Decoupling Won’t Kill a Green Future

U.S. Climate Policy, Protective Trade Agenda Need Joint Revamp
This photo taken on March 12, 2021 shows workers at a factory for Xinwangda Electric Vehicle Battery Co. Ltd, which makes lithium batteries for electric cars and other uses, in Nanjing in China's eastern Jiangsu province. (Getty)
An industrial port zone is seen by the Delaware river near Philadelphia, Pennsylvania on March 16, 2021. (Getty)

The COVID-19 pandemic has thrown the debate over U.S. economic “decoupling” from China into stark relief. Former President Donald Trump made the curtailment of economic ties with China a cornerstone of his trade policy, citing concerns about China’s handling of intellectual property rights, currency manipulation, and other unfair trade practices. Then came the pandemic, which found U.S. manufacturers at the mercy of distant and overstretched supply chains. Now, President Joe Biden has made clear he will maintain aspects of his predecessor’s tough China policy, suggesting that some form of economic partition between the world’s two largest economies is likely inevitable.

But decoupling will come at a cost. Among the biggest losers, some experts argue, will be the global effort to combat climate change. The technologies behind such green innovations as solar panels, nuclear power, and electric vehicles draw from expertise and production that is distributed across the globe. China, for instance, is the world’s biggest manufacturer of electric vehicles. Europe is a pioneer in industrial energy efficiency and a leader in renewable infrastructure. Decoupling could interrupt the global spread of these innovations, potentially crippling any attempt to address climate change.

But decoupling doesn’t have to be a blunt instrument, and its effect on climate change needn’t be all bad. Washington could use the impetus behind decoupling to create green industries and domestic jobs. The United States would then produce at home some components of its clean energy industry that it had once imported from China, while leaving other parts of the supply chain intact. Such selective decoupling would give domestic industry a boost, help American workers, address supply chain vulnerabilities, and assist efforts to combat climate change. The initial costs may be high, but the security and environmental benefits may largely end up outweighing them.

SELECTIVE ONSHORING

The United States develops and produces clean energy within a highly integrated global market. Many advanced technologies—so-called smart electric grid management systems, batteries and fuel cells for energy storage, renewable electricity generation, and nuclear power facilities—consist in large part of components that are cheaper to import than to purchase domestically. The complex supply chains that go into producing these technologies are vulnerable to disruption, but they keep costs down.

There is little reason to think that the low-carbon technologies of the future will not also benefit from global supply chains and the collaboration among governments that supports them. Carbon capture and storage, for example—a process that involves removing and sequestering carbon dioxide before it reaches the atmosphere—could become far more affordable if nations coordinated and pooled funds. Other innovations, such as those that might reduce the carbon footprint of steelmaking and other industrial processes, are expensive, and the sectors that need them have only slim profit margins from which to pay for them. Overcoming these obstacles requires collaboration and the free flow of knowledge and capital, both within sectors and across national boundaries.

Should the United States and China succeed in decoupling their economies, green technologies might be set back. Today, the United States imports solar panels and electric-vehicle batteries relatively inexpensively from China; after decoupling, such goods could become more expensive, leading buyers to turn to cheaper, dirtier sources of energy and in turn slowing growth and innovation. Building support for the transition away from fossil fuels was already difficult. American workers fear the loss of well-paying jobs in the energy industry, and many will reject a transition that cuts them out of a new low-carbon economy, regardless of how much good it does for the planet.

An approach to decoupling that creates a thriving domestic clean energy industry could help overcome that resistance by generating jobs and industrial leadership. To get there, the U.S. government will need to focus on onshoring the elements of the energy supply chain that are essential to production but that current domestic resources cannot quickly replace. Biden has already begun this process with an executive order on supply chain security that focuses on electric-vehicle batteries, among other items. His administration will need to evaluate a wide range of clean energy supply chains and identify the risks of relying on foreign suppliers. In general, the risks will be higher when a technology can be easily compromised, co-opted, or infiltrated by external actors once installed or if it relies on opaque supply chains with questionable environmental and labor practices.

When the assessment is complete, the Biden administration should invest in developing domestically the products it has deemed both critical and high risk and leaving the rest of their supply chains in place. The United States could also subsidize research into substitute technologies—electric-vehicle batteries that don’t rely on cobalt, lithium, or rare earth metals, for instance—that might be necessary in the event of a prolonged supply chain disruption. When possible, the administration should direct the funds for these efforts to the parts of the country that will bear the costs of an ambitious climate policy—states where fossil fuel production remains important, such as Oklahoma, West Virginia, and Wyoming, for example.

In the short term, U.S. manufacturers of green energy products may end up paying more for some of their parts. After all, the reason they looked abroad for components in the first place was in order to source from nations with lower production costs. But to focus narrowly on the downsides of decoupling is to overlook the hidden, hard-to-price risks that current sourcing patterns entail—such as vulnerability to disruption during a pandemic.

A STARTING POINT

A nuanced approach to decoupling can allow Biden to kick-start domestic clean energy industries. To seize that opportunity, however, the president needs a strong climate policy that encourages innovation and investment. He could start by setting binding targets for carbon reduction and charging fees for emissions. Washington could then direct the revenue from those fees toward domestic clean energy development. The administration should also direct public funds toward low-carbon infrastructure, such as electric-vehicle charging stations and new grids. Washington should invest not only in researching and developing green technologies but also in retraining workers, again aiming to benefit the communities that stand to lose the most from a transition away from fossil fuels.

The Biden administration will need to strike a delicate balance—simultaneously striving to bring some essential production back to domestic shores, investing in domestic clean technology leadership, and pushing to allow trade and international collaboration to proceed in other areas. Biden should encourage the United States to collaborate with other countries on developing important new technologies to help arrest climate change, such as carbon capture and storage and green steel.

Successfully addressing climate change will require the goodwill and hard work of both government and private industry. For the United States, this means adopting a climate policy that can work in tandem with a more protective trade agenda, if neither is to provoke a political backlash. A smart approach to decoupling that focuses on the ends rather than the means will foster a strong domestic clean energy industry that creates jobs and, as a result, becomes politically self-sustaining.

This article was originally published on ForeignAffairs.com.