon tax rate starts at $14/ton in 2024 and rises to just over $18/ton in 2030. In the low-tech-cost CES scenario, the equivalent carbon tax rate starts at $9/ton and rises to just under $12/ton in 2030. These rates are far lower than any recent carbon tax proposal in Congress because the cheapest near-term abatement opportunities reside in the electric power sector.
  • The CES could drive US power sector greenhouse gas (GHG) emissions down roughly 55 percent from 2005 levels by 2025, and down 62 percent by 2030, from 2,420 million metric tons (MMT) in 2005 to roughly 920 MMT in 2030. By design for this report, electric power sector emissions with the carbon tax are the same. But because the carbon tax modeled in this report is economy-wide, it could drive total US net GHG emissions down 27 percent by 2025 relative to 2005 levels, and 30 percent by 2030, from 5,999 MMT in 2005 to roughly 4,230 MMT in 2030.
  • While the two policies result in a slightly different electricity generation mix, coal sees the most significant decline in both.
  • Both policies substantially reduce conventional pollutants like sulfur dioxide (SO2) and nitrogen oxides (NOx), but SO2 emissions are 23–54 percent higher and NOx emissions are 7–16 percent higher under the CES on an annual average basis than under the carbon tax, which creates explicit disincentives for coal and to a lesser extent natural gas.
  • Electricity prices increase more under the carbon tax because the tax is applied to all carbon dioxide emissions from electricity generation. In contrast, once generators achieve the mandated carbon intensity standard of the CES, their remaining emissions are effectively unregulated, so no costs are associated with these remaining emissions to be passed on to consumers. A carbon tax, however, brings in revenue that can be used in a number of ways, including offsetting any increases in electricity bills.
  • The higher consumer prices under the carbon tax provide a stronger incentive for conservation of electricity than is found under the CES. The model shows electric retail sales to be 1 percent lower in the carbon tax scenario.
  • Overall electricity generation is 1 percent higher in the CES scenario than in the carbon tax scenario, because the policy goal of the CES is to reach a certain carbon intensity level, providing incentives to both reduce emissions (the numerator of the fraction) and increase generation (the denominator).
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Translatlantic Tools: Harmonizing US and EU Approaches to China

Close cooperation between the United States and Europe is essential if advanced economies are to develop effective responses to the array of challenges presented by China. The transatlantic partners share democratic political systems, open market economies, and a commitment to many of the same values. Washington and Brussels also share concerns about recent developments in China. These include worries about the competitive distortions arising from the role of the state in China’s economy, Beijing’s use of advanced dual-use technologies to repress ethnic minorities and fuel its military, and the spread of authoritarian influence through the Belt and Road (BRI) and other foreign policy initiatives.

Despite the shared concerns, there has been a lack of coordination and cooperation in recent years between the United States and the European Union (EU) (and its member states) when it comes to responding to China’s policies and behaviors. Under the Trump administration, tensions in the transatlantic relationship and differing views about how to address the array of challenges presented by China prevented a common agenda. Although talks took place between the administration and European capitals on issues like investment screening, export controls, and fifth-generation (5G) telecommunications technology, policies evolved mostly in parallel on either side of the Atlantic. This is more problematic than it may have been in decades past. The complexity and systemic nature of competition with China—encompassing trade, technology, security, human rights, climate, and more—makes transatlantic cooperation even more important today.

Washington’s focus on risks to US economic and national security contrasts with an emphasis in Brussels on ensuring reciprocity and leveling the economic playing field. This has yielded two distinct policy approaches with some overlap, but also many differences. The EU is devising complex regulatory instruments to limit the activities of subsidized foreign firms in the EU market, ensure reciprocity in public tenders, and compel corporations to vet their supply chains for environmental harm and human-rights abuses. No similar measures are currently being pursued in Washington. The United States, by contrast, has developed an array of China-related tools that don’t exist in Europe. The Foreign Investment Risk Review Modernization Act (FIRRMA) and Export Control Reform Act (ECRA) of 2018 give the US government far-reaching powers when it comes to investment screening and export controls. Washington has also developed innovative approaches to counter the BRI, and introduced outward financial-investment bans in relation to Chinese firms with military links.

These distinct policy approaches are partly a reflection of the differences in how Washington and Brussels perceive the China challenge. Differences in legal systems and political cultures also make it difficult (or impossible) to introduce rules and regulations that have been implemented on one side of the Atlantic on the other side. But, with the transatlantic relationship back on a better footing under the Biden administration, new structures for transatlantic dialogue being put in place, and a greater focus on the Indo-Pacific in both Washington and Brussels, there is now an opportunity for the United States and Europe to learn from each other and harmonize some of their China-related efforts. The United States can learn from a rules-based, actor-agnostic EU approach that does not define every challenge as a threat to national security. The EU and its member states, by contrast, must learn to be nimbler, adapting their thinking and processes to the new geopolitical reality of systemic competition.

Aligning approaches is important for several reasons. It can close loopholes in defensive mechanisms, reduce the risk of subsidies on both sides of the Atlantic nullifying each other, and limit the burden on firms from complying with two sets of regulations. Alignment also reduces the risk of conflicts in the transatlantic relationship because of diverging, or even competing, approaches. Ultimately, a coordinated approach can lead to a more constructive relationship with China—one that is based on consensus and is less prone to reactive or excessive measures.

To facilitate the transatlantic discussion, this Rhodium Group policy brief for the Atlantic Council takes a granular look at the full range of autonomous policy tools that have been developed in the United States and Europe over the past half decade (Section 2). Among these tools, it identifies three policy areas where the crossover potential is high (Section 3). These are policy areas that have not yet been given top priority under the EU-US Trade and Technology Council (TTC). For each, the paper describes EU and US approaches to date, presents the case for greater transatlantic coordination, outlines possible concrete next steps, maps out barriers to greater harmonization, and proposes avenues for overcoming them. It then offers concluding thoughts (Section 4).

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Pathways to Paris: A Policy Assessment of the 2030 US Climate Target

Over the course of this year, the impacts of climate change have become more immediate and tangible. A cascade of natural disasters—floods, hurricanes, wildfires, droughts, and extreme heat —have touched nearly every corner of the US. Meanwhile, it’s clearer than ever that the planet is on track for even more intense impacts in the decades ahead if action isn’t taken soon to avoid the worst climate damages.

President Biden campaigned on a platform that prioritized action on climate change. Now in office, the Biden administration has taken a whole-of-government approach to the issue, placing staff in key agencies to coordinate federal efforts to cut emissions. As part of this effort, President Biden submitted a nationally determined contribution (NDC) under the Paris Agreement, pledging the US will cut net greenhouse gas (GHG) emissions in the range of 50-52% below 2005 levels by 2030.

Meanwhile, congressional leaders are shepherding a major infrastructure package and a multi-trillion dollar spending bill towards the finish line. The two bills combined have the potential to be the largest action ever taken to abate climate change in US history. In a few weeks, world leaders will meet in Glasgow, Scotland for the UN Climate Change Conference (COP26) to enhance global action and limit warming to 1.5 degrees Celsius. As other countries step to the plate with bold ambition, they will need to be able to trust that the US can deliver on its 2030 promise of a 50-52% reduction.

This report aims to provide an independent, objective, and policy-focused assessment of the US 2030 target. We combine our knowledge of the US economy, energy systems, and policy design with state-of-the-art modeling tools to comprehensively answer two questions: Can the US cut net GHG emissions by 50-52% by 2030 and if so, what does a policy pathway to the target look like?

We consider actions by all key actors in the US federal system, including legislation under construction in Congress, regulations and other actions that can be taken by the Biden administration and key departments, as well as actions by climate-leading states and corporations. The suite of policies we consider is not intended to be exhaustive. Instead, it represents a series of actions that can be reasonably expected to occur over the next nine years if leaders in all levels of government work in earnest to address climate change. Based on this analysis, here is a summary of our key findings.  

Without new action, the US will not meet its 2030 target

Under current policy as of May 2021, with no new action, the US is on track to reduce GHG emissions 17-25% below 2005 levels in 2030. The range reflects uncertainty around energy markets, clean technology costs and the ability of natural systems to remove carbon from the atmosphere. This leaves a gap of 1.7-2.3 billion metric tons of emission reductions required to achieve the US target in 2030 (Figure ES1). The gap is roughly equal to all 2020 emissions from the transportation sector on the low end and all emissions from electric power and agriculture combined on the high end.

While the challenge of closing the gap is daunting, achieving the target is in line with what’s required to avoid the worst impacts of climate change. Not following through on this commitment risks undermining the credibility of the US and reduces the chances of an ambitious multilateral response to climate change.

Joint action by Congress, the executive branch, and subnational leaders can put the 2030 target within reach, but all must act

Our analysis demonstrates that meeting the US’s 2030 target is achievable, if Congress, the executive branch, and subnational leaders all take a series of practical and feasible policy actions—what we refer to as our “joint action” scenario (Figure ES2). This scenario represents passage this year of the infrastructure bill and budget reconciliation package in Congress, coupled with a steady stream of standards and regulations by federal agencies and accelerated action by leading states and companies. Combined, these actions can cut US net GHG emissions to 45-51% below 2005 levels in 2030.

At each level of government, we identify practical policy actions under clearly established authorities (where applicable) that, if pursued on reasonable timelines, can help achieve the target. No one level of government alone can deliver on the target. None of the policies we identify are novel or new, and all federal regulatory action can be implemented with existing legal authority. To close the emissions gap, agencies and states will need to pursue new actions at a pace, scope, and level of ambition that has not been seen to date, but which are also practical and within reach.

Action across all sectors of the economy is required to achieve the 2030 target

We find that the biggest opportunities for emission reductions in this decade reside in the electric power sector—covering 39-41% of total reductions achieved in the joint action scenario. If actions to cut electric power sector emissions are not successful, then achieving the 2030 target may not be possible. Even so, achieving the target will require successful emission reduction actions across all sectors of the US economy, not just the power sector, as well as increased natural and technological removal of carbon from the atmosphere.

Achieving the 2030 target can also cut harmful air pollutants and consumer bills

Getting US emissions on track to reach the 2030 target can be done with little cost to consumers. Long-term tax credits, investments in energy efficiency and other factors cushion consumers from price increases associated with new standards and regulations. On a national average basis, households save roughly $500 a year in energy costs in 2030 in our joint action scenario. Many policy actions that cut emissions also reduce harmful air pollutants. For example, SO2 emissions in the electric power sector decline to near zero by 2030.

If Congress fails to act, the 2030 target may be in jeopardy

Congressional action is critical to achieving the 2030 target for two reasons. First, measures in the infrastructure and budget packages can enable and accelerate clean technology deployment and on their own cut emissions significantly. Second, those same programs reduce consumer and compliance costs of federal and state actions that, combined with congressional actions, put the target within reach. Without the cost reduction assistance of congressional actions, federal and state leaders will face higher technical and political hurdles as they pursue the ambitious policies required to get to the 50-52% target. Congressional investments in emerging clean technologies will also drive innovation to enable the next wave of decarbonization after the 2030 target is reached.

Achieving the target will be a historic feat but is only halfway to the net-zero finish line

If all actors successfully pursue all aspects of the joint action scenario and achieve the 2030 target, it will represent one of the most monumental national achievements in recent decades. Even then, achieving the ambitious goal puts the nation just halfway to the longer-term goal of net-zero emissions by mid-century, which is the level required for the US to play its role in a robust global response to the threat of climate change. Getting to net-zero will require new policies and the commercial scale-up of a suite of emerging technologies like clean hydrogen, direct air capture, and advanced zero-emission electric generation, as well as continued electrification of transportation and buildings. Without near-term progress on these fronts in the years ahead, closing the gap to net-zero emissions by 2050 will be even more challenging than getting to the 2030 target.

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For more information about our approach and methods, see the Pathways to Paris Technical Appendix. 

China Pathfinder: Annual Scorecard

China Pathfinder is an initiative from the Atlantic Council’s GeoEconomics Center and Rhodium Group that seeks to measure China’s system relative to advanced market economies. The goal is to shed light on whether China’s economic system is converging with, or diverging from, open market economies. This report examines six elements of the market economy model: financial system development; market competition; modern innovation system; trade openness; direct investment openness; and portfolio investment openness. With the launch of an annual scorecard, and quarterly updates, China Pathfinder aims to put recent developments like the crackdown on private technology companies, Beijing’s “dual circulation” strategy, and the debate over “common prosperity” into a broader framework to help policymakers and businesses assess China’s economic trajectory.

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Key Findings

  • China has generally moved toward market economy norms over the past decade. The current fashion in China analysis is to downplay any serious reform effort by Beijing, and to emphasize an enduring Chinese strategy of state control. Both Chinese officials and US strategists repeat this ahistorical view. The China Pathfinder benchmark indicators show that China has made some progress in all six dimensions since 2010.
  • Despite making some progress over the past decade, China in 2020 remains remote from the characteristics typical of open market economies. Movement since 2010 has been modest, and Beijing is well short of expectations set as a condition of World Trade Organization (WTO) accession that it would achieve “market economy” norms. The Xi era pledge to “make the market decisive” remains unfulfilled, seven years after this reform goal was initially announced. China ranks last in five out of China Pathfinder’s six clusters when compared to open market economies.
  • China has made demonstrable progress in some areas, but has a long way to go in most. In openness to trade, China is inside the market-economy range. In most other areas, however, China’s distance from advanced economy norms remains striking and problematic. The biggest shortfalls are in structural areas like market competition, which are hard to measure and harder to discipline with established international tools.
  • Within each of the six areas, we observe a mix of reform, stagnation, and backsliding. China is open in goods trade, but remains closed on digital services trade. Beijing has proceeded to liberalize some inward portfolio flows, while barriers to outbound flows remain high. Within its innovation system, China has progressed on protecting intellectual property, but ramped up industrial policies and distortive subsidy programs.
  • The most recent policy signals are at odds with a market orientation. Since 2016, Beijing has experienced serious reform setbacks and, by 2021, even perennial optimists were shocked by anti-market trends including: resurgent state ownership and extralegal influence; eroding freedom for firms to use capital markets at home and abroad; the overnight shutdown of entire sectors, such as for-profit education; regulations that effectively nationalize the data collected by technology companies; and an overreach by state planners in shaping the market structure of tomorrow.
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Taking Stock 2021: US Emissions Outlook Under Current Policy

For the past seven years, Rhodium Group has provided an independent annual outlook for US greenhouse gas (GHG) emissions under current federal and state policy. This current policy baseline provides a starting point for assessing where additional work—in the form of federal, state, or corporate action—is necessary to achieve mid- and long-term US GHG emission reduction goals.

Given the current state of federal and state policy (as of May 2021) and a range of potential energy market dynamics on the horizon, we find that the US is on track to reduce emissions 20% to 22% below 2005 levels by 2025. Looking ahead to 2030, the US is on track to achieve emission reductions anywhere from 20% to 26% below 2005 levels, absent additional action. Taking into account additional uncertainty in the direction and pace of US economic growth—and in particular, the pace of recovery from the economic disruption caused by the COVID-19 pandemic—we project 2030 emission reductions as small as 17% below 2005 levels, or as great as 30%.

This analysis only considers federal and state actions that are on the books today. It is clear that more policy action is needed if the US is going to achieve deeper emission reductions, including the Biden administration’s pledge to reduce US emissions 50-52% below 2005 levels by 2030. Later this fall, Rhodium Group will publish new research identifying the emissions impacts of a suite of federal and subnational actions that can help close the gap between the current US emissions trajectory and ambitious decarbonization goals.

Detailed national and 50-state results for all Taking Stock baseline scenarios—including GHG emissions and underlying sectoral data—are available in Rhodium’s ClimateDeck data platform.

Key trends by sector

In addition to the economy-wide outlook for US emissions under current federal and state policy, here are the key trends we see by sector under a range of potential energy technology and market uncertainties:

Power sector emissions increase modestly over the next few years as the US economy bounces back from the pandemic, but then continue their secular decline through 2025 due to a continued decline in coal-fired generation. After a temporary rebound in coal generation coming out of the pandemic, coal continues its downward spiral, due in large part to competitive pressure from low-cost natural gas. If natural gas prices fall below $3/MmBTU, more than 50% of the current coal fleet could shutter by 2030. By 2025, these trends help cut power sector emissions in half relative to 2005 across our scenarios.

Going forward, however, the trajectory of US power emissions isn’t defined by how much coal comes offline but rather the pace of natural gas expansion. In scenarios with the cheapest gas, power sector emissions begin to rise again after 2025. Low-cost natural gas, once the primary driver of emission reductions in the power sector, will begin to hamper the pace of decarbonization as it out-competes renewables and pushes out nuclear. Wind and solar capacity increase across our outlook, but cheap natural gas and a moderate reduction in clean energy technology costs could slash this clean build-out by almost 60% by 2030, compared to a future with more expensive natural gas and steeper technology cost declines. Low natural gas prices also put pressure on zero-emitting nuclear power, which could see more than a third of today’s capacity retire by 2030.

After a brief post-pandemic rebound, transportation emissions decline modestly through 2030, driven by fuel economy improvements in passenger vehicles and a shift toward electric vehicles (EVs). Assuming the most optimistic outlook for declining EV battery costs combined with high oil prices—which would increase the EV share of total new passenger vehicle sales to 35% by 2030—transportation emissions fall by 23% by that year. More moderate EV battery cost reductions coupled with low oil prices lead to EVs capturing only 9% of the market in 2030, and transportation emissions decline by 18% from 2005 levels. Across our projected range, steeper emission reductions are limited by consumer preference for larger, higher-emitting vehicles, and robust demand growth for freight and air travel.

Industrial emissions continue to rise and become the top-emitting sector in the mid-2020s. Industrial emissions grow across our scenarios, but climb almost three times as fast from current levels when natural gas is cheap compared to when it’s more costly. The oil and gas industry itself faces an uncertain future. If natural gas prices fall and global oil prices remain weak, emissions from upstream oil and gas activities could fall 12% by 2030 from today’s levels. Conversely, a stronger outlook for natural gas and oil prices could drive emissions up 25% from current levels by 2030.

Building efficiency improves but emissions from residential and commercial buildings remain effectively flat. Low-cost natural gas, increasing building square footage, and economic and population growth put upward pressure on building emissions, even while state policies make homes and businesses more efficient. Even in our highest scenario for natural gas prices, CO2 emissions from buildings fall only 2% below 2005 levels by 2025. By 2030, emissions fall modestly to 1-4% below 2005 levels.

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For more information about our approach and methods, see the Taking Stock 2021 Technical Appendix. 

Chinese FDI in Europe – 2020 Update

This report, from Rhodium Group and MERICS, summarizes China’s investment footprint in the EU-27 and the United Kingdom (UK) in 2020, analysing the fallout from the pandemic as well as policy developments in Europe and China. Below are the main findings and a link to the full report:

China’s global outbound investment hit a 13-year low in 2020: Concerns that the Covid-19 global pandemic slump might trigger another round of Chinese distressed asset-buying proved unfounded. Instead, China’s global outbound M&A activity dropped to a 13-year low, as completed merger and acquisition (M&A) transactions totaled just EUR 25 billion, down 45 percent from 2019.

China’s FDI in Europe continued to fall, to a 10-year low: Shrinking M&A activity meant the EU-27 and the United Kingdom saw a 45 percent decline in completed Chinese foreign direct investment (FDI) last year, down to EUR 6.5 billion from EUR 11.7 billion in 2019, taking investment in Europe to a 10-year low. However, greenfield Chinese investment reached its highest level since 2016 at nearly EUR 1.3 billion.

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The “Big-3” reclaimed their top spot, Poland emerged as a key recipient: More than half of total Chinese investment in Europe went to the “Big Three” economies – Germany, the UK and France. However, the UK saw Chinese investment plummet by 77 percent. Poland rose to become the second most popular destination, though inflows of EUR 815 million were largely concentrated on one acquisition.

China’s state-owned enterprises (SOEs) took a higher share in a quiet market: SOEs were responsible for 18 percent of total Chinese FDI to Europe, higher than 11 percent 2019 but still significantly below historical averages. Their investment stayed relatively stable in absolute terms, however, concentrating in energy, infrastructure and basic materials. Private sector investment dropped by almost 50 percent.

Figure

Chinese investment was spread more evenly across sectors: Small- and mid- size transactions dominated in 2020, with no major billion-dollar acquisitions as in 2019. As a result, Chinese investment was spread more evenly across sectors. Infrastructure, ICT and electronics were the top three sectors, attracting 51 percent of the total.

Chinese FDI faces greater scrutiny by EU member states: The Covid-19 crisis prompted the EU to issue guidelines stepping up scrutiny of FDI in Europe’s critical assets. 14 EU member states, including Italy, France, Poland and Hungary, have updated their FDI screening mechanisms last year. Member states have also moved to block several acquisitions by Chinese firms.

Headwinds to Chinese investment in Europe will grow in 2021: Chinese FDI activity into Europe continued to fall in the first quarter of 2021 and has remained weak elsewhere, even as global M&A activity has recovered and surged to a 10- year high of EUR 1.08 trillion. Europe remains an attractive investment location. However, continued disruption from Covid-19, high barriers to outward capital flows in China and rising regulatory barriers to foreign investment in Europe have all contributed to low levels of Chinese investments. Deteriorating EU-China relations will create additional headwinds for Chinese investors going forward.

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Two-Way Street – US-China Investment Trends – 2021 Update

The US-China Investment Project tracks and analyzes investment flows between the world’s two largest economies. This report summarizes key developments in 2020, an unusually volatile year due to the COVID-19 pandemic, and analyzes the outlook for 2021 as the world slowly emerges from this period of crisis and a new US administration settles in. The key findings of the report are:

Foreign direct investment (FDI) between the US and China fell to $15.9 billion in 2020 amid pandemic related disruptions and rising tensions in the US-China relationship. This was the lowest level for two-way flows since 2009.

Completed Chinese FDI in the United States reached $7.2 billion in 2020, a slight increase from $6.3 billion in 2019. This was driven by a handful of large acquisitions, including Tencent’s purchase of a share in Universal Music Group and Harbin Pharmaceutical Group’s acquisition of GNC Holdings. M&A transaction volumes remained low, and acquisitions were mostly confined to consumer-oriented sectors. Greenfield investments did not see a meaningful uptick.

US FDI in China dropped to $8.7 billion in 2020, a fall of roughly a third from the previous year, and the lowest level since 2004. Greenfield investment was disrupted by the pandemic in the first half of the year but picked up strongly in the second half as China’s economy stabilized and COVID-19 related restrictions eased. Compared to previous years, US investors launched fewer significant greenfield projects. The slowdown in acquisitions was more acute, with only a handful of medium-sized takeovers in consumer products and financial services.

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Two-way venture capital (VC) investments also declined slightly in terms of both total value and number of funding rounds. Chinese VC in the US increased slightly and exceeded flows in the other direction for the first time ever, but only marginally so. In contrast, US VC in China dropped to the lowest level in five years.

Chinese venture capital investment in the US increased to $3.2 billion in 2020, from $2.3 billion in 2019, despite stricter regulatory scrutiny tied to Chinese venture investors participated in 249 unique funding rounds for US startups, which was lower than the previous year (305). But investment totals were larger due to several later stage transactions with high valuations. More than half of all transactions (132) occurred in the Health, Pharmaceuticals and Biotechnology sector, followed by Financial and Business Services (43) and Information and Communications Technology (26).

US to China venture capital deals dropped in terms of value and deal count. In 2020 there were 247 unique funding rounds, down from last year’s total of 306. Total investment value dropped more sharply to $2.5 billion, just half of last year’s total and a fraction of the almost $20 billion recorded in 2018. Financial and Business Services and Health, Pharmaceuticals and Biotech were the most common targets for US VC investors, with 54 and 52 transactions each. Consumer Products and Services deals fell from 52 to 31.

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The post-pandemic recovery could lead to a rebound in two-way flows but policy developments in Washington and Beijing are a wild card.

In China, the balance that leaders strike between domestic financial stability and openness to the outside world will shape the investment landscape. Throughout the pandemic, Beijing prioritized stability, refusing to loosen restrictions on outbound investment by private companies despite a massive trade surplus and upward pressure on its currency. On the inflow side, the outlook hinges on whether Beijing delivers on its promises to level the playing field for foreign firms and how its “dual circulation” strategy and industrial policy push to replace foreign technology suppliers with domestic firms progresses. A more challenging environment for traditional FDI could also encourage foreign investors in certain sectors to seek greater exposure to Chinese assets through portfolio investment.

In the United States, the Biden administration has signaled that it will maintain key elements of the restrictive policies deployed in past year. But a change in style, that seeks to restore confidence in due process, transparency and non-discriminatory openness to foreign investment, seems likely. A shift away from aggressive decoupling rhetoric could also help instill confidence. Among the key questions are how US officials will implement and enforce new rules for foreign investment reviews (FIRRMA) and export controls (ECRA). Supply chain safety rules, next generation antitrust policies, and new initiatives to protect personal data could all have a profound effect on Chinese companies and investors.

Aside from national policies, broader geopolitical dynamics will likely shape the environment for bilateral investment. The arrival of a new US administration that is prioritizing cooperation with allies could lead to more coordinated action among advanced economies in areas like investment screening, export controls and human rights. If such convergence brings more transparency and predictability around national security-related concerns, then it could support US-China investment in non-sensitive areas. But greater market economy convergence could also trigger a broader rethink that incentivizes US and Chinese investors to shift their focus.

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