Competition First? Anchoring U.S. Climate & Energy Strategy Amidst Geostrategic Competition With China

Slide 1. Gabriel Collins, J.D.
Baker Botts Fellow for Energy & Environmental Regulatory Affairs
Baker Institute for Public Policy, Rice University
Please cite as: Gabriel Collins, “Competition First? Anchoring U.S. Climate & Energy
Strategy Amidst Geostrategic Competition With China,” Houston, TX, November 2021
Competition First? Anchoring U.S. Climate & Energy
Strategy Amidst Geostrategic Competition With China
*Note: These are working research findings and are subject to change. In the event of material developments, the author will post an updated version.*

Slide 2. Disclaimer & Disclosure
This analysis reflects my personal opinions and assessments only. It is designed solely to be illustrative and stimulate strategic thought on potential policy ideas, with the objective of elevating the conversation in the energy and climate space. It does not advocate for specific outcomes and IS NOT an investment analysis or investment advice. It is also NOT offering any legal opinions or advice and does not create an attorney-client relationship with any reader or consumer of the information presented herein. Readers rely on the information in this analysis at their own risk. Neither the author nor the Baker Institute for Public Policy are liable for any loss or damage caused by a reader’s reliance on information contained in any of the charts, data series, opinions, or other information presented herein. I am not a hydrologist, geologist, or engineer and am not offering advice on technical aspects of any assets which may be discussed in this analysis, including, but not limited to geological factors and engineering challenges that may arise in an oilfield water development project. The information and opinions contained in, and expressed by this analysis, are based on sources deemed reliable.
However, there is no warranty, assurance, or guarantee, express or implied, about the completeness, reliability, or accuracy of this content. The views expressed herein are my interpretations as of the date the report is published and are subject to change without notice.

Slide 3. China Drives Global Emissions Growth
China and the U.S. now the biggest emitters, combined accounting for almost 45% of global CO2 emissions in 2020
Global CO2 Emissions Breakout, Million Tonnes/Year Trading Places: U.S. and China Share of Global CO2 Emissions
Source: BP Statistical Review of World Energy, Author’s Analysis

Slide 4. Climate and Energy Actions Exist in a Broad Global Context
Sitting and waiting on the evolution of an increasingly tense relationship not an option, lest we flirt with potential points of no return.
Multi-decade, multidimensional competition is already well underway

Slide 5. PRC Senior Leaders Are Securitizing Climate Issues
 “…I’d like to stress that China-U.S. cooperation in specific areas, unlike flowers that can bloom in a greenhouse despite winter chill, is closely linked with bilateral relations as a whole. China has emphasized time and again that no one should imagine they could ask China to understand and support them in bilateral and global affairs when they blatantly interfere in China’s domestic affairs and undermine China’s interests.”—PRC Foreign Ministry Spokesman
Zhao Lijian, 28 January 2021
 “The United States should not repeatedly challenge China’s rights and interests on issues related to Taiwan, Xinjiang and Hong Kong, and at the same time expect China to cooperate with it on issues of its own concern.”—PRC Foreign Minister Wang Yi, 23 April 2021
 “China-U.S. cooperation on climate change cannot be divorced from the overall situation of China-U.S. relations. The United
States should work with China to meet each other halfway and take positive actions to bring China-U.S. relations back on track.”—PRC Foreign Minister Wang Yi, 1 September 2021
“Climate diplomacy is inextricably linked with broader PRC diplomacy and protection of revisionist gains”
“We’re concretely naming some of our ‘core interests.’
We have some others too, like the South and East China
Seas.”
“Climate discussions might begin IF Washington makes a big down payment by accepting our revisionist actions.”
Blunt Form Translations

Slide 6. U.S. Responding to PRC Revanchism, Cooperation Will Be Increasingly Difficult
Defense Spending From 1990-2020, Billion Current USD
Source: SIPRI, Congress.gov, Author’s Analysis
China-Related Legislative Activity, 1973-Present

Slide 7. Climate Competition and Energy
Evolution Starts at Home, Carbon
Taxation Potentially Plays
Foundational Role

Slide 8. What Does “Carbon Tax” Potentially Mean Here?
Carbon Tax
 Tax fuels based on carbon content or CO2 emissions upon combustion (0.27 tonnes of carbon per tonne of CO2, so every $1 of CO2 taxation equivalent to $3.70 of actual carbon content taxation).
 Practical Impacts: Every $10/tonne increase in CO2 fee would:
 raise gasoline prices by about 8.5₵/gallon;
 increase avg. residential power bills by about 11₵/day, and  increase price of hamburger with a quarter-pound patty by about 4₵
 Practical Impacts: Social Security and SNAP payments already pegged to CPI, and food prices, respectively, which builds in protection from carbon fee-driven cost increases
 Practical Impacts: Could also set aside a certain portion of fee income to spin back to lower quartile households as a “carbon dividend.” (partial implementation of Baker-Schultz 2017 proposal)
Production
Processing
Consumption
Multiple Potential Taxation Points
Regulators and taxation authorities already have natural inroads to these segments…
Far more contact points and admin complexity if taxes levied at consumer stage.

Slide 9. “Carbon Fee” And Border Adjustments
Carbon Border Adjustment Mechanism
 Goods importers pay fee based on difference between carbon taxation level in their place of production and United
States
 In short, if U.S. assesses a $60/tonne fee on domestic CO2 emissions and China charges $10/tonne, goods imported from China would pay for “embedded” CO2 content at the rate of $50/tonne [U.S. rate – China rate]
 Would include energy embedded in basic materials, including basic materials incorporated into manufactured products and then exported (for instance, an aluminum engine block or EV battery cathodes)
 Emissions can be based on national energy profiles (default) or possibly provincial/state-level, if supported by independently verifiable audit
 EU is already moving to implement a CBAM. Reporting and tracking will begin in 2023, with actual financial payments commencing in
2026. Revenues will be paid into the EU budget.
 Goods initially covered: iron and steel, cement, fertilizer, aluminum and electricity generation.
 Note the precedent set by recent Global Minimum Corporate Tax deal
Source: Colgate
Domestic Carbon Tax + CBAM = “complimentary goods.”
Key Policy Issues To Consider:
–Offsets/credits, for instance based on nature-based or mechanical CO2 capture and sequestration
–What is ultimate carbon price needed to move from being viewed as “cost of doing business” to a true lever for change?
–Will PRC weaponize key supply chains such as rare earths or antibiotics to get U.S. to back down on CBAM applied to PRC-origin goods?

Slide 10. Carbon Taxes Could Cement US
Structural Energy Advantages and Create New Strategic Leverage

Slide 11. Talk vs. Action: Tale of Two Energy Transitions
Electricity Production, 1985-2020 (TWh, by Fuel)
People’s Republic of China United States
2007: Coal accounts for 81% of electricity generated
2020: Coal accounts for 20% of electricity generated
2020: Coal accounts for 65% of electricity generated
2007: Coal accounts for 49% of electricity generated
Source: BP Statistical Review of World Energy 2021, Author’s Analysis

Slide 12. U.S. Electricity Supply About 1/3 Less Carbon-Intensive Than China’s
Thousand Tonnes of Carbon Dioxide Per Terawatt-Hour Generated
Source: EIA, IPCC, BP Statistical Review of World Energy 2021, Author’s Analysis
Note that these estimates DO NOT account for industrial process heat, which in China still primarily comes from coal
Nuclear: 9 KT CO2 /TWh
Hydro: 24 KT CO2 /TWh*
Natural Gas: 413 KT CO2 /TWh*
Coal: 1,000 KT CO2 /TWh
Wind: 11 KT CO2 /TWh
Solar: 44 KT CO2 /TWh
*Higher total GHG profile due to methane emissions

Slide 13. U.S. Carbon Advantage Endures on Broader Energy Front
China, Primary Energy Consumption, 1965-2020 (EJ, by Fuel)
Source: BP Statistical Review of World Energy 2021, Author’s Analysis
U.S., Primary Energy Consumption, 1865-2020 (EJ, by Fuel)
How Long Did It Take A Given Source to Reach 10% of PRC Energy Consumption?

Slide 14. China’s Coal-Centricity + Export Orientation Creates Substantial
Relative Exposure to Carbon Border Adjustment Taxes
Source: BP Statistical Review of World Energy 2021, environmentalfootprints.org, Exiobase, Author’s Analysis
Net Greenhouse Gas Emissions, Million Tonnes CO2 Emissions Per Million BTU of Primary Energy Used

Slide 15. China Has Moved Up the Export Value Chain…
Blue sector is the least energy-intensive relative to goods’ value. Brownish shades, green, etc. trend much higher

Slide 16. Carbon Border Adjustment: Quantifying Potential Impacts
Commodity Total
CBAM/Tonne
Approximate Mkt Price (11
October 2021)
CBAM % of Total
Underlying Mkt Value
Flat glass $74.18 $481 15.4%
Primary aluminum $263.04 $2,900 9.1%
Virgin steel $78.45 $900 8.7%
Recycled steel $47.64 $900 5.3%
Copper $154.91 $9,200 1.7%
Basic Materials and EV battery pack embedded energy calculations shown in Appendix slides
Electricity Carbon
Intensity (g/kWh)
Process Heat
Carbon Intensity (g/kWh)
Embedded
Carbon per
100 kWh battery, tonnes
CBAM, $/tonne
Carbon
Differential for CBAM
Assessment
China 660 320 8.4 $60 267.4
U.S. (TN) 265 180 3.9
CBAM Assessment on PRC Origin 100 kWh Battery Pack $267
Basic Materials
Manufactured Good: EV Battery Pack
Source: https://www.greencarcongress.com/2020/10/2
0201022-hummerev.html

Slide 17. How Fast Could China Potentially Adapt
Its Energy System?

Slide 18. Major Uncertainty For China’s Electricity Evolution…But Coal Hard to Dislodge
China Electricity Production, By Source, 2008-2030 (TWh) Projected Coal Power Plant Additions, By Country (MW)
GW installed Utilization Rate Annual Coal Use, Billion Tonnes
Source: China Electricity Council, Gov’t Targets, Authors’ Analysis
Source: Global Energy Monitor, Authors’ Analysis
Finally, beware of potential disparity between plant capacity and actual coal use

Slide 19. Substantial Uncertainty For Alternative, Non-Electric Industrial Energy As Well
Source: National Bureau of Statistics, China General Customs Administration, Author’s Analysis
China Natural Gas Supply, Million Tonnes/Yr
Gas would be a logical noncoal industrial process heat source…
…But import dependency is likely to rise, and would rise faster with a more decisive shift away from coal
…And changing industrial heat sources is a multi-decade process that in USA was facilitated by gas abundance post-WWII

Slide 20. Potential
Domestic
Pitfalls
Author’s driveway during Great Texas Blackout, February 2021, Houston, TX

Slide 21. Energy Abundance Underpins U.S. Quality of Life
U.S. Historical Energy Use, MMBTU Per Capita 155 Years of U.S. Primary Energy Use Shifts, Exajoules
Source: EIA, Author’s Analysis
Gas displaces coal as industrial heat source Gas displaces coal as electricity source

Slide 22. Avoiding Energy Monoculture: Source Diversity Promotes Reliability
February 2011, ERCOT Generation, 15-min Intervals, MWh February 2021, Same
Smaller system, more baseload, fewer failures
Bigger system, much more intermittent, all sources fail/fall short
Source: ERCOT, Author’s Analysis

Slide 23. Energy Insecurity Can Undermine Climate Goals
Change in Global Energy Consumption By Source (Quadrillion BTU)
A quadrillion BTU is equivalent to the gasoline usage of 11 million large V8-powered pickups or SUVs each driving 12,000 miles per year.
Wyoming Coal production (Million Tonnes)
Source: BP Statistical Review of World Energy 2021, Author’s Analysis Source: Wyoming State Geological Survey
Explosive Growth in WY
Coal Production As Consumers Sought
Secure Energy Supplies
Following 1973 Arab Oil
Embargo

Slide 24. Concluding Thoughts

Slide 25. Where Could I Be Wrong on China?
1. China Unleashes Another Round of Cement and Steel Growth
2. China Overcomes/Avoids
Demographic Crisis
3. China Defies Debt Burdens and Unleashes Consumer-Led Growth
Gross Fixed Capital Formation as % of GDP
U.S. Population 1865-2020, Millions
China Population, Actual & Projected to 2100
• China’s consumers have increasingly turned to debt
• Does U.S. begin to pull back from QE amidst inflation?
• “China Dream” vs. “躺 躺 躺 躺
Image Source The Lancet (2020)

Slide 26. Thank you! gabe.collins@rice.edu

Slide 27. Supplemental Slides

Slide 28. Last 10 Years Mark a Key Inflection Point: China Now Global
CO2 Leader on Flow AND Stock Basis

Slide 29. Appendix 1: Basic Materials Embedded Energy
Embodied Energy kbtu/lb MJ/kg kbtu/tonne kWh/tonne Elec % of input energy Electricity Used Per Tonne, kWh
China Carbon
Intensity of Electricity, g/kWh
US Carbon
Intensity of Electricity
China Excess
Carbon Emissions, g/tonne material produced
China Excess
Carbon
Emissions, tonne/tonne material produced
Carbon
Tax, $/tonne
CBAM
Payable Per
Tonne of Material
Imported
Flat glass 11 23,362 6,847 28% 1,942 660 377 549,542 0.55 $60 $32.97
Virgin steel 10 22,944 6,724 38% 2,560 660 377 724,474 0.72 $60 $43.47
Primary aluminum 29 64,335 18,855 65% 12,198 660 377 3,451,916 3.45 $60 $207.11
Copper 19 41,347 12,118 51% 6,191 660 377 1,752,095 1.75 $60 $105.13
Recycled steel 10.1 2,806 100% 2,806 660 377 793,972 0.79 $60 $47.64
Other Primary Energy/Tonne, kWh
Coal Process
Heat, g/CO2 per kWh
Gas Process
Heat, g/CO2 per kWh
China Excess
Carbon Emissions, g/tonne material produced
China Excess
Carbon
Emissions, tonne/tonne material produced
Carbon
Tax, $/tonne
CBAM
Payable Per
Tonne of Material
Imported
Flat glass 4,905 320 180 686,740 0.69 $60 $41.20
Virgin steel 4,164 320 180 583,019 0.58 $60 $34.98
Primary aluminum 6,658 320 180 932,100 0.93 $60 $55.93
Copper 5,927 320 180 829,776 0.83 $60 $49.79
Recycled steel 0 320 180 0 0.00 $60 $0.00
Sources: Dixit et.al, “Environ. Sci. Technol. 2015, 49, 3, 1936–1945, January 5, 2015 https://doi.org/10.1021/es503896v ; Embodied Energy Coefficients – Alphabetical, https://www.wgtn.ac.nz/architecture/centres/cbpr/resources/pdfs/ee-coefficients.pdf

Slide 30. Appendix 2: EV Battery Embedded Energy
MJ kWh
Electricity Fuel Electricity Fuel
Aluminum 101.0 50.8 28.1 14.1
Cell production 29.9 140.0 8.3 38.9
Copper 7.3 13.7 2.0 3.8
Electrolyte solvents 0.8 11.5 0.2 3.2
Electronic parts 36.1 25.1 10.0 7.0
Graphite/carbon 17.9 6.6 5.0 1.8
LiPF6 9.6 0.0 2.7 0.0
NMC111 Precursors 17.4 57.7 4.8 16.0
NMC111 Production 44.5 75.2 12.4 20.9
Others 2.8 7.9 0.8 2.2
Plastics 0.6 1.5 0.2 0.4
Total 267.9 390.0 74.4 108.3
Total
NMC111 battery pack embedded energy per kWh of battery capacity (kWh)
Electricity Carbon
Intensity (g/kWh)
Process Heat
Carbon Intensity (g/kWh)
Embedded
Carbon per
100 kWh battery, tonnes
CBAM, $/tonne
Carbon
Differential for CBAM
Assessment
China 660 320 8.4 $60 267.4
U.S. (TN) 265 180 3.9
CBAM Assessment on PRC Origin 100 kWh Battery Pack $267
Sources: Dai, Q.; Kelly, J.C.; Gaines, L.;
Wang, M. Life Cycle Analysis of LithiumIon Batteries for Automotive
Applications. Batteries 2019, 5, 48;
EIA/BP Statistical Review of World
Energy/Author’s Estimates (carbon intensity of electricity), EIA, https://www.eia.gov/environment/emiss ions/co2_vol_mass.php (carbon intensity of process heat)