The Clean Investment Monitor: Tracking Decarbonization Technology in the United States

Clean energy is quickly becoming one of the largest industries in the U.S. Across the economy, public and private investment in decarbonization is growing—accelerating manufacturing and the adoption of the technologies needed for clean electricity and transportation, building electrification, low-emission industrial production, and carbon management. However, there is currently no comprehensive tracking of actual investments in clean technology and infrastructure in the U.S., making it difficult to assess on-the-ground progress in the country’s transition to a cleaner economy. In order to fill this gap, Rhodium Group and MIT’s Center for Energy and Environmental Policy Research (CEEPR) have created the Clean Investment Monitor, which provides real-time, methodologically consistent tracking of all public and private investments in the manufacture and deployment of the full spectrum of greenhouse gas emission-reducing technologies in the U.S.

In our inaugural report, we find that in the past year, there was $213 billion in new clean investment across the economy—a 37% increase from the previous year and a 165% increase from five years ago. At this level, clean investment nationwide is larger than the annual GDP of 18 of the 50 U.S. states. The most rapid investment growth has been in clean technology manufacturing—with annual investment growing 125% year-on-year to $39 billion—and particularly within electric vehicle and solar manufacturing. Investment in clean energy production and industrial decarbonization rose 15% year-on-year to $61 billion. And household and business retail investment in purchasing and installing clean technologies like heat pumps and zero-emission vehicles (ZEVs) rose 32% year-on-year to $113 billion.

Figure 1

The Clean Investment Monitor catalogs public and private investments in a wide range of emission-reducing technologies and their input components. To create a historical baseline against which to assess recent clean investment developments in the U.S., the CIM includes all investments in our covered technologies since 2018. This results in a database with roughly 20,000 individual facilities, 3 million ZEV registrations, 20 million heat pump sales, and 4.5 million distributed electricity generation or storage installations. Detailed data is available at cleaninvestmentmonitor.org, including breakdowns of all investment trends highlighted in this report at the state level.

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ESG Impacts of China’s Next-Generation Outbound Investments: Indonesia and Cambodia

Executive Summary

This report describes the changes in China’s global outbound foreign direct investment (OFDI) since 2017 and draws on case studies in Southeast Asia to analyze the implications of this next-generation Chinese OFDI for host countries from an environmental, social, and governance (ESG) perspective. Based on new data estimating China’s regional investments from 2000 to 2021, we isolate four investments for case study and evaluate them using a multi-tier ESG framework and open-source reports. In Cambodia, we examine the massive Dara Sakor zone and a new tire manufacturing plant, while in Indonesia we examine a geothermal plant and a nickel processing plant for next-generation electric batteries.

Our main findings are:

  • China’s global investment has seen tectonic shifts since 2017: Total investment has slowed down, likely taking an even sharper downturn than that shown in official data. The geographic focus has shifted from advanced economies to other parts of the world, especially Asia. In the 2010s, mergers and acquisitions (M&A) were the dominant mode of Chinese OFDI. However, greenfield FDI is becoming an increasingly important driver of China’s OFDI flows in recent years.
  • Chinese investment in Southeast Asia has increased—counter to the global trend in China’s investment since 2016—and Chinese firms are becoming involved in new sectors. While China’s engagement in the region once focused on a handful of sectors, like real estate and light manufacturing, Cambodia and Indonesia are now seeing investments that fall outside those narrow industry bounds. Chinese firms’ investments in Southeast Asia are shifting from traditional sectors to more advanced manufacturing, processing of critical raw materials, and investments in technology and regional platform businesses. This mirrors shifts in investment in other regions, including Latin America.
  • These new patterns are likely to continue, and host country governments should plan accordingly. As China’s economy matures and attempts to shift toward a new domestic model based on consumption and advanced technology, China’s firms may make new energy-intensive manufacturing investments overseas. As traditional industries move abroad, Chinese companies’ growing expertise in green technologies like alternative energy and electric vehicles will also enable new overseas investments in those sectors, but environmental effects on recipient countries will likely be mixed.
  • The four ESG case studies covered in this report assess PT QMB New Energy Materials and PT Sorik Marapi geothermal plant (SMGP) in Indonesia and the Dara Sakor zone and CART Tire Co, Ltd in Cambodia. Each case was selected to highlight features of China’s outbound FDI in the region, such as new sectors of financial engagement, or Chinese firms’ new sustainability policies.
  • Chinese companies are paying increasing attention to ESG concepts, formulating ESG policies and often producing reports covering firm-wide ESG activity. However, these reports often lack detail and metrics. Reports often omit company-wide metrics (like total carbon emissions) and project-level data. Instead, companies are more likely to report corporate social responsibility (CSR) initiatives like donations to local schools.
  • Although Chinese firms operating abroad are often stereotyped as polluters with poor labor practices, there is substantial variation in the ESG practices and performance of the Chinese firms in our case studies. Each firm often performs satisfactorily in some aspects of ESG, such as community consultation, but does poorly in others. One exception is Dara Sakor, which rates poorly across almost all our metrics.
  • Host country context in Indonesia and Cambodia matters for ESG outcomes. Our case studies support previous research showing that Chinese companies investing in Southeast Asian countries generally comply with host countries’ minimum requirements around ESG practices, including nominally conducting environmental and social impact studies, but usually they do not go further. Despite new voluntary “green investment” guidance from Chinese officials in recent years, in practice, the companies appear to adhere to China’s mandatory legal requirements, which require compliance only with host country regulations even if China’s domestic regulations might prohibit specific practices.
  • Transparency remains a recurring challenge for the firms in our case studies. For our case studies, we could only verify the completion of environmental impact assessments (EIAs) or social impact assessments (SIAs) through secondary reports, and only for certain projects. None of the assessments were available via the internet. Only one project—CART Tire’s plant in Cambodia—had a publicly available feasibility study. This makes it difficult to establish assessment quality and analyze compliance with their recommendations—and sometimes even to ascertain if they were ever completed. A lack of additional quantitative data, including legally mandated disclosures, obscures the impact of investments on local areas, especially for projects that have small footprints or are part of larger zones.
  • Our case studies observe recurring problems with pollution to waterways, marine areas, and protected land. Three of the Chinese investments we examine are located near sensitive or protected zones that do not appear to have received sufficient protections. In the case of Dara Sakor, the legal status of protected land did not prevent the development of protected areas, and similar dynamics appear to have been at play for Indonesia’s PT. SMGP geothermal power plant.
  • Even projects that appear to promote “green” industry practices or support green technologieslike the battery materials plant and geothermal power station explored in this report—can fail to support good ESG outcomes at the project level. The battery material processing and geothermal power projects covered in this report exhibit poor environmental performance in one or more areas, highlighting the potential byproducts and risks of green technology development.
  • China and host countries can do more to improve the capacity of almost all actors involved in Chinese overseas investment in Indonesia and Cambodia. These include consultants and contractors who may be responsible for implementing impact assessments, feasibility studies, and project activities. They also include Indonesian and Cambodian governments and regulatory bodies that may be under-resourced, lack clear legal authority or enforcement power, or are undermined by political input or interference on specific projects.
  • Improving company-level disclosures and including meaningful quantitative and qualitative metrics is critical to improving ESG performance and facilitating new investment. If China’s government were to define clear standards and mandate disclosure (rather than relying on voluntary compliance), it would likely improve overseas ESG performance. More comprehensive coverage of Chinese companies’ activities abroad by commercial ESG data providers and public policy researchers would also help promote transparency and improve public accountability.
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Introduction

China’s outbound investment has increased rapidly since 2010, establishing the country as one of the world’s largest sources of FDI. Southeast Asia, where China is now the largest single source of FDI, has felt this rise keenly. What began in the early 2000s as a slow trickle of investments in low-skilled manufacturing and natural resource extraction has evolved: Chinese firms have steadily expanded in the region, building regional supply chains, new markets for Chinese goods and services, and robust financial and services networks.

Like FDI from other countries, new investment presents both opportunities and risks for host countries in Southeast AsiaSoutheast Asia is defined in this report as the members of the Association of Southeast Asian Nations (ASEAN): Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma (Myanmar), the Philippines, Singapore, Thailand, and Vietnam.. China’s inflows have the potential to drive economic development and innovation, but they also present possible challenges to ESG outcomes. Even identifying where China’s firms are investing is a major data challenge, making it difficult to understand how host countries are being affected.

China’s outbound investment is changing rapidly. Significant developments in China’s economic priorities—from a new focus on “green” development to more restrictive policies on outbound investment—are shifting where and how Chinese firms invest in Southeast Asia. While previous investments focused on low-skilled manufacturing and resources, recent investments in the region include next-generation technologies from alternative energy and electric vehicles (EVs) to big data analytics and advanced manufacturing, while schemes like the Belt and Road Initiative (BRI) and the Regional Comprehensive Economic Partnership (RCEP) promote relationships across several contexts. Behind this shift, new Chinese economic policies emphasize a broader set of goals beyond simple economic returns. Now with several decades of experience operating in emerging markets, Chinese firms are paying increasing heed to ESG considerations. From the top down, China’s government has issued new green finance guidelines and policies to promote foreign investment sustainability, while from the bottom up, China’s firms are disclosing more about their global impacts and CSR initiatives as ESG principles become more deeply embedded in global markets.

This report examines the ESG impacts of China’s investment in Indonesia and Cambodia against the backdrop of these changes. First, we draw upon both official data and a novel transactions dataset tracking Chinese firms’ investments in both countries from 2000 to 2021. We review patterns of China’s investment in Southeast Asia and discuss the challenge of tracking Chinese financial flows to the region. We then review the current state of ESG, including China’s sustainability practices in both countries, and develop a framework for evaluating the ESG impacts of China’s overseas investments. Finally, we apply the framework to four recent Chinese investments across Cambodia and Indonesia to evaluate how China’s firms are applying ESG principles in practice.

A New Era of Chinese Outbound FDI

This section describes the evolution of China’s global investment trajectory and then reviews in greater detail China’s FDI footprint in Southeast Asia, specifically in Indonesia and Cambodia. Our overview draws from official FDI data as well as an alternative transactions dataset to address the gaps in official FDI statistics.

China’s Global Outbound FDI

Data on global FDI flows come with major caveats and limitationslimitations – In national accounting statistics, cross-border investment flows are commonly separated into five categories: FDI, portfolio investment, derivatives, other investment, and reserves. Chinese investors have been active in Southeast Asia via all these channels, but this report focuses on FDI. . One problem is that international statistics rely on national statistical agencies, many of which lack resources, manpower, or adequate training to collect detailed and accurate data on FDI flows and the operations of transnational enterprises. Compounding the challenge is firms’ use of holding companies and offshore vehicles to route financial flows; “roundtripping” (where companies route funds to themselves through countries or regions with generous tax policies and other incentives); and “transshipping” (where companies channel funds into a country to take advantage of favorable tax policies, only to reinvest in a third country). Accordingly, international FDI statistics (including those from United Nations [UN] agencies) often offer a frustratingly incomplete picture in which data are usually available only after years of processing delays, reported totals from home and host countries are inconsistent, and the investments are difficult or impossible to track after they pass through tax havens.

Tracking China’s overseas investment comes with additional challenges. First, two different government agencies are responsible for collecting outbound FDI statistics, causing data reconciliation and access issues. Second, China’s existing capital controls and burdensome regulatory requirements incentivize firms to underreport (or not report) foreign investments to evade capital controls and bureaucratic reviews. This means not all foreign investments may be reflected in official data. Lastly, because China’s firms almost always rely on offshore entities to structure their overseas investments, official data distort the geographical and sectoral distributions of Chinese investment. According to data from China’s Ministry of Commerce (MOFCOM), an average of 64 percent of China’s outbound FDI flows from 2015 to 2020 were registered in either Hong Kong or tax havens such as the Cayman Islands and Singapore. From there, money flows to its ultimate destination—or, in many cases, back to China as part of roundtripping,” where flows end up funding domestic investments or returning back to the original investor. This means there can be substantial differences between what Chinese officials report on the outbound side and what host economies report receiving from China.

For these reasons, it is critical to consider various available data points to get a reliable sense of China’s investment trajectory and its FDI footprint in a specific region or country. In addition to official statistics from China and the host nation, it is important to consult alternative data that can shed light on the patterns of Chinese outbound FDI. One such perspective is a dataset compiled by Rhodium Group that collects and aggregates data on global acquisitions and greenfield investments by companies and investors from China with a value of $1 million and above (the Rhodium “Core China OFDI” dataset, Table 1). Such alternative transactions datasets are not directly comparable to those compiled using the traditional balance of payments (BoP) method, but they do avoid some of the existing problems—namely issues with time lags and passthrough locations—and permit a real-time assessment of investment trends.

All available data sources illustrate a sea of change in China’s outbound investment trajectory in recent years. Since the mid-2000s, China’s global OFDI has grown steadily, reaching a boom in 2014 after Beijing liberalized outflows through the FDI channel. Beijing reversed this policy in late 2016 and initiated a crackdown on “illicit” flows in sectors such as real estate and gaming. The reimposition of capital controls and greater regulatory scrutiny abroad led to a significant drop in annual OFDI flows after 2016, but available data sources paint a different picture of the extent of the slowdown. The average annual outbound FDI over the last five years recorded in China’s official statistics only indicates a modest drop of about 21 percent from the 2016 peak, while alternative datasets show a much steeper drop, especially in certain types of transactions like M&A (Figure 1). Both official sources and alternative data show another drop in 2021, but official data suggest more stability than the alternative transactions approach.

Figure 1

Chinese FDI in Southeast Asia

In addition to a slowdown in overall investment, we are also observing a clear change in the geographic patterns of Chinese outbound FDI since 2016. Advanced economies that previously attracted large amounts of Chinese FDI in the form of M&A transactions—such as the United States, the United Kingdom, or Australia—have seen declining inflows since 2016, especially in sectors blacklisted by Chinese regulators and scrutinized by host country authorities under tightening investment screening rules.

Other regions have seen resilience or even an increase in Chinese investment compared to the 2014–2017 boom period. Southeast Asia is one of these regions with a growing Chinese investment footprint. Various sources agree that Chinese firms’ investments into Southeast Asia have grown rapidly in the past decade, countering the overall trend of falling global investments (Figure 2). According to ASEANstats (the statistics division of the ASEAN Secretariat), annual Chinese FDI in Southeast Asia grew from only $3.6 billion in 2010 to $10 billion by 2016; annual totals were $13.6 billion in 2021. Data from China’s MOFCOM show a similar growth trend, with annual flows of around $4.4 billion in 2010 reaching an average of $14.3 billion per year from 2018 to 2020. China’s overall share of FDI in Southeast Asia also grew from 6 percent in 2010 to an average of 12 percent from 2018 to 2020.

Rhodium’s Core China OFDI dataset on global acquisitions and greenfield FDI projects by Chinese companies follows the overall growth trajectory that official data show, but headline investment is lower than in official statistics and more volatile year to year. In the latest available year, MOFCOM shows a total of $133 billion of Chinese investment in the region (2021), ASEAN statistics show $109 billion (2021), and the cumulative value of Rhodium’s transactions amounts to $100 billion (2021).

Figure 2

Beyond that aggregate perspective, however, official data vastly disagree on the destinations and target sectors for Chinese investment in Southeast Asia (Figure 3). Singapore is the largest destination for China’s outbound investment in Southeast Asia in both official datasets, but this likely reflects investment routing and roundtripping through a major tax and investment haven. MOFCOM data show that Indonesia is the second-biggest recipient of Chinese direct investment among the 10 countries after Singapore. According to these official statistics, in total, Indonesia received $15.9 billion in cumulative Chinese investment from 2010 to 2020, ahead of Malaysia ($9.8 billion) and Thailand ($9.6 billion). ASEAN data has Cambodia (not including Singapore) as the destination with the most accumulated FDI ($11 billion), followed by Thailand ($8.1 billion) and Indonesia ($8 billion).

Figure 3

In addition to confusing information about the geographic distribution of Chinese investment, official data also provide very little useful information about the industry distribution of Chinese investment in Southeast Asia. MOFCOM’s aggregate OFDI data are very much distorted toward the industries of the first investment in Hong Kong or other offshore centers (“business services”), and no authoritative breakdown of Chinese investment in Southeast Asian economies by industry is available. Data from host governments widely vary in quality and comprehensiveness. Some governments provide reasonably good data (like Singapore or Malaysia), but other governments do not provide more detailed information, especially for flows coming in through offshore centers (for example, Cambodia or Myanmar). Rhodium’s Core China OFDI transaction dataset provides a detailed perspective on the evolution of Chinese FDI by recipient nation, entry mode, and industry (Figure 4). The Rhodium data confirm that the offshore hub of Singapore is the single largest destination for Chinese OFDI in Southeast Asia. After that, Indonesia has been the biggest attraction for Chinese investors, receiving more than $21 billion in cumulative investment, followed by Vietnam ($13 billion) and Malaysia ($8 billion).

Figure 4

The industry distribution of Chinese FDI transactions in Southeast Asia tracks China’s domestic development and the shifting capabilities of its companies. While Chinese investment in 2010–2015 was chiefly dominated by traditional low-value-added manufacturing sectors and some investments in extractive industries, recent increases in outward FDI to ASEAN countries (especially outside of Singapore) are largely driven by a combination of Chinese private firms exporting their business models and knowhow to new markets and a variety of firms looking to expand their presence in different places on the EV supply chain. The former includes Tencent’s investments in Southeast Asia and Alibaba’s acquisition of Lazada, while the latter is driven by large capital expenditure projects for critical minerals in Indonesia. China’s firms are moving into new technology supply chains in other parts of the world. In Latin America, for example, Chinese investments in key inputs for renewable energy sectors, such as alumina, lithium, and niobium have grown over the past decade.

In terms of entry mode, Chinese FDI in Southeast Asia has historically been dominated by greenfield investment over acquisitions. That pattern generally held up over the past decade, although M&A has become a driving force in certain sectors such as infrastructure and logistics as well as extractive industries.

In the following two sections, we will provide a more detailed description of China’s investment patterns in two Southeast Asian economies—Indonesia and Cambodia—that illustrate how investors’ diverging economic interests can affect local impacts.

Chinese FDI in Indonesia

Both Chinese and Indonesian statistics show that China has been a major source of FDI for the Indonesian economy. MOFCOM data captured $16 billion of cumulative Chinese FDI in the country from 2010 to 2020. Indonesian statistics show cumulative flows of $20 billion (Figure 5).

Figure 5

Rhodium’s Core China OFDI dataset includes 110 major transactions with a disclosed value of $22 billion from 2002 to 2021 (Figure 6). More than a third (35) of these were in the financial services sector, despite only accounting for 16 percent of the cumulative value of Chinese investment into Indonesia. By value, the top industries were the basic materials sector (31 percent of value since 2002) and the transportation and infrastructure sector (24 percent). Annual flows spiked in 2015 and momentum remained strong through 2021, with considerable volatility from year to year.

Figure 6

The majority of China’s FDI is concentrated in a handful of large-scale projects. The combined value of the largest project in each year makes up more than two-thirds of total Chinese FDI stock in Indonesia. Of these large projects, the vast majority are in the extractives and infrastructure sectors (Table 2).

The composition of FDI has also shifted in recent years. Prior to 2017, Chinese investment in Indonesia was almost exclusively dominated by controlling stakes. Since then, minority stakes (10–49 percent) by private Chinese companies have become an increasingly important part of China’s overall investment into the country.

The quality of Rhodium Group Core China OFDI data covering Indonesia is generally better than for other countries in Southeast Asia due to better local reporting on financial transactions. However, by only capturing major FDI transactions, our dataset still undercounts China’s actual investment footprint in Indonesia by omitting smaller-scale greenfield investments by Chinese nationals. We also do not capture “hidden” investments in the informal sector of the economy, like small retail or services operations established by Chinese expatriates. In terms of investment value, about 50 percent of transactions in our sample do not have a disclosed value. If we were to estimate the value of these transactions value based on historical patterns in the same industry, it would likely add several billions of dollars to our estimates of cumulative investment.

Chinese FDI in Cambodia

China’s aid and lending relationship with Cambodia is substantial, and analysts estimate China has provided more than $1.8 billion in aid and development finance since 2000. While aid flows and other projects are well-documented, China’s FDI footprint in Cambodia is more difficult to grasp, due in part to data challenges.

ASEAN statistics show $7 billion of cumulative Chinese investment in Cambodia, which is the third-lowest value in the region only ahead of Myanmar and Brunei. MOFCOM data show slightly less than $7 billion of cumulative Chinese FDI from 2010 to 2020 but do not provide any additional details on the industry distribution or other breakdowns (Figure 8).

Figure 7

Given the nature of Chinese investment in Cambodia, Rhodium Group’s Core China OFDI dataset only includes 16 transactions from 2008 through 2020 worth about $6 billion (Figure 9). This is certainly an undercount of the true scope of Chinese investment in the country and reflects the shortcomings of the “Core China OFDI” dataset to detect smaller scale transactions and activity in the informal sector of the economy. However, examining specific transactions still offers a sense that Chinese investment is fairly uniformly distributed across a number of sectors, but transport and infrastructure accounts for more than 50 percent of value since 2008.

Figure 8

China’s state-owned enterprises account for more than one-third of the total value of these transactions. Most projects are in the real estate and light manufacturing industries. Compared to Indonesia, we see fewer next-generation investments, including in fintech and other rapidly growing investment spaces. Some of the largest projects are summarized in Table 3.

Cambodia is an even clearer illustration than Indonesia of the importance of expanding alternative data collection to include estimations of informal flows and transactions without public identifiers. Cambodia is in close geographic proximity to China, has a large Sino-Khmer community as well as a significant resident population of Chinese citizens, and has a large informal sector. Combined with historically poor—though improving—statistical reporting by the Cambodian government and civil society institutions (media, think tanks, etc.) that track economic activity, these characteristics mean that many FDI transactions are not readily traceable through public sources.

The ESG Impacts of Chinese Outbound FDI in Southeast Asia

China’s economic engagement with Southeast Asia has helped power regional growth, but analysis also suggests that over the last two decades, China’s economic actors—from firms to banks—have contributed to lasting environmental damage, disrupted local or traditional communities, and promoted corruption in countries around the region. As the nature of China’s outbound investment shifts, ESG concepts are becoming integral to international markets; listed companies in Hong Kong are required to participate in some ESG disclosure, while China has voluntary rules for ESG matters. But ESG is complex, as there is no single global standard for ESG disclosure, and practices that are applicable in one domain may not be applicable to others. We review existing knowledge of the sustainability impacts of China’s global investment before examining the impact of China’s investment on Indonesia and Cambodia to date.

Impacts of China’s Global Investment: Diverse Outcomes

ESG concepts overlap with existing initiatives focusing on the potential impact of investment on environmental, human rights, or political outcomes. As China’s global investment footprint has expanded, the potential for Chinese firms to impact these outcomes has only increased, and existing studies offer a mixed picture of the impacts of Chinese investment. While acknowledging the benefits for recipient countries in the form of development and economic growth, analyses also identify a host of negative impacts on emerging market and developing country recipients of China’s FDI.

Environmental protection is a recurring challenge for projects that receive financing from Chinese institutions, though China’s development projects appear to be gradually improving. Analysis of projects financed by China’s main policy banks—the Export-Import Bank of China and China Development Bank—finds that on average, these projects present a greater threat to biodiversity and environmental protection than projects that receive multilateral funding from the World Bank. However, along with changing patterns of investment and lending in recent years, there has been a decline in the number of Chinese policy bank-financed projects located in environmentally sensitive locations and on indigenous peoples’ lands since 2018. Chinese FDI—especially in extractives or natural resources, agriculture, and infrastructure—has been implicated in environmental degradation and threats to local biomes, including in Africa and Latin America where China’s investment has concentrated in environmentally sensitive sectors. China’s investments in energy are a good example, showing both progress and ongoing challenges. To date, the greatest proportion of China’s energy sector FDI has gone to coal assets, with clear environmental implications. However, this situation is changing, as Boston University data show that financing for fossil fuel power generation peaked in 2015, and investments in renewable energy are taking up an increasing share of China’s outward investment in power generation. FDI has driven much of the growth in renewables. Yet hydropower projects, the largest destination of Chinese investment in renewables, pose their own environmental risks, and other investments in carbon-intensive industries may offset the environmental benefits of China’s increasing support for renewable energy assets.

Similarly, the social impacts of China’s investments—how those investments affect local communities—vary widely. Specifically, questions over Chinese’ firms treatment of local workers and displacement of local labor with workers from China have lingered since at least the early 2000s; China’s investments in specific sectors like mining have featured especially poor safety records. However, in other cases, analysts find China’s enterprises do not present worker health and safety threats, instead contributing to host country worker training and the creation of new local jobs in more productive sectors—like low- and semi-skilled manufacturing (such as assembly line work), construction and real estate, and services. This contrasts theories of labor displacement. Analysts point out that while there is substantial variation in Chinese firms operating abroad, these firms are sometimes subject to special scrutiny due to nationality, and firms that have a neutral impact (or demonstrate good practices) are rarely publicized. At the same time, documented cases of corruption among China’s foreign direct investments pose challenges for recipient governance.

Major differences between Chinese investors at least partly explain these outcomes. Chinese firms operating overseas vary widely in their understanding of local and Chinese law, their capacity to evaluate impact of firm actions on local communities, and their long-term planning and outlook. Research on Chinese investment in Africa, for example, finds that the scope of negative impacts varies widely by company size, sector, ownership, and the host country regulatory environment. Of these characteristics, ownership seems highly important. One study finds that larger and/or state-owned firms are associated with larger, more complex, and environmentally and socially sensitive projects, but also benefit from more robust internal policies, more frequent discussions with Chinese officials, and better capacity to address emerging problems with investments and undertake CSR initiatives. Conversely, private firms making large overseas investments, especially “hot” inflows in sectors like gambling or real estate, may lack clear incentives to work with host countries and mitigate adverse investment effects. However, outcomes can vary widely by company and sector.

A key issue—and one that is seen in the case studies described in this report—is that China’s domestic environmental and social investment policies are generally stricter than policies governing overseas investments and come with explicit enforcement mechanisms. Chinese law has required that foreign enterprises investing overseas only meet the environmental standards of the host country, even if those standards fall below those normally required for Chinese domestic investment projects. Beyond this, there are no binding environmental requirements for Chinese investments abroad, although there are a host of nonbinding and advisory policies promoting “green” investment and environmental responsibility for companies operating overseas. Although China continues to develop new regulations and recent guidelines are beginning to encourage firms to follow international standards in environmental protection, these initiatives remain voluntary.

Existing research directly comparing Chinese firms’ environmental and social impacts to the impacts of firms from other countries is somewhat limited. Focusing on development and infrastructure finance, studies examining China’s BRI suggest Chinese banks have less developed environmental and social oversight systems and regulations compared to multilateral development banks or Japanese and Korean overseas development agencies. Several studies document how China’s overseas projects, including aid projects and those funded by Chinese banks, can have negative ESG impacts. Some work also suggests Chinese foreign direct investors are more active in countries with less developed ESG regimes than investors from other countries and are therefore operating more frequently in contexts with lower preexisting regulatory baselines. Going as far back as the 1990s, for example, research suggests Japanese firms tended to invest in countries with relatively more robust environmental frameworks, as opposed to those with weak environmental regulations. Whether this is due to investor preference for weaker regulation or Chinese firms being “crowded out” of strong investments in countries with more developed regulatory regimes is debated.

However, it is less clear if Chinese foreign direct investors—whether state-owned enterprises (SOEs) or private firms—perform more poorly than investors from other countries in the same sector and host country context, even if the quality of EIAs conducted by Chinese companies overseas are problematic relative to investors from other countries. Here, evidence is limited. Metanalysis by Wang and Zadek (2016) identifies fewer than 10 studies that directly compare Chinese investors to firms from the Organization for Economic Cooperation and Development (OECD) or other large developing economies. Much of the existing analysis on labor relations in Chinese investment projects in Africa, for example, focuses on large-scale firms or projects, especially those in construction, textiles, or extractives, as these were the major sectors for foreign investment during the 2000s. Analysis of Chinese work in the mining sector finds that while specific Chinese firms had poor labor relationships and elevated social risks, this was not unique to Chinese firms but instead common across investors in those sectors. Analysis also indicates that Chinese firms differ primarily in their higher number of serious accidents, but otherwise they had similar environmental and social impacts when compared to firms from other countries. More recent work in Kenya suggests that while Chinese firms sometimes displayed poor labor rights policies and practices, US firms were vulnerable to similar criticism.

Impacts of Chinese Investment in Indonesia

In the early 2000s, most of China’s investment activities in Indonesia were in high-emissions sectors like infrastructure, hydropower, and coal mining. Accordingly, China’s impact on Indonesia’s ecosystems has been heavily scrutinized. Supported by BRI, China’s investment portfolio in Indonesia has now expanded and includes manufacturing for the broader Southeast Asian markets, including solar manufacturing, vehicles (including EVs), and other industries. At present, China is attempting to broaden its green energy investment scope in Indonesia by constructing Indonesia’s biggest hydropower plant and setting up an industry for the manufacturing of solar cells.

However, studies suggest the impact of existing Chinese investment on Indonesia’s environment has been mixed. Pramono et al. (2022) recently used remote sensing data to identify risks to biodiversity and local communities from Chinese investment projects, finding that the concentration of investments in sensitive sectors—like coal power, extractives, and infrastructure—has caused vegetation loss and threatened endangered species. Investments from Chinese firms have also presented social risks, including corruption and labor rights issues, which can be compounded by complex relationships between the Chinese diaspora and Indonesians of Chinese descent and other groups and political actors in Indonesia.

On the positive side, some studies suggest China’s FDI has contributed significantly to local economic growth. For example, after the foundation of the Morowali Industrial Park (IMIP), the economic growth of Central Sulawesi Province (where the park is located) increased to over 13 percent annually, much higher than the national average of 5 percent. In addition, while foreign companies tend to invest in high-emissions sectors, research by the OECD Investment Policy Review found that foreign firms, including Chinese ones, are more energy efficient than domestic firms.

The risks of Chinese investment in Indonesia appear set to increase with the passage of the Omnibus Law in 2020, which amended and relaxed over 1,200 articles and regulations—including regulations on environment, forestry, fisheries, investment, and spatial planning—in an effort to streamline and boost FDI. Among the most controversial articles of the Omnibus Law is the repeal of the current regulation requiring at least 30 percent of forest area to be conserved for each watershed area or island. The Omnibus Law also eases the requirements for businesses to carry out an EIA as a precondition to obtaining a business license and limits public consultation to only those who are directly affected by the specific project. Previous major Chinese investment projects in Indonesia, including the Jakarta-Bandung High-Speed Rail project, have been criticized for poor adherence to Indonesia’s environmental and social impact evaluation regulations.

Case Study: Morowali Industrial ParkCase Study: Morowali Industrial Park Case Study: PT. Sorik Marapi Geothermal (PT. SMGP)/PT. Sokoria Geothermal Indonesia (SGI)Case Study: PT. Sorik Marapi Geothermal (PT. SMGP)/PT. Sokoria Geothermal Indonesia (SGI)

Impacts of Chinese Investment in Cambodia

Investment from China has helped fund needed infrastructure and propelled economic growth in sectors across the Cambodian economy, including textiles and real estate. However, some of China’s investment has come at a substantial cost. Analysts, nongovernmental organizations (NGOs), opposition political figures, and others have alleged that some Chinese projects have damaged Cambodia’s environment, promoted corruption, and harmed the interests of Cambodian workers. While proponents often cite the economic benefits of Chinese investment, other analysis argues that the spillover effects of a given project to the wider Cambodian economy may be limited and that large Chinese infrastructure and investment projects in Cambodia provide much in the way of technology and knowledge transfer for Cambodian firms.

Hydropower projects and dams, which have large physical presences that can affect local biodiversity and have implications for local communities that are often forced to resettle, are among the most widely studied types of investment, and researchers have found numerous ESG issues. Other academics have found that non-infrastructure investments in Cambodia, such as manufacturing plants, generally encounter fewer issues. An important finding in the literature is that many of the adverse outcomes of Chinese investment are exacerbated due to lax enforcement on the part of local officials. A study examining Chinese businessmen who engage in bribery, for example, points to the environment of corruption in Cambodia and the need to adhere to local practices to do business. Accordingly, case studies of Chinese projects in Cambodia (including by Cambodian organizations) find noncompliance with environmental and social standards and Cambodian laws and widespread conflicts of interest in both aid and loan projects and investments, including negative impacts in Sihanoukville. One recurring challenge is Chinese firms’ adherence to Cambodia’s environmental and SIA regulations. Limited public access to project reporting documents, such as EIAs and SIAs, exacerbates challenges with compliance monitoring. Cambodian law lacks detailed requirements for the implementation of EIAs and clear designation of responsibility for public disclosure, resulting in a more permissive environment for government actors and firms to sidestep safeguards. In April 2023, Cambodia’s Council of Ministers approved a new Environment and Natural Resources Code. Earlier draft versions of the code dictate more defined responsibilities for government oversight and instate more articulated disclosure requirements. Cambodia’s institutional context is also challenging, government agencies have limited—but improving—capacity to process assessments, consulting firms approved to conduct them vary widely in qualifications, and local elites and politicians can influence how projects are treated.

Case Study: Dara Sakor ZoneCase Study: Dara Sakor Zone Case Study: CART TireCase Study: CART Tire

Conclusions and Policy Implications

Chinese firms’ activities in Southeast Asia are changing, and ESG principles are an increasingly important consideration as they explore new opportunities in Indonesia, Cambodia, and beyond. As our case studies illustrate, how these Chinese firms investing in Southeast Asia implement ESG principles in practice is far from uniform. In some cases, costs to local populations, ecosystems, and governance modes have been significant. The experiences of Indonesia and Cambodia in tracking and managing China’s investments—and their ESG impacts—mirror the larger challenge for countries in the region, as issues of state capacity and enforcement can hamper projects that aim to have a fundamentally positive and sustainable impact, whether in alternative energy, sustainable manufacturing, or other sectors.

Our data and analysis suggest that China’s engagement in the region is fundamentally shifting to new sectors, with a different ESG profile compared to past Chinese investments in the region. Examining four case studies in Indonesia and Cambodia, we see how China’s firms are considering ESG in their overseas operations and responding to global ESG trends.

First, Chinese companies are paying increasing attention to ESG concepts, formulating ESG policies and increasingly disclosing firm-wide ESG activity. However, much of their focus remains on corporate charity and CSR. For recipient countries to know their investment partners, much more is needed, including a comprehensive (and, according to Chinese law, required) system of company-wide disclosure with clear standards and mandatory compliance.

Second, there is no single story of China’s investment in Indonesia and Cambodia, and ESG impacts vary. Some investments are highly opaque, positing clear concerns for corruption and negative social and environmental outcomes, like Dara Sakor. Others overtly embrace “green” and sustainable principles, like the CART Tire plant in Qilu SEZ. The confounding effects of Chinese (and international) industrial zones make it even more difficult to distinguish positive or negative ESG contributions from individual firms, raising the stakes for policymakers and regulators to ensure zones are well planned, well managed, and well supervised to ensure positive ESG outcomes.

Third, host country context in Indonesia and Cambodia matters for ESG outcomes. China’s legal regime for foreign investors, which places most of the ESG regulatory burden on host countries, means that local conditions and practices are important for understanding ESG outcomes. Even where Chinese firms aim (or claim to aim) for higher standards or better compliance, as long as Indonesian and Cambodian regulations lag behind international or Chinese standards, companies will have fewer incentives to perform beyond baseline.

Fourth, transparency remains a recurring issue for the firms in our case study. This implicates the Chinese firms covered in our case studies as well as Indonesia and Cambodia’s transparency and disclosure regimes, which appear to contain major gaps. For example, without ready access to impact assessments, it is very difficult to determine how effectively firms understand and address (or fail to address) ESG risk.

Fifth, in terms of environmental sustainability, across countries and industries, our case studies observe recurring challenges, including questions regarding the protection of waterways, marine areas, and protected land. The investments in our case studies are all located near sensitive zones that do not appear to have received sufficient consideration and, in some cases, appear to have developed in contravention of Indonesian or Cambodian law or best practices. In the case of Dara Sakor, the legal status of protected land did not serve as an effective safeguard to prevent the development of protected areas.

Sixth, the green future comes with costs and risks to countries that will play key roles in global supply chains. The battery materials and geothermal power station explored in this report exhibit poor environmental performance in one or more areas, including water safety and pollution controls, even as the technologies they advance become increasingly important for wider environmental outcomes.

Our research has several implications for policymakers and the philanthropic community.

First, increasing the transparency of China’s overseas investment patterns and investors remains a key challenge even in this next phase of Chinese overseas investment. Tracking and confirming Chinese outbound investment projects remains challenging, and tightened capital controls and greater national security scrutiny have further increased existing transparency problems. These issues are particularly acute in Southeast Asia because of governance problems, large informal sectors, and other factors. Understanding the ultimate ownership of Chinese overseas investments is also critical for identifying the ESG risks a proposed investment may pose for potential partners, national and local authorities, and civil society groups. Creating tools to improve the capacity for data collection and due diligence among local stakeholders should be a primary goal for philanthropies and international organizations. Importantly, transparency in China’s overseas investments is deteriorating, not improving.

Second, improving corporate-level ESG disclosure and reporting is another important pillar for more robust ESG impact assessment in both China and potential partner countries, even at an aggregate level. The reporting available from our sample Chinese firms does not include quantifiable metrics, even on the company’s aggregate impact. Specific ESG standards and frameworks like the Sustainability Accounting Standards Board (SASB) standards and the Global Reporting Initiative are a starting point but have not been uniformly adopted, even by firms that report ESG. Adopting specific ESG criteria allows ESG impact to be distinguished from traditional CSR, offering a more detailed insight into company impact. Beijing’s appetite for greater foreign portfolio investment and offshore fundraising offers a window of opportunity to work with major institutional investors and impactful ESG funds to accelerate that process and create positive spillovers for other Chinese companies. Chinese firms’ attempts to build global consumer-facing brands provide greater incentive for ESG compliance.

Third, improving country capacity to review and monitor project-level environmental and social impact assessments and conduct ongoing reporting is important to ensuring better outcomes in Indonesia, Cambodia, and beyond. Our research confirms findings of previous studies: in Cambodia and Indonesia, responsibility for reviewing and enforcing regulations may be spread across different agencies or levels of government that lack sufficient staffing or expertise to handle complex ESG issues. Importantly, improving recipient institutional capacity improves officials’ ability to deal effectively with investor firms from all countries, not just China, and attract investment from other destinations.

Fourth, engaging communities affected by an investment early, often, and meaningfully is difficult but critical. Even where consultations are nominally held, they may be held too late, may lack sufficient community participation, or may be unable to affect project design or outcomes, even following project-related accidents or negative outcomes. Traditional CSR initiatives involving donations or agricultural training do not offset these needs. Chinese firms’ reliance on joint ventures, local partners, or secondary consultants for impact assessment and engagement may compound these risks.

Fifth, it is important to tread carefully with large land concessions, SEZs, and industrial zones. These are particularly complex to supervise and manage from an ESG perspective. It can be difficult to distinguish how individual firms adhere to ESG principles. On the other hand, shared zones offer opportunities for shared infrastructure and collaboration on ESG outcomes.

Sixth, these changes in China’s engagement with Southeast Asia and regional supply chains offer an opportunity for Indonesia, Cambodia, and outside investors to share best practices and improve ESG outcomes. Cambodia’s draft overhaul of environmental laws is an encouraging start, and China continues to roll out new voluntary guidelines and standards that can serve as a blueprint—if not a binding guide—for its overseas firms. New activity in next-generation sectors presents a chance to improve ESG outcomes at all levels, but it will require a concerted effort—from regulators, investors, and other groups—to achieve consistently strong ESG outcomes in foreign investment.

Taking Stock 2023: US Emissions Projections after the Inflation Reduction Act

Every year, Rhodium Group provides an independent projection of future US greenhouse gas (GHG) emissions, under current policy and expectations for economic growth, future fossil fuel prices, and clean energy cost and performance trends. This year, the ninth edition of our annual Taking Stock report, the current policy baseline we model includes something different than the last eight reports: meaningful congressional action on climate change in the form of the Inflation Reduction Act (IRA). We’ve quantified the effect of the IRA in previous work, but this is the first time major federal climate legislation is incorporated into Taking Stock.

The full suite of current policies on the books as of June 2023 drives US emissions to 32-51% below 2005 levels in 2035. Along the way, the US will achieve a 29-42% reduction in GHGs in 2030—a meaningful departure from previous years’ expectations for the US emissions trajectory but not enough for the US to meet its pledge under the Paris Agreement to reduce emissions by 50-52% below 2005 levels by 2030. The difference between our estimate’s low and high ends is primarily driven by faster economic growth, cheaper fossil fuels, and more expensive clean energy technologies.

Today, nearly one year after Congress passed and President Biden signed the IRA, its effects on the US’s path to decarbonization are coming into clearer focus. We have more signals on how federal agencies plan to implement key aspects of the law, including tax credit provisions for clean electricity and clean vehicles—two major sources of emissions abatement. We’ve also seen markets and supply chains begin to respond to the incentives the law puts in place, and we incorporate the latest cost and performance projections for wind, solar, electric vehicle batteries, and a range of other clean energy technologies to reflect these responses.

With the IRA in place, the power and transportation sectors continue to see the largest declines in GHG emissions relative to today, as detailed in Chapter 3 of the full report. The power sector in particular looks quite different in 2035 compared to today, with zero- and low-emitting power plants making up 63-87% of all generation that year, up from around 40% in 2022. Electric vehicles also continue their rapid growth, and, taken together, this progress on decarbonization also reduces household energy bills by an average of $2,200-$2,400 per year in 2035 from 2022 levels.

But challenges remain in achieving these outcomes, especially a massive build-out of new infrastructure. In the power sector, for example, the US needs to add 32-92 gigawatts (GW) of wind and solar on average every year from now until 2035 to achieve these ambitious results. For comparison, adding 32 GW of renewables is roughly equivalent to the best year of renewable installations on record, and adding 92 GW is triple the best year on record. This level of deployment faces headwinds in nearly every direction, meaning more work is likely needed to address supply chain constraints, transmission, interconnection, and siting issues, and a growing need for a qualified workforce—to name a few hurdles.

In the vein of additional policy action, in this year’s Taking Stock, we also update our look at what other policies are required for the US to achieve its 2030 target under the Paris Agreement. Our previous Pathways to Paris reports quantified the impacts of a set of additional steps that all levels of government need to take to push US emissions to 50% below 2005 levels in 2030. In this report, we update key components of some of those policies to reflect the latest proposals from the federal government, and we find that reductions of 41-52% below 2005 levels are still possible—putting the 2030 Paris target within reach—but getting there won’t be easy. Federal actions that the Biden administration can take unilaterally and that can be achieved in the president’s first term only yield GHG reductions of 37-49% below 2005 levels, leaving the 2030 target out of reach. While critical, these federal regulatory policies will need to be paired with ambitious state actions. The IRA is the most substantial federal action the US has ever taken to combat climate change, but it was not intended to solve every decarbonization challenge in one bill. A sustained stream of federal and state actions is the only way to close the US emissions gap. While there is more activity at all levels of government than ever, the ramp-up of policy action required in the years ahead will be a substantial lift above and beyond the unprecedented actions of late.

In the first two chapters of Taking Stock 2023, we account for changes in policy and energy market & economic conditions since last year’s edition. Chapter 3 shares our new projections under current policy, including key trends by sector, and in Chapter 4 we assess the path to the 2030 Paris Agreement target. As in years past, we provide our emissions projections at the 50-state level in all emitting sectors of the economy for all greenhouse gases for the three main emissions scenarios. This detailed data is available on the ClimateDeck, a partnership between Rhodium Group and Breakthrough Energy.

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Sanctioning China in a Taiwan Crisis: Scenarios and Risks

In recent months, growing tensions in the Taiwan Strait as well as the rapid and coordinated Group of Seven (G7) economic response to Russia’s invasion of Ukraine have raised questions—in G7 capitals and in Beijing alike—over whether similar measures could be imposed on China in a Taiwan crisis. This report examines the range of plausible economic countermeasures on the table for G7 leaders in the event of a major escalation in the Taiwan Strait short of war. The study explores potential economic impacts of such measures on China, the G7, and other countries around the world, as well as coordination challenges in a crisis.

The key findings of this paper:

In the case of a major crisis, the G7 would likely implement sanctions and other economic countermeasures targeting China across at least three main channels: China’s financial sector; individuals and entities associated with China’s political and military leadership; and Chinese industrial sectors linked to the military. Past sanctions programs aimed at Russia and other economies revealed a broad toolkit that G7 countries could bring to bear on China in the event of a Taiwan crisis. Some of these tools are already being used to target Chinese officials and industries, though at a very limited scale.

Large-scale sanctions on China would entail massive global costs. As the world’s second-biggest economy—ten times the size of Russia—and the world’s largest trader, China has deep global economic ties that make full-scale sanctions highly costly for all parties. In a maximalist scenario involving sanctions on the largest institutions in China’s banking system, we estimate that at least $3 trillion in trade and financial flows, not including foreign reserve assets, would be put at immediate risk of disruption. This is nearly equivalent to the gross domestic product of the United Kingdom in 2022. Impacts of this scale make them politically difficult outside of an invasion of Taiwan or wartime scenario.

G7 responses would likely seek to reduce the collateral damage of a sanctions package by targeting Chinese industries and entities that rely heavily and asymmetrically on G7 inputs, markets, or technologies. Targeted sanctions would still have substantial impacts on China as well as sanctioning countries, their partners, and financial markets. Our study shows economic countermeasures aimed at China’s aerospace industry, for example, could directly affect at least $2.2 billion in G7 exports to China, and disrupt the supply of inputs to the G7’s own aerospace industries. Should China impose retaliatory measures, another $33 billion in G7 exports of aircraft and parts could be impacted.

Achieving coordination among sanctioning countries in a Taiwan crisis presents a unique challenge. While policymakers have begun discussing the potential for economic countermeasures in a Taiwan crisis, consultations are still in the early stages. Coordination is key to successful sanctions programs, but high costs and uncertainty about Beijing’s ultimate intentions will make stakeholder alignment a challenge. Finding alignment with Taiwan in particular on the use of economic countermeasures will be central to any successful effort. G7 differences on Taiwan’s legal status may also prove a hurdle when seeking rapid alignment on sanctions.

Deterrence through economic statecraft cannot do the job alone. Economic countermeasures are complementary to, rather than a replacement for, military and diplomatic tools to maintain peace and stability in the Taiwan Strait. Overreliance on economic countermeasures or overconfidence in their short-term impact could lead to policy missteps. Such tools also run the risk of becoming gradually less effective over time as China scales up alternative currency and financial settlement systems.

 

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This research was a collaboration between Rhodium Group and the Atlantic Council’s GeoEconomics Center.

Strengthening US-EU Cooperation on Technical Standards in an Era of Strategic Competition

Transatlantic ties have had a rough go in recent months. After an unprecedented degree of alignment on Russia in the first half of 2022, including the quick and efficient rollout of a series of groundbreaking sanctions packages, the United States and Europe stepped back into dispute territory with the fallout from measures taken by Washington, notably some key provisions of the pathbreaking Inflation Reduction Act (IRA) passed last summer.

This has again strained transatlantic cooperation and affected the potential for US-EU alignment, particularly around China and technology and trade issues. Recent US actions have amplified the divide between “Atlanticists” and “strategic autonomists” and made it harder for Europe to follow in Washington’s footsteps on, for example, export controls or outbound investment screening. Even though both issues are on the table, as European Commission President Ursula von der Leyen confirmed in her recent China speech, coordinated moves on these fronts could now be seen as bowing to US pressure in a context of perceived green-technology unilateralism.

Against this background, the December 2022 US-EU Trade and Technology Council (TTC) meeting can be seen as a missed opportunity. The TTC had, starting in September 2021, a productive and collaborative first year, but recently some of the most relevant transatlantic discussions have been happening outside the council’s framework. These include negotiations on IRA interpretation and carve-outs, and on export controls on semiconductor technology.

International technical standards, however, is one key aspect of transatlantic cooperation that is moving forward on a strong footing, with significant implications. Over the past 18 months of TTC work, the two sides have managed to build a solid foundation for engagement on the topic, from increased information sharing to the identification of key sectors for collaboration to fruitful collective action on recent International Telecommunications Union (ITU) leadership elections. This happened despite longstanding disagreements on ways to approach international standards development, the role of “harmonized standards”, for instance in the context of the EU’s regulatory framework for artificial intelligence (AI), and US criticism of the EU’s new standardization strategy.

Sometimes overlooked, collaboration on international technical standards is important in the current context of heightened technological competition. A highly technical workstream, international technical standards play a key role in defining future technological pathways. China’s increasing involvement in global standard setting makes transatlantic cooperation in the field crucial and increases the need for a common, strategic approach. Without careful coordination, there is a risk that the current, broad-based pushback against China could spill into the standards sphere and impede the important work of global standards organizations. There is, therefore, a need to strike a balance between strategic competition and an interest-driven approach that can ultimately uphold the benefits of collaborative global standards development.

On the heels of the G7 summit in Hiroshima, and ahead of the next TTC meeting in Sweden on May 30-31, both of which have international technical standards on their agendas, we lay out the case for why and how the United States and the EU can build on achievements in this area to maintain constructive engagement and attain concrete, ambitious results. We begin by explaining why preserving global technical standards is crucial to economic competitiveness and strategic objectives on both sides of the Atlantic (Part 2) and explore China’s increased involvement in the field (Part 3) before laying out six avenues for continued transatlantic cooperation on technical standards (Part 4).

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Chinese FDI in Europe: 2022 Update

Building on a long-standing collaboration between Rhodium Group and MERICS, this report summarizes China’s investment footprint in the EU-27 and the UK in 2022, analyzing the shifting patterns in China’s FDI, as well as policy developments in Europe and China. Key findings and a link to the full report are below:

China’s global outbound investment falls to an 8-year low: In line with the global decline in cross-border investment, Chinese outbound foreign direct investment (FDI) fell by 23 percent in 2022 compared to 2021, to USD 117 billion (EUR 111 billion). China’s outbound mergers and acquisitions (M&A) activity also dropped, falling 21 percent from 2021 levels to a total of EUR 22 billion. A range of external and internal factors—from China’s zero-Covid policies to rising global risks following Russia’s invasion of Ukraine—created strong headwinds for Chinese investors.

Chinese investment in Europe (EU-27+UK) continues its multi-year decline: Chinese FDI in Europe reached a decade low of just EUR 7.9 billion in 2022, down 22 percent compared to 2021. The drop takes Chinese investment back to its 2013 level. A lack of Chinese M&A activity was the prime reason for the fall. Only one transaction—Tencent’s purchase of British video game developer Sumo Digital—exceeded one billion euros.

Greenfield investment overtakes M&A for the first time since 2008: Driven by electric vehicle battery factories, Chinese greenfield investment in Europe increased by 53 percent, exceeding M&A flows for the first time since 2008.

Investment concentrates heavily on the “Big Three” and Hungary: 88 percent of investment flowed to just four countries, the “Big Three” European economies (the UK, France and Germany) and Hungary. All four received major greenfield investments by Chinese battery makers, as well as most of the year’s M&A activity.

Consumer products and automotive remain the top sectors: As in 2021, consumer products—again driven by a single large acquisition—and automotive remained the two top sectors. Three quarters of total Chinese investment flowed into these two sectors.

Europe has become a key part of China’s global electric vehicle expansion: Battery investments are now the mainstay of Chinese investment in Europe. Further greenfield expansion in Europe in up- and down-stream segments of electric vehicle (EV) value chains, including vehicle production, are being considered by Chinese firms.

European governments increase scrutiny of Chinese investment: They continue to tighten investment screening measures, impacting Chinese acquisitions of strategic assets such as European semiconductor companies and critical infrastructure.

A strong rebound in 2023 is unlikely, but investment could recover slightly: The end of China’s zero-Covid policy could boost Chinese outbound investment in 2023, but China’s fragile economic situation and geopolitical pressures make a rebound to mid-2010 investment levels unlikely.

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China Pathfinder: Q1 2023 Update

China Pathfinder is a multiyear initiative from the Atlantic Council’s GeoEconomics Center and Rhodium Group to measure China’s economic system relative to advanced market economies in six areas: financial system development, market competition, modern innovation system, trade openness, direct investment openness, and portfolio investment openness. To explore our data visualization and read our 2022 annual report, please visit the China Pathfinder site.

China reopened its borders in the first quarter of 2023 and rolled out the rhetorical welcome mat for foreign investors. This included pledges to promote foreign investment and imports, restoration of suspended long-term visas, and high-level visits by Chinese leaders abroad and foreign leaders in China. But an aggressive public campaign to allay concerns about the direction of China’s economy has not been underpinned by a convincing shift in policy. The restructuring plan that emerged from the “Two Sessions” meetings in March did not reassure the private sector, nor did it suggest that Beijing is poised to tackle the root causes of its macroeconomic malaise.

Meanwhile, pressure on foreign consultancies, due diligence providers, and others (including Bain & Company, Mintz Group, and Deloitte) further dampens business confidence. Heightened geopolitical tensions with the US also cloud the picture. Turning a cold shoulder to perceived American hostility, Beijing sought to warm relations with Europe: it had success with French President Macron, but faced setbacks at the European Commission, including a universally condemned comment by China’s ambassador to France that some European nations aren’t sovereign.

Quarterly Assessment and Outlook

The Bottom Line: In the first quarter of 2023, Chinese authorities were active in three of the six economic clusters that make up the China Pathfinder analytical framework: financial system development, competition policy, and portfolio investment. There were fewer developments in the innovation, trade, and direct investment clusters. In assessing whether China’s economic system moved toward or away from market economy norms in Q1, our analysis shows a negative picture.

Figure

A Look at Q1 Trendlines

China’s government hoped to put the economy on a firm recovery path by abandoning the zero-COVID measures in the last days of 2022. Months later, it is clear that 2023 will look better than 2022. Service sector activity, consumption, and even sales in the stricken property sector show positive momentum. Exports, the primary driver of China’s economy during the pandemic years, are reported to have been robust, though not to G7 markets, and with some inconsistent data. There are other reasons for concern. The pandemic years did lasting damage to income growth, employment, and business confidence. Exports are likely to weaken significantly over the course of the year as external demand flattens, and long-term structural problems continue to drag down growth. Domestically, local governments face financial pressures—from declining property sales, the hangover from COVID-era expenditures, and difficulties refinancing debt—that will require a near-term response from Beijing.

The external dimension is important too. The US October 7, 2022 controls on the export of advanced semiconductor technologies and the expected outbound investment screening regime could make it more difficult for Beijing to sustain economic growth. In a March survey conducted by the American Chamber of Commerce in China, 66 percent of member companies—and a higher proportion of technology companies—named uncertainty in US-China relations as their top business challenge in the country. China’s foreign direct investment in 2023 may also take a hit: over half of surveyed US companies do not plan to make new investments in China this year.

Financial System

Policy decisions taken in the first quarter highlighted the government’s conflicting approach to securing financial stability. On the one hand, Beijing pledged to alleviate the fiscal stress of local government and restructuring debt. On the other hand, it is launching a campaign-style crackdown on the financial system, which will result in the Party having a larger role in the allocation of credit, which runs counter to financial reform. Without a more compelling solution to financial system risks, the outlook for longer-term growth will remain dim.

Xi Jinping directly addressed the local government debt problem at last December’s Central Economic Work Conference (CEWC), saying: “We will increase the disposal of existing implicit debt, improve the debt maturity structure and lower interest payment burdens.” Translated into plain speak, this means debt maturities will be extended, locking away financial institutions’ funds with local governments for longer periods of time. The burdens on financial institutions will be amplified when local governments are allowed to repay loans at a lower interest rate. In other words, these measures will likely impair financial institutions, which have no clear way to absorb these costs. This suggests that Beijing expects the financial system to answer to Party priorities in the future rather than profit incentives.

Beijing’s measures are a mix of carrots and sticks designed to increase financial system depth and openness, while simultaneously tightening political oversight. On the positive side of the ledger, the central government is making it easier for localities to list their state-owned enterprises (SOEs) on the stock market, which often represent their most valuable assets, where sales can assist in the repayment of local debt. In Q1, the most important effort to achieve this was the rollout of a new registration-based system for initial public offerings (IPOs), which replaced a system that required approval from the securities regulator. Some hard requirements on profitability and other financial ratios have been relaxed under the new IPO system, making it easier for SOEs to qualify for listings.

At the same time, the Chinese government has increased its scrutiny of the financial sector, with the Central Commission for Discipline Inspection (CCDI) launching numerous anti-corruption investigations targeting financial executives (Figure 2). Both the former chairman of the Bank of China, Liu Liange, and the former chief of the financial conglomerate Everbright Group, Li Xiaopeng, were investigated for “serious disciplinary violations.” Meanwhile, the case of financier Bao Fan demonstrated the lack of transparency around the government’s anti-corruption campaign; Bao disappeared for nearly 10 days before his company reported that he was cooperating with authorities in an investigation. While these practices are not new, developments in Q1 2023 suggested that the government is intensifying its campaign. Zhou Chengyue, a former Ministry of Finance official and Chairman of the China Public-Private Partnership Fund, is the latest prominent name in the financial sector to be investigated by the CCDI.

Market Competition

Beijing’s crackdown against tech companies appears to be entering a new phase in 2023. In a move that reassured some investors, Didi Global received the green light to accept new user registrations. Alibaba also seems to have gotten over the hump, as it announced a split into six separate units that will each explore IPO options. However, government scrutiny of the data security policies of private companies and of sectors that do not align with Party goals is increasing.

Starting in June, companies will face greater scrutiny when it comes to cross-border flows of personal data, as the Cyberspace Administration of China (CAC) published the final version of the Cross-border Transfer of Personal Information Standard Contract measures in March. This Standard Contract is one of three mechanisms governing data transfers in China. Compared to the June 2022 draft, the final measures are stricter regarding how closely cross-border data transfer agreements must align with the Standard Contract, the requirement for foreign recipients of personal information to be monitored by Chinese authorities, and how the total volume of personal information transferred is calculated.

Meanwhile, foreign companies are watching carefully for the fallout from the recent raid by Chinese authorities of US due diligence firm Mintz Group, which saw several staff detained. The raid, which took place just days ahead of the China Development Forum, was a departure from the reassurances for foreign companies the forum was meant to foster. Official scrutiny on foreign firms continued into Q2, with Chinese police questioning employees of the US consulting firm Bain & Company at their Shanghai office. These developments raise concerns about fair treatment of foreign businesses and their ability to access data for assessing risks in Chinese firms and the broader market landscape.

In the first quarter, local companies were not immune to new limitations imposed selectively by the government. The China Securities Regulatory Commission (CSRC) began to use a traffic light system to select which local firms would be allowed to list on China’s main stock exchanges, according to the industry they belong to. Sectors such as COVID-19 testing (once a government priority) and the food and beverage industry were given a “red light.” This system allows the government to directly determine the success of certain sectors over others; as state priorities change, companies are incentivized to anticipate the next government-favored sector or activity rather than focus on delivering profits.

Portfolio Investment Openness

As part of its effort to boost economic growth in 2023, Beijing has rolled out several measures that marginally increase the country’s openness to portfolio investment. For instance, the stock exchanges of Shenzhen and London signed an agreement to move forward in establishing the Shenzhen-London Connect, which will improve the connectivity of capital markets. The CSRC also encouraged overseas listings by explicitly stating that it would support the offshore listing of Chinese companies with variable interest entity (VIE) structures if they are compliant with national security-related regulations. This is a softening of the previous guidance, where regulators had warned companies against using VIE structures to list abroad. Finally, China’s new registration-based IPO system will not only have positive effects on the financial system but will also allow investors to invest in a wider range of companies. These developments suggest that China is taking steps to open up its capital markets in hopes of boosting foreign investors’ confidence in the Chinese market.

Special Topic: Bureaucratic Restructuring is a Solution in Search of a Problem

At the 2023 Two Sessions, the government released a major restructuring plan, involving the establishment of new departments, consolidation of responsibilities, and an overhaul of the financial system. While the extensive nature of this restructuring may suggest the government is focused on maximizing efficiency in the economy to boost growth, the reality is more complex and less positive. Rather than implementing policies that address systemic problems in the country’s economy—such as the fragile property sector, the loss of consumer and business confidence following destabilizing zero-COVID measures and unpredictable government intervention in different sectors, and high levels of local government debt—the restructuring plan overall does not enhance transparency or indicate that the Party is willing to offer more room for the market to define outcomes.

The restructuring plan shifted control over certain bureaus from the State Council to the Party’s Central Committee (Figure 3). Premier Li Qiang’s speech at the first meeting of the new State Council in March similarly suggested that the State Council’s role is to implement Party decisions. As traditional barriers between the Chinese state and the Communist Party melt away, the influence of markets in driving outcomes will weaken. While bureaucratic restructuring may improve governance and reduce inefficiencies, it is not a panacea for the challenges facing China’s economy.

Financial Restructuring

The shift in oversight of the sale of corporate bonds from the National Development and Reform Commission (NDRC), which has been a bottleneck for bond issuance, to the China Securities Regulatory Commission is a minor streamlining step that could increase financial system openness. However, this will depend on how the change in responsibility is managed.

On the downside, other bureaucratic restructuring measures signal an increase in Party control over the financial system. The bureaucratic overhaul involved the creation of a new financial regulator, the National Financial Regulatory Administration (NFRA), to replace the China Banking and Insurance Regulatory Commission (CBIRC). NFRA will have significantly more power, with the centralization removing several levers of local government control of credit allocation at city levels and below. The revamp also resurrected the Party-directed Central Financial Commission, replacing the financial stability committee previously controlled by the State Council. In combination with the Party’s establishment of a department for “social work” or building Party committees within private enterprises, the efficiency of China’s financial system seems to be moving in the wrong direction.

Data Security

The financial sector was not the only area affected by the restructuring plan: the Chinese government founded the National Data Bureau “in an effort to balance supervision with encouragement of the digital economy.” This could streamline supervision over private companies that have access to data that the government deems sensitive. As the Party-led CAC has been the primary regulator of the tech industry, this new bureau could balance CAC’s focus on national security with new measures focused on treating data as an economic resource. Details on the extent of the National Data Bureau’s authority have not yet been released, so the potential effects on China’s market competition atmosphere remain unclear. Even though there is increased clarity on how the data regulation process will unfold, the types of data flows that will be restricted are still ill-defined. This gives the government ample latitude in determining the companies and activities that would be subject to mandatory disclosure or security reviews.

The creation of the data bureau comes at a time when tighter data security is being prioritized. For instance, the academic database China National Knowledge Infrastructure (CNKI), a frequently used resource for non-China based researchers that provides a library of Chinese government documents, academic papers, and datasets, notified foreign universities that it will be limiting their access effective April 1, 2023. The CAC also announced that it will conduct a cybersecurity review of US memory chip company Micron, with the stated goals of eliminating national security risks and ensuring supply chain security of critical information infrastructure. Though data regulations are necessary in rapidly growing technology spaces, the Chinese government’s tightened control of academic sources corresponds with worsening relations with the United States, where a clear lens studying China’s domestic economy from the outside in is more useful than ever. In the semiconductor space, Beijing’s actions come in response to US-led restrictions on exports of advanced chip manufacturing equipment to China.

Companies were further alarmed in Q2 when the NPC updated China’s anti-espionage law, broadening the definition of espionage—currently limited to state secrets—to include transfers of information pertaining to national security and interests. So far, the government has not clarified what would be considered “national security and interests,” and the widespread applications of this revised legislation are a cause for concern.

Innovation

At a time when the United States and other countries are introducing new measures to restrict China’s access to core technologies such as semiconductors, Beijing’s restructuring plan centered around developing self-reliance in science and technology. The Ministry of Science and Technology (MOST) was elevated to a policymaking role in coordinating China’s research and development. Going forward, MOST will have an increased say on science-related funding and allocation. The reorganization could have a streamlining effect, as specific project planning and implementation would be handled by other ministries. The overlap in goals and disorganized efforts to meet targets across ministries and provinces could be less severe with the revised system. The area of innovation is yet another where the Party is eager to have more direct control. A Party committee for S&T, the Central Science and Technology Commission, was created and consolidates the work conducted by various leading groups. This demonstrates that Xi and the CCP will drive the direction of China’s innovation in the foreseeable future. The bureaucratic streamlining may not have its intended effect: increased CCP oversight could in fact limit the range of R&D activities that businesses pursue.

Looking Ahead

Last year, we said that one of the most important challenges that Beijing faced was restoring the confidence of domestic consumers and foreign investors. Developments in Q1, however, fell short of providing reasons for optimism on this front. Consumption growth, when adjusting for positive effects of the National Bureau of Statistics’ data revisions, saw only a weak rebound despite the easing of COVID-19 restrictions, and Beijing did not offer direct fiscal support for incomes. Though consumer spending and travel have surged for the May 1 Labor Day holiday in China, household savings rates have risen sharply in 2023 as a whole. And because much of these savings are in the form of time (rather than demand) deposits, they suggest that any robust rise in consumer spending is still far off.

Figure 4

Surveys of US and EU businesses point to growing trepidation about investing in China given the worsening business environment. While some companies, including BlackRock and Fidelity, have expanded their operations in China, others like the Van Eck Associates Corp. disbanded its China mutual fund group. Similarly, the future of Vanguard’s joint venture with Ant Group remains unclear amid news reports of a planned exit from the Chinese market. Still, most foreign companies are taking a wait-and-see approach, looking for concrete signs that the government is serious about delivering on its promises of more opening.

External factors are also playing an important role in shaping investor perceptions toward China. US-China relations took a turn for the worse in Q1 2023, following the shooting down of a Chinese surveillance balloon over the United States, a chummy meeting between Xi and Russian President Vladimir Putin in Moscow, and growing tensions over Taiwan. While some had held out hope of an easing of tensions after a meeting between Biden and Xi at the G20 summit last year, communication channels between Washington and Beijing have instead shut down almost completely, and the path to restoring dialogue is uncertain. The US is expected to continue to ramp up its restrictions on technology engagement with China in the months ahead, including the introduction of an outbound investment screening mechanism in May. While Treasury Secretary Janet Yellen appeared to offer an olive branch to Beijing, by stressing in a speech in mid-April that the US was keen for dialogue and had no intention of containing, isolating, or pursuing a far-reaching economic decoupling from China, she also made clear that Washington would continue to prioritize national security in its relations with Beijing.

In Europe, we have seen contradictory signals on China. In a hawkish speech in late March, European Commission President Ursula von der Leyen said that China has turned the page on a reform and opening of its economy, and entered a new era of security and control. She urged Europe to reduce its economic dependence on China and explore tighter restrictions on the transfer of technologies as part of a new “de-risking” strategy. A visit days later from French President Emmanuel Macron, however, sent a different signal, drawing criticism from other European capitals. Macron brought a large business delegation with him to Beijing and presided over the signing of numerous deals, distancing France from the United States and pledging to work closely with Beijing going forward. Germany’s foreign minister Baerbock stuck a different tone after her latest trip to China, stating that Beijing is increasingly becoming a “systemic rival.”

Still, the Yellen and von der Leyen speeches suggest a path forward for transatlantic cooperation on China. The coming months will be crucial in this regard, with a G7 summit looming in mid-May, a meeting of the US-EU Trade and Technology Council taking place at the end of May, and an important meeting of European leaders in Brussels a month later, where von der Leyen will try to build support for a new economic security strategy. We will be watching for signs of whether Beijing can succeed in driving a bigger wedge between Europe and the United States, including by offering European businesses carrots, while hitting US firms with sticks. Against this increasingly murky backdrop, policymakers will need objective benchmarks to assess whether China is delivering on its reform and opening promises, or pursuing a tactical, selective approach which continues to raise doubts about its future as a business location.

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The authors wish to acknowledge the members of the China Pathfinder Advisory Council: Steven Denning, Gary Rieschel, and Jack Wadsworth, whose partnership has made this project possible. Niels Graham, Jeremy Mark, and Miles Munkacy were the principal contributors from the Atlantic Council’s GeoEconomics Center.

Grasping Shadows: The Politics of China’s Deleveraging Campaign

China is currently facing a long-term, structural economic slowdown and rising risks of a financial crisis. Key contributors to China’s economic growth over the past two decades are fading away: demographic dividends, rising shares of global exports, a boom in residential property construction, and an unprecedented single-country expansion of credit and debt. Local governments laden with debt are increasingly unable to implement Beijing’s policy initiatives. An economic rebound after lifting Covid-related controls on citizens’ movement and activity is already underway this year, but all of the structural headwinds to China’s growth will persist.

The deleveraging campaign that China’s leadership launched in 2016 to reduce systemic financial risks is the only logical starting point to explain how China’s structural economic slowdown began. By reducing the growth of the “shadow” or informal banking system, China’s financial authorities cut credit growth in half and made it far more difficult for Beijing to power the economy using its traditional tools of credit-fueled investment by state-owned enterprises and local governments. Over the course of the deleveraging campaign, property developers continued expanding their own borrowing, inflating an unprecedented real estate bubble even larger before it finally burst in late 2021, amplifying China’s current economic distress. The deleveraging campaign marked the end point of China’s unprecedented credit expansion after the global financial crisis. 

But the legacy of China’s deleveraging campaign is complex. Had Beijing not taken the forceful steps it did targeting shadow banks starting in 2016, China probably would have faced a financial crisis far earlier, as its system became increasingly difficult to regulate and was already resembling parts of the U.S. financial system ahead of the 2007–2008 global financial crisis. Acting preemptively to control risks in one area of the financial system ended up creating them in another. China had previously used its financial system as a shock absorber for political risks from a slowing economy, rolling over loans and extending credit to unproductive enterprises in order to avoid unemployment and bankruptcies. After the deleveraging campaign cut rates of credit growth almost in half, China’s financial system can no longer play this role, and more credit risks and political consequences are now materializing within the economy, from banks to property developers and local governments. 

This report, by Rhodium Group partner and CSIS Trustee Chair senior associate Logan Wright, aims to objectively and comprehensively analyze the economic and political consequences of China’s deleveraging campaign, which are closely related to China’s current economic slowdown. The deleveraging campaign is an important test case of the adaptability and flexibility of the Chinese state to respond to meaningful economic challenges, such as the growth of the shadow banking system. The campaign reflected a series of monetary and regulatory policy choices, where Beijing was forced to calibrate its response to avoid creating unexpected shocks to the financial system, while still reducing systemic risks. 

In addition, the internal politics of China’s deleveraging campaign shifted over time, particularly as political power became more centralized under Xi Jinping in the late 2010s. The deleveraging campaign was successful in some of its objectives because China’s top leaders were narrowly focused on reducing financial risks, but maintaining a consensus behind this objective became far more difficult as the economy suffered. As tightening monetary policy gave way to new regulations, a consensus-driven approach to policymaking also gave way to a campaign-style system of economic governance, marked by periodic crackdowns against internet platform companies and the for-profit education industry. This year, the Chinese Communist Party took concrete steps to strengthen centralized control of China’s financial system, in what may presage another political campaign.

Beijing faces difficult strategic choices ahead as it confronts the end of the credit and investment-led growth model that has powered China’s economy for the past two decades. Restructuring local government debt and the central-local fiscal relationship are near-term imperatives, along with the need to unlock additional spending power for Chinese households to ensure more sustainable growth. Interest rates will need to fall in order to manage debt levels, creating incentives for capital outflows and corresponding pressures on China’s exchange rate. 

The rising risks within China’s economy and financial system also raise new policy questions for the United States in the context of rising systemic competition. Liberalization of China’s financial markets has been a long-held U.S. objective, but China’s limited convergence with global economic practices and norms has elevated political concerns about deeper linkages between China and global markets. The United States has a clear interest in regulating its own markets transparently, including Chinese firms’ participation in those markets, rather than attempting to influence or alter the calculations of risks and returns for investors in China’s financial markets. Beijing has plenty of challenges of its own attracting foreign investment given the headwinds China’s economy is now facing.

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Projecting Vehicle Sales: A Review of Light-Duty Vehicle Adoption Models

To meet its nationally determined contribution under the Paris Agreement, the US must reduce greenhouse gas (GHG) emissions by 50-52% below 2005 levels by 2030. Achieving this ambitious goal will require a concerted effort across all levels of government and in all sectors of the economy (Larsen, et al., 2021). Furthermore, this interim target only gets the country halfway toward its goal of net-zero greenhouse gas emissions by 2050 (Department of State and Executive Office of the President, 2021).

Though the power sector had historically been the largest GHG emitter, since 2016, the transportation sector has claimed that title (Figure 1). Moreover, while the Inflation Reduction Act (IRA) is projected to decrease economywide GHG emissions to 32-42% below 2005 levels, much of that reduction comes in continued gains in the power sector rather than substantial reductions in other parts of the economy (Larsen, et al., 2022). While we project power sector emissions fall to 69-79% below 2005 levels, transportation emissions only drop to 18-26% below 2005 levels. Further, even with the incentives provided in the IRA, we expect the transportation sector to remain the highest-emitting sector through 2035. Put another way, there are plenty of emissions left to cut in the transportation sector, and additional policy action will be necessary to drive down transportation sector emissions and keep the US on its decarbonization pathway through 2030 and beyond.

The transportation sector is diverse in its energy use and sources of emissions, but the largest share—more than half—comes from the combustion of liquid fuels in light-duty vehicles (LDV) (Figure 2). Though reductions will be required across the board in a net-zero transportation sector, commercial technologies (like electric vehicles and other zero-emitting vehicles, or ZEVs) are most widely available today to reduce emissions from LDVs, making them a promising place to work on driving further emissions reductions.

Figure 1

Progress is already underway on this front. The Energy Information Administration (EIA) reported that electric vehicle sales represented nearly 5% of total LDV sales in the fourth quarter of 2021, up from less than 1% just a few years prior (Dwyer, 2022). But the LDV fleet faces a stock turnover problem: in any given year, only a small percentage of LDVs on the road are new, such that even if 100% of LDV sales are ZEVs starting in 2030, the fleet wouldn’t be fully ZEV until after 2040 (Larsen, King, Kolus, & Wimberger, 2021). Every vehicle sale today matters, given how long it will be on the road.

Figure 2

Given this context, it is critically important to understand consumer adoption of zero-emitting LDVs to inform policy design to further this goal. Of course, the price of owning and operating a vehicle is a critical factor in a consumer’s vehicle purchasing choice. But, depending on the analysis, cost parity between some ZEVs and their conventional internal combustion engine (ICE) counterparts is either fast approaching or has already been achieved (Lutsey & Nicholas, 2019; Harto, 2020; Orvis, 2022). Since ZEV sales shares are still low relative to incumbent ICE vehicles, further explanation is necessary to understand what drives this outcome. Numerous methodological approaches have been developed and deployed in a wide range of consumer adoption models that seek to inform this understanding further.

This study seeks to inform policymakers and the modeling community by reviewing the range of consumer adoption modeling approaches used in projecting future ZEV sales. The study first reviews three main categories of consumer adoption techniques—market diffusion models, consumer choice models, and agent-based models—and explains their basic function and the strengths and weaknesses of each approach. We then dive deeper into specific consumer choice models used in policy-relevant modeling contexts. Finally, we offer some concluding thoughts.

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Sustainable Aviation Fuels: The Key to Decarbonizing Aviation

Aviation is currently the third largest source of greenhouse gas emissions from the transportation sector in the US, and emissions are expected to continue to grow. It’s also one of the most challenging industries to decarbonize, due to the long lifespan of airplanes and the limited number of viable pathways for reducing emissions. The avenue that holds the most promise is sustainable aviation fuels (SAF), which can easily substitute as a drop-in replacement for conventional jet fuel. However the industry and SAF technologies are still nascent, and face significant economic and technological hurdles to scaling up.

Recognizing this challenge, the Biden administration has set a “SAF Grand Challenge,” with a goal of scaling US SAF production to 3 billion gallons per year in 2030 and 35 billion in 2050—a considerable ramping up from the current level of 4.5 million gallons per year. At scale, SAF could not only play a major role in fully decarbonizing aviation, but also offers other benefits including reduced local air pollution and considerable employment opportunities. Unlocking this potential will require significant new investment and long-term policy frameworks to jump-start the infant industry. In this report, we provide an overview of the current state of the industry and SAF technologies, followed by our estimates for the employment and economic benefits from scaling up SAF. We then discuss the challenges to scaling up SAF, as well as potential ways to help accelerate it.

The US is committed to decarbonizing the aviation sector

Just over a year ago, the Biden administration set an ambitious target of reducing economy-wide greenhouse gas (GHG) emissions to net-zero by 2050. The administration developed a long-term climate strategy to help achieve these goals, which includes shifting away from fossil fuels towards clean electricity and clean fuels to power the US economy. The combination of clean electricity and widespread electrification of end-uses is typically viewed as the most efficient and economical way to reduce emissions in sectors such as power, transportation, and buildings. However, this strategy is not always accessible or possible for hard-to-abate sectors like industry and heavy-duty transportation.

Of the hard-to-abate sectors, aviation is viewed as one of the most challenging to decarbonize, due to the long lifespan of airplanes and the limited number of pathways for emissions reductions over the next few decades. The aviation sector is the third largest source of US transportation emissions, accounting for roughly 7% of total sector emissions (Figure 1). Emissions from the sector are anticipated to continue growing, given the projected growth in US passenger air travel and freight.  Recognizing this challenge, the Biden administration has set a decarbonization target for the aviation sector specifically—to achieve net-zero GHG emissions by 2050.

Figure

Aviation industry stakeholders have identified five primary options (Table 1) for reducing aviation emissions by 2050, and broadly agree that replacing conventional jet fuel with sustainable aviation fuels (SAF) is the most promising option for yielding significant CO2 emission reductions over the next 30 years.

Table 1

The decarbonization potential of sustainable aviation fuel

Sustainable aviation fuels (SAF) are low-carbon fuels produced from biological (i.e., plant and animal materials) and non-biological (i.e., municipal solid waste, industrial waste gases) feedstocks, which have similar physical and chemical characteristics as conventional jet fuel but with a lower life-cycle carbon footprint. One of the reasons why SAF is viewed as a leading feasible solution for decarbonizing aviation is because it can easily substitute as a “drop-in” fuel replacement for conventional jet fuel.[1] SAF and conventional jet fuel can be mixed safely, without having to redesign aircraft and aircraft engines to utilize it because the chemical characteristics are very similar. And existing fueling infrastructure can also be used to transport SAF.

SAF has the potential to reduce life-cycle CO2 emissions by up to 99% compared to traditional jet fuel, depending on the technological pathway and feedstocks used to produce the fuel. Other major benefits include local air quality improvements because of lower sulfur content and reductions in soot pollution. Communities responsible for producing and processing SAF feedstocks also stand to reap considerable employment and economic benefits as production scales.

At scale, SAF has the potential to play a major role in fully decarbonizing the aviation sector over the next 30 years. But SAF technologies are currently at various stages of technology readiness, and the scaling of production and deployment faces major technological and economic hurdles. In the rest of this report, we start with an overview of the different SAF technologies currently available or under development. We then provide estimates for the employment and economic benefits from scaling up SAF, followed by some of the challenges the nascent industry faces, as well as potential ways to help accelerate it.

SAF technology pathways

The SAF industry is currently in its infancy. There are several SAF technological pathways that have been developed or are currently under development. However, only seven have been approved by the American Society of Testing and Materials (ASTM) for blending with conventional jet fuel. ASTM is an international standards organization that develops technical standards for various materials, systems, and products. In the case of SAF, it establishes which technologies can be used to produce SAF, as well as the limits for blending SAF fuels with conventional jet fuel. Out of caution, ASTM currently limits most pathways to 50% by volume blending. Doing so helps to ensure that the blended fuel is a true drop-in fuel and will not require additional infrastructure (and costs) to support its use. Industry is currently discussing the need for higher blend limits. Additional testing and evaluations, however, will be needed to ensure that the higher blends remain drop-in compatible.

In this report, we focus on three of the ASTM-approved pathways[2] (Table 2): (1) hydroprocessed esters and fatty acids (HEFA); (2) alcohol-to-jet (AtJ); and (3) synthesis gas Fischer-Tropsch (FT). In the case of FT, we consider two pathways for synthesis gas (syngas) production: feedstock gasification (Gas-FT) and electrolysis of CO2. Production via the second FT route is often referred to as the “power-to-liquid” (PtL) pathway. The first three production routes listed in the table are classified as advanced biofuels. They have a life-cycle emissions-intensity that is at least 50% lower than fossil-based fuels. The PtL fuel is classified as an electrofuel—the term for a drop-in fuel produced from hydrogen obtained from clean electricity together with captured CO or CO2.

Figure

Gas-FT was the first SAF pathway to be approved by ASTM, in 2009. The process involves the conversion of a synthesis gas (syngas) into liquid fuel via a Fisher-Tropsch (FT) reaction. FT is a common commercial process for producing liquid fuels from both coal and natural gas. Syngas is produced from the gasification of cellulosic feedstocks or municipal solid waste. The syngas is then converted to a mixture of hydrocarbons (the main chemical component of jet-fuel) in a FT reactor, before being further refined into SAF and other clean fuels.

The HEFA pathway was formally approved by ASTM in 2011. It involves the refining of vegetable oils, tallow, or waste greases into SAF through the deoyxgenation and hydroprocessing of the feedstocks. It is the most mature of the SAF technologies and the only one currently used today at commercial scale.

AtJ, using isobutanol as a feedstock, was approved in 2016, followed by the approval of ethanol as a feedstock in 2018. This pathway converts alcohol feedstocks (i.e., sugars, starches, hydrolyzed cellulose, industrial waste gases) into SAF and other clean fuels, through several chemical processes.

Electrofuels, also referred to as “power-to-liquids,” are another type of drop-in fuel produced using green hydrogen (H2) and sustainable CO2 via point-source capture or direct air capture (DAC). Like the advanced biofuel pathways, the PtL process can also be used to produce a series of clean fuels. PtL involves the conversion of syngas into SAF via a FT reaction. However, the syngas is produced from either green H2 and captured CO2 via a reverse water-gas-shift reaction or directly via co-electrolysis using solid oxide electrolysis cells and clean electricity.

Announced SAF production volumes

In the last few years, there have been numerous announcements of new SAF projects across the globe. Announced global capacity is on track to total roughly 4.3 billion gallons per year (BGY) by 2026, with HEFA accounting for more than two-thirds (3.1 BGY) of the new capacity (Figure 2). Still this capacity is relatively small compared to the 60 billion gallons consumed globally last year (~4 billion gallons in the US). HEFA production capacity could potentially increase by roughly another 2.5 BGY by 2026 if feedstock supply issues are immediately addressed. Announced capacity additions associated with AtJ, Gas-FT, and other pathways are minor, but are likely to ramp up considerably after 2026 as growing investment and policy support for these technologies help to advance their commercialization.

Figure 2

The economic benefits of scaling up SAF

In addition to being a potentially pivotal tool for decarbonizing aviation, scaling up SAF also offers significant economic and employment opportunities in the US.

We examined the potential employment benefits of SAF production for the four technology pathways described above: HEFA, Gas-FT, AtJ. Each estimate is associated with a typical 50 million gallon/year production facility and includes jobs created from plant investment, operations and maintenance as well as jobs associated with suppliers of equipment, energy, feedstocks and other upstream activities.

According to our analysis, the average total number of jobs associated with the construction and operation of a 50 million gallon per year SAF facility ranges between 1,645 and 7,640 jobs, depending on the technology pathway adopted by the facility. Jobs estimates can vary widely across pathways because of differences in the levels of capital intensity. Generally, the more capital intensive the production pathway is, the more job creation there is. We also note that our analysis focuses solely on total job creation, lacking details on job type and job quality. Forthcoming analysis will delve into these metrics for a better depiction of SAF-related jobs.

A major takeaway from our analysis is that on a plant-by-plant basis, SAF produced via AtJ has the potential to create the greatest number of jobs. However, uncertainties surrounding future deployment levels of each SAF technology make it unclear as to whether we will observe more overall SAF jobs coming from AtJ in the long-run. Our analysis indicated that while HEFA, AtJ, and Gas-FT all have the potential to scale significantly over the next few decades, PtL can scale to the largest quantities, given that it does not face the feedstock limitations that the biogenic alternatives face.

Noting this, we present the job results for a single PtL facility in Figure 3. We find that the construction and operation of a 50 million gallon per year SAF facility utilizing the PtL production process results in an average of 3,710 total jobs being created. Roughly 60% (2,200) of these jobs are directly related to the construction and operation of the physical facility, while all other jobs stem from supporting supply chain activities. Our findings associated with the other three biogenic pathways can be found in the Appendix.

Figure 3

Our analysis shows that the breakdown of job types also varies across the different pathways. In the example above, most of these jobs (3,530 jobs) are related to plant investment, which includes the construction, engineering, materials, and any equipment needed to build the facility. Construction and engineering jobs are those that have to do with the designing and planning of the facility’s construction. For example, this includes architectural services required to design the facility. Materials and equipment jobs capture those linked to the physical construction of the building and its systems. Also included in plant investment are the upstream supply chain activities that support facility construction, materials, and equipment. An average of 180 jobs are associated with ongoing plant operation and maintenance (O&M) activities, with onsite O&M being responsible for the bulk of these jobs. More specifically, it is the operation and maintenance of the electrolyzer system and other major plant components such as the FT reactor.

If the industry scales up enough to produce the majority of aviation fuel, hundreds of thousands of new industry jobs could be created. We have forthcoming analysis that will investigate jobs at scale in detail for the SAF industry.

More investment is needed to jump-start SAF

While SAF offers the potential of long-term decarbonization and significant employment benefits, ramping up production to meet these goals will require addressing major economic and technological hurdles first. In the US, current production levels of SAF are approximately 4.5 million gallons per year. A major hurdle to SAF deployment is the considerable cost differential that exists between it and conventional jet fuel. On average, SAF is 3 to 5 times more expensive than conventional jet fuel before considering subsidies and policy incentives (Figure 4). This is due in large part to the nascent production pathways for SAF, which are more expensive than fossil fuels. HEFA fuels are closer to being at price parity with conventional jet fuel than the other pathways primarily because of how long the technology has been around.

Figure 4

In addition to cost, the technological unreadiness of some SAF technologies also serves as a major hurdle on the supply side. To date, the AtJ, Gas-FT, and PtL technologies exist only at lab-scale or pilot-scale demonstration. Shifting to full commercialization will require continued investments in research, development, and demonstration.

Another major supply-side hurdle to scaling up SAF is investment levels, which have been insufficient to date. Poor investment levels are largely driven by high production costs with the converse also being true, creating a negative feedback loop. Both must be addressed in tandem to see improvements in overall SAF economics. Moving SAF forward to full-on commercialization will require additional investment in new and reconstructed SAF facilities, supply chain development, and other supporting infrastructure. Addressing this investment hurdle requires de-risking of “first-of-a-kind” SAF projects and increasing certainty around future SAF demand.

Limited availability of biogenic feedstocks also presents a hurdle for scaling up the advanced biofuels pathways. A large share of eligible biogenic feedstocks are already being used in other industries and transport applications (e.g., personal transport). Also, feedstocks are widely distributed across the world and difficult to collect. Potential solutions for increasing feedstock availability include increasing biomass production on degraded lands, continuing to make advancements in feedstock collection capabilities, and instituting new incentive structures which shift some biomass supply away from competing industries towards SAF.

On the demand side, one hurdle is uncertainty around sufficient future demand. Numerous airlines have established commitments that could potentially boost SAF demand. For example, Delta Airlines has committed to replacing 10% of their jet fuel with SAF by 2030. Similarly, the United Postal Service (UPS) plans to power 30% of their aircrafts using SAF by 2035. However, even with these types of ambitious SAF consumption targets and offtake agreements, demand continues to be rather scarce, which is stymying deployment.

New coalitions of non-governmental organizations and leading corporations such as the Sustainable Aviation Buyers Alliance (SABA) are working to drive new investment in low-carbon SAF and overcome barriers to procurement and scale-up—much-needed efforts to help jump-start the industry. Increased investment in SAF will be necessary to help make it price competitive with jet fuel and accelerate deployment. However, this on its own is not enough to get the aviation sector on track for decarbonization by 2050. In addition to increased investment, long-term policy frameworks will be needed to address many of the demand- and supply-side hurdles we have identified here.

Policy support for scaling up SAF

Recently, policy developments in the US, EU, and elsewhere internationally have been put in place to support SAF production and create demand for SAF. The most far-reaching of these is the multilateral Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). CORSIA is a three-phase program administered by the International Civil Aviation Organization (ICAO) that aims to stabilize international aviation emissions at 2020 levels by 2035. Several SAF pathways are approved for use in compliance with CORSIA, and airlines can use SAF, approved offsets, and other strategies to meet the target. Compliance with CORSIA is currently voluntary but will be mandatory for all participating countries beginning in 2027, potentially creating new demand for SAF globally.

In the US, the federal government has established a “SAF Grand Challenge” to reduce the cost, enhance the sustainability, and expand the production and use of SAF. The overarching goal of the effort is to scale SAF production to 3 billion gallons per year in 2030 and 35 billion in 2050. This multi-agency initiative includes coordination on research and development investments, demonstrations, and SAF supply chain support. In addition, the federal Renewable Fuels Standard (RFS) and California’s Low Carbon Fuel Standard (LCFS) include provisions allowing jet fuel producers to opt-in to these life-cycle GHG reduction programs with compliance credits acting as a supplemental revenue stream to support production. The US Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) both provide support for SAF supply and demand creation. The IRA provides a SAF production tax credit of up to $1.75/gallon for very low life-cycle GHG fuels through 2027. The IRA also includes tax credits for carbon capture, DAC, clean hydrogen, and clean electricity production, all of which indirectly support SAF deployment by decreasing the cost of SAF feedstocks. All these policies have the potential to substantially cut the delivered cost of SAF, and we plan to assess the net cost implications of all these programs in future analysis.

A recent Rhodium Group analysis of the IRA considered how much the new SAF production tax credits improved the cost-competitiveness of low and high cost SAF production pathways eligible for the maximum credit value. We estimated that SAF produced via the low-cost pathway could reach price parity with conventional jet fuel in 2027, the last year the credit is available (Figure 5). Although the IRA can potentially improve the economics of some production pathways, our analysis suggests that additional incentives and/or tax credits will be needed for more of the costlier pathways to be cost-competitive. We have a more in-depth analysis of the impact of tax extenders that is forthcoming.

Figure 5

Getting SAF to scale

SAF has the potential to play a major role in fully decarbonizing aviation. If the industry scales up enough to produce the majority of aviation fuel, hundreds of thousands of new industry jobs will be created. However, varying levels of technology readiness across the different technological pathways and general uncertainty about the future availability and pricing of sustainable feedstocks makes it unclear as to which pathway will emerge as dominant. HEFA is currently the more mature of the pathways. It is also the least expensive to produce and is currently commercially viable. However, because of high feedstock costs and feedstock limitations, it will serve as only a near-term decarbonization solution. Other biogenic pathways like AtJ and Gas-FT will likely serve as medium-term solutions as they eventually reach technical and commercial maturity and increasingly become more cost-competitive. Their deployment and possible viability in the long run will largely depend on future feedstock supply.

The current costs of PtL likely prevent it from being a near- or medium-term supply source for SAF. Sizeable declines in electrolyzer costs and the costs of CO2 capture, as well as a growing abundance of clean electricity sources—all of which are associated with PtL production (Figure 6)—will be necessary if it is ever to reach some degree of price parity in the future.

Figure 6

Despite the technology development and cost hurdles PtL faces, it is the only SAF technology that has the potential for unbounded production as it does not face the feedstock limitations that the biogenic pathways do. Future Rhodium work will explore ways to bring down these costs and technology deployment hurdles. More specifically, we will investigate how policies like the IRA improve PtL economics.

Our observations of growing investment in domestic first-of-a-kind SAF facilities along with mounting policy support (i.e., IRA, expansion of RFS and LCFS) suggest that industry stakeholders and policymakers alike understand the vital role SAF could play in decarbonizing US aviation. However, these efforts alone are not enough. More must be done to overcome the existing supply-side and demand-side hurdles, which greatly inhibit the scaling of SAF. The US government could push for more public-private partnerships for SAF production. And long-term policy frameworks are critical for getting SAF to scale. Possible avenues include continued government support (at both the federal and state levels) in the form of additional policy incentives, consumption mandates for airlines, further backing for SAF R&D and demonstration plants, and implementing policies that de-risk SAF plant investments.

[1] It is worth noting that SAFs are a subset of clean fuels which are drop-in fuels used anywhere in the economy that generate fewer life-cycle GHG emissions than their conventional counterparts. Many of the SAF processes are like those that produce clean fuels used elsewhere in the economy.  If the US does succeed at widespread economy-wide decarbonization, it is likely that clean fuel facilities will produce multiple types of fuels including SAF. We focus on SAF specifically in this note because clean fuels are most needed in the aviation sector.

[2] The other four pathways include: (1) Fischer-Tropsch synthesized kerosene with aromatics (FT-SPK); (2) Synthesized iso-parafinns (SIP); (3) Catalytic hydrothermolysis jet (CHJ) fuel; and (4) Hydroprocessed hydrocarbons – synthesized isoparaffinic kerosene (HC-HEFA).