Focus on Arts and Ecology

Two provinces accounted for more than national net decline, while grid bottlenecks and curtailment threatened to waste clean power gains, write Lauri Myllyvirta and Qi Qin. 

By Lauri Myllyvirta, Qin Qi, May 21, 2026

Last year, China’s coal-fired power generation and power sector CO2 emissions fell for the first time in a decade. Record growth in wind and solar output had met most of the country’s rising electricity demand, whose growth eased after several years of unusually rapid expansion. 

But the national turning point masked an uneven provincial picture: while 18 provinces reduced CO2 from the power sector, 13 recorded an increase.

Clean power growth was led by both large-scale clean energy bases in the north and west of the country, and major electricity demand centres in the east. All but three provinces increased the share of clean power in their energy mix. Yet much of the national decline in fossil generation was concentrated in Inner Mongolia and Shandong; together they reduced such generation by around 42 terawatt-hours (TWh), more than the national net decline. 

China has been building wind and solar far faster than any other country. The next challenge is how much of that power the grid system can actually absorb. Had severe curtailment – that is, wastage – and other utilisation losses been avoided in 2025, wind and solar generation would have been around 13% higher, displacing a further 5% of coal-fired power generation.

At the same time, China’s clean power expansion has protected its energy supply in the face of the Strait of Hormuz crisis. Much of China’s seaborne imports of coal and gas, which could have been impeded by the crisis, end up in its the demand hotspots of its populous eastern coast. This is where more than a third of its clean power growth took place in 2025, lessening the impact of international fuel price hikes.

Two engines of China’s clean power boom

China’s cleanest provincial power systems are still largely shaped by geography, especially access to abundant hydropower resources. But the provinces driving the biggest increases in clean generation in 2025 were not necessarily those with the cleanest power mixes.

Regarding the power mix, Tibet and Qinghai had the highest shares of non-fossil generation, although Tibet’s power system is very small. In Yunnan and Sichuan, clean electricity still relies heavily on hydropower, with wind and solar so far playing a smaller role in reshaping the generation mix. Qinghai is different: its already-clean power system has been pushed further by rapid solar expansion.

Regarding clean generation increases, two very different types of provinces saw the largest gains. These were resource-rich power-exporting bases that added large volumes of new wind and solar in northern and western China, and major electricity-consuming provinces in the east which expanded clean power supply to keep up with rising demand.

Inner Mongolia stood out most clearly: Its clean power generation rose by around 51 TWh, far outpacing the increase in total generation and pushing fossil generation down by about 26 TWh. Hebei showed a similar pattern, supported by broad capacity additions in its Jibei clean energy base. Xinjiang also recorded a large rise in clean generation, but fossil generation still rose, partly because of continued, rapid coal power expansion.

Coastal demand hotspots also recorded large clean power gains, but these were not enough to cut fossil generation. Guangdong, Jiangsu and Zhejiang all ranked among the top provinces for clean generation growth, yet fossil output still rose in all three. Jiangsu came closest to covering new generation demand with non-fossil power; while Guangdong covered around three-quarters and Zhejiang about half. All three were also among the top five provinces for new coal power additions in 2025.

Where the power mix shifted fastest

Some of the sharpest shifts came from places not usually at the centre of China’s clean-power story. Guizhou, Tianjin, Hainan and Guangxi recorded the largest increases in share of clean power generation. In Tianjin, Hainan and Guangxi, the gains reflected strong growth in wind and solar, with Guangxi also benefiting from a broader mix of clean sources. Guizhou’s increase was the largest, but much of this was due to stronger rainfall and water availability boosting hydropower generation, rather than only new clean capacity.

Several fossil-heavy provinces also achieved notable improvements. Hebei and Inner Mongolia benefited from their position as hosts of major clean energy bases. More striking shifts came from Shanxi, Anhui and Henan. In these provinces, which remain deeply tied to coal, either as major producers or as industrial provinces close to eastern demand centres, clean power is beginning to erode coal’s dominance.

Gansu saw the largest decline in clean power share (a fall of around 1.3 percentage points), pointing to growing integration constraints. In other words, as curtailment pressures increased, Gansu turned to new coal power to provide system support. Coal generation and wind-and-solar generation increased by similar amounts as a result, limiting the improvement in the overall power mix. Tibet and Qinghai also recorded weaker clean-share performance. But once hydro is stripped out, the picture looks much stronger; the weaker hydropower output masked a significant rise in wind and solar.

Did clean power cut fossil generation?

The clearest test of provincial progress was whether clean power growth actually displaced fossil generation and cut emissions.

As mentioned, Inner Mongolia and Shandong stood out. Together they cut fossil generation by around 42 TWh, more than the national net decline. Inner Mongolia stood out most clearly, with a fall of 26 TWh. While Shandong cut around 17 TWh despite being one of China’s largest industrial provinces; Shandong did bring 3.8 gigawatts (GW) of new coal power online in 2025 but it also retired 3.3 GW.

Shanxi, Hubei, Guizhou, Guangxi, Henan, Anhui, Tianjin and Hebei all reduced coal and gas-fired generation. Some of these provinces have not usually been seen as leaders in power sector decarbonisation.

Zhejiang, Gansu and Guangdong recorded the largest increases in fossil generation. Xinjiang also saw actual fossil generation rise, showing how curtailment and utilisation losses prevent wind and solar from fully displacing fossil output.

The bottleneck: turning wind and solar into usable electricity

Reported curtailment rose sharply in 2024-25, and the fall in wind and solar utilisation was even larger than the official curtailment figures would suggest. Official utilisation rate data only counts system-related curtailment, excluding some lost generation linked to market trading, grid-connection conditions and other “special” causes.

The underlying issue is that coal power plants, transmission networks and market mechanisms have not adapted quickly enough to the flexible operation needed to absorb China’s vast wind and solar capacity, including the huge additions made in 2025. The policy framework also became more permissive in 2024, with the relaxation of an important benchmark. The amount of potential electricity supply from wind and solar required to be utilised by the grid was dialled down from 95% to 90%.

Had these utilisation losses been avoided in 2025, wind and solar generation would have been 13% higher, enough to displace a further 5% of coal-fired generation. The value of the lost power generation is around USD 17 billion, which helps explain the boom in energy storage. There was 66.4 GW of new storage added in China in 2025, up around 52% year on year.

By volume, the biggest losses were concentrated in provinces such as Xinjiang, Inner Mongolia, Gansu, Hebei, Shandong and Qinghai. By rate, Tibet stood out most sharply, though its power system is small; Xinjiang, Qinghai, Gansu and Guangxi also recorded very high curtailment rates, both reported and estimated unreported. This helps explain why some of China’s biggest clean power provinces still struggle to reduce fossil generation: renewable capacity growth only translates into emissions reductions when the electricity can actually be absorbed by the system.

In contrast, Jiangsu, Anhui, Henan and Jiangxi have all pushed wind and solar above 20% of generation while keeping curtailment relatively low and avoiding large utilisation losses. Ningxia has come closer than most western provinces to combining a high wind-and-solar share with relatively low curtailment.

The central government has also recognised solar and wind curtailment as one of the central challenges of the energy transition. Guidelines published this April (Chinese original; English summary) have put stronger emphasis on promoting clean power consumption. In practice, this means operating coal plants more flexibly so they make room for wind and solar when renewable output is high, while providing backup when needed. The government is also investing heavily in long-distance transmission and encouraging new demand channels for renewable electricity, such as direct green-power supply, zero-carbon industrial parks and green fuels.

Clean power boosts China’s energy security

Clean power is reducing China’s exposure to imported fuels. As President Xi pointed out as early as 2024, China’s clean power boom is increasingly becoming an energy security story. China’s seaborne coal and gas imports for power generation are essentially all destined to a few regions: the Yangtze River Delta, Guangdong, Fujian, Hebei and Shandong.

Around 34% of the increase in clean power generation between 2020 and 2025 took place in these provinces themselves. Once you include wind and solar power from the north-west, delivered via long-distance transmission lines, that rises to 38%. In other words, more than a third of China’s clean power growth has gone to the parts of the country that are most exposed to imported fossil fuels, sheltering the country from the current fossil fuel crisis.

The total increase in clean power supply to these fuel-importing provinces was 730 TWh, equal to 1.5 times China’s liquid natural gas imports if all that gas had been used for power generation.

By expanding clean electricity in, or delivering it to, coastal demand centres, China can meet more of its power demand without turning to fuel shipped from overseas. In that sense, clean power has become both a decarbonisation tool and an energy-security asset.

Lauri Myllyvirta

Lauri Myllyvirta is senior fellow at Asia Society Policy Institute, China Climate Hub. He is also the lead analyst of Centre for Research on Energy and Clean Air.

The funds for Latin America’s energy transformation need to be collaborative and not politicised, writes Global China academic Rebecca Ray. 

By Rebecca Ray, May 26, 2026

Latin America has the potential to be a renewables powerhouse. It ranks highly for solar and wind power potential, and is home to some of the largest reserves of crucial transition minerals, like lithium and copper.

But many existing transition projects have led to clashes with local communities, who feel they have not been adequately consulted on potential environmental damage, or suitably compensated.

Billions of dollars will be spent on the energy transition in Latin America. The question, then, is: how best to direct this finance toward mining projects with high-level environmental, social and governance (ESG) performance? And in addition, toward renewable energy access for communities across the region?

A key part of the puzzle involves the main drivers of demand: Chinese investors, who in turn receive financial backing from Chinese public development finance institutions (PDFIs).

A new series of working papers – coordinated by the University of the Pacific’s (UP) Center for China and Asia-Pacific Studies in Peru, and the Boston University Global Development Policy Center in the US – traces these relationships and outcomes throughout Latin America.

The papers conclude that Chinese firms are capable of high-level ESG performance but require clear, simple regulations, as opposed to the existing complex patchwork of rules that can frequently create loopholes and misunderstandings in this sensitive sector. These would typically be provided by host governments, as well as PDFIs.

Furthermore, fully realising Latin America’s potential for renewable energy deployment will require deep coordination between national governments and PDFIs, to develop system-wide portfolios of investable projects.

Chinese finance and green supply chains

Among global PDFIs, Chinese institutions in particular have led on financing mining projects in Latin America. They provided hundreds of millions of dollars in support of the Toromocho copper mine in Peru, for example.

Renewable energy projects have generally attracted relatively less interest from public development finance institutions. They are instead being funded via multilateral development banks, such as the Inter-American Development Bank (IADB), often with goods and services provided by Chinese contractors. For example, the IADB’s recent utility-scale solar project in Guyana sourced its equipment from a joint venture between Sumec and XJ Group, both Chinese.

PDFIs have two main advantages in supporting supply chains that work for both local communities and global energy transitions.

First, their public ownership and mandate to pursue development goals means they have the advantage of “patient capital”. Focusing on longer-term, community-wide goals rather than short-term profits can give mining and energy companies the time needed to meet Latin America’s ambitious – but varied – environmental and social regulations. 

Chinese banks have been well-known for directing this patient capital approach toward shared development goals in Latin America. This approach is particularly important in the sectors of mining and renewable energy, which rely heavily on a project’s exact location and can thus bring local economic benefits, or local environmental conflicts, or both, depending on their management.

Secondly, Chinese PDFIs traditionally defer to borrowing countries to oversee their projects’ ESG standards. However, the wide variety of ESG regulations across Latin America can create confusion and mismatched expectations between foreign investors and local communities: the former feels it has adhered to national government standards, while the latter feels consultation has been lacking.

PDFI-based ESG standards that meet or exceed local regulations, and form part of the financing contract, can help ensure companies know what is expected of them at every stage.

Chinese PDFIs are still devising their in-house ESG requirements, although the 2022 Green Finance Guidelines admonish banks to specifically develop mechanisms for community consultations before projects begin, and accountability and complaint mechanisms during a project’s operations. Further development of these standards will help ensure projects are compatible with the concept of a “just transition”.

PDFIs face rising obstacles

PDFIs also face two major internal bottlenecks in financing a just energy transition in Latin America.

First, although Chinese PDFIs have the capacity to bolster investments in renewable energy generation, their participation in this sector has been largely limited to older technologies, like hydropower. Newer technologies, such as solar and wind, are relatively rare in Chinese PDFI portfolios.

Chinese participation in the Latin American hydropower sector is often a result of PDFIs taking on legacy projects, first developed decades ago. The reason for this is simple: Chinese PDFIs do not yet have project development platforms to help design portfolios of new projects using 21st century technology, while regional governments have not necessarily developed these project ideas themselves.

More recently, PDFIs around the world – western as well as Chinese – have become more politicised in their funding as superpowers grapple to control transition supply chains. Gradually, their missions have shifted away from shared development goals, and toward the national interest of securing mineral supply chains.

For example, the United States Development Finance Corporation (a major national PDFI) recently offered USD 565 million in equity finance to Serra Verde’s Pela Ema rare earth mine in Brazil. But it came with the condition that the mine end its agreement with Chinese customers and sell only to US or US-allied firms.

A few days later, China announced new regulations aimed at limiting the ability of multinational firms that operate in China to relocate industrial production away from the country.

This geopolitical manoeuvring creates a problem for host countries as it diminishes their bargaining power and ability to pursue their own sustainable development goals through investor relations. They can also find themselves stuck between China and the US and increasingly forced to “take sides”, as has been seen with the recent US push to create a “critical minerals alliance”.

From capital to coordination

The solution to these challenges is clear: greater direct coordination between host governments and PDFIs to help build and deploy strategies for developing green supply chains that support local communities. This coordination needs to include developing portfolios of new mining and solar and wind energy projects that incorporate 21st century ESG standards.

These supply chains need to extend all the way from minerals to megawatts. This includes all the industrial steps between those start and end points, to promote high-level ESG performance at mining sites and deliver reliable, renewable energy access to communities throughout the region. For example, Chinese hydropower projects in the region were typically designed decades ago by Latin American governments, and do not incorporate current community consultation expectations. Coordination on new project development facilities can aim higher.

Chinese PDFIs should develop detailed project development guidelines with ESG standards, similar to those of multilateral funders. This will help them to better engage with communities, as Latin America shifts from older to newer renewable energy technologies.

Latin American governments would be wise to pursue these methods in building out their national strategies. Doing so will better position them amid the rising tensions between the US and China.

Rebecca Ray

Policies encouraging use of cleaner steel and cement in Chinese-financed construction projects could help drive down emissions, write authors of new report. 

By Wang Hanjie, Ali Hasanbeigi, Cecilia Han Springer, May 29, 2026

From railways to power plants, China has become the leading force in overseas infrastructure development. These investments have accelerated demand for carbon-intensive materials such as steel and cement across the Global South, while scrutiny has grown over their environmental impacts.

However, China has a lever to green its overseas infrastructure: using procurement rules to incentivise the use of lower-carbon steel and cement. As China launches its 15th Five Year Plan, for 2026-30, which includes a call for “new avenues for cooperation on green development” through the Belt and Road Initiative (BRI), green procurement can answer that call by cutting emissions before a project breaks ground.

Much of the “green BRI” debate has focused on power generation – fewer coal plants, more renewables. But one major opportunity for China’s overseas green development remains overlooked. That is the “embodied carbon” embedded in construction materials themselves, in the CO2 created during their production.

In a recent report by the Boston University Global Development Policy Center, we examined the steel and cement use in global energy and transport infrastructure projects that received finance in 2008-2024 from China’s two major development finance institutions (DFIs), the China Development Bank and its Export-Import Bank. Steel and cement, the world’s two most emissions-intensive industrial sectors, make up nearly 20% of global CO2 emissions, making them major drivers of infrastructure’s carbon footprint.

To quantify these emissions, we identified power generation and transport (road and railway) projects that received Chinese development finance. We then estimated the carbon footprint of these materials via data on project size and literature-based material and emissions-intensity factors.

Chinese development-financed infrastructure projects typically source cement domestically within the host country, largely because cement is heavy and expensive to transport internationally, and because many countries have sufficient local production capacity. Case studies from Pakistan, Cambodia and Nigeria suggest that even in Chinese-financed projects, cement is generally procured from local suppliers, often also reflecting local content requirements.

In contrast, we found case study evidence that steel may be more frequently imported from China, especially for technically demanding infrastructure such as railways, where Chinese standards, specifications and supply chains play a larger role.

This sourcing choice matters for emissions. The carbon intensity of steel production varies significantly depending on whether steel is produced domestically or imported from China, whereas cement production emissions are relatively similar across countries due to standardised clinker-based production processes. Chinese-supplied steel can carry up to 37% more embodied carbon than steel produced in or near most of the Global South countries hosting Chinese-backed projects. This is due to the carbon-intensive steelmaking technologies in play in China, namely coal-based blast furnaces.

Steel used in the projects financed between 2008-2024 that we analysed could represent up to 3.5 to 4.8 million tonnes of CO2 emissions, depending on where the steel is sourced. (Because project-level procurement records are not consistently public, our calculations use different sourcing scenarios for steel rather than confirmed records of where it was purchased.)

Meanwhile, cement use in the projects analysed from the same period is estimated to have generated 2.5 million tonnes of CO2 emissions.

The new study finds that ambitious green procurement standards set by Chinese DFIs or their regulators could have cut up to 3.6 million tonnes of steel emissions, and up to 1.8 million tonnes of cement emissions. With some Chinese development finance-backed projects still under construction or in planning, and for future projects, that window for change is still open and the opportunity is immediate.

In addition, as these numbers only focus on certain energy and transport projects receiving Chinese development finance, they capture only a subset of China’s overseas infrastructure engagement, which goes beyond development finance to investment, other forms of lending, construction arrangements and more.

The total transformational potential of green procurement in China’s overseas infrastructure projects could lead to emissions reductions orders of magnitude higher than our initial numbers.

Transformative potential

While low-carbon procurement has long been treated as a technical footnote, it is in fact a frontline climate policy tool. Decisions on carbon content from Chinese DFIs, state-owned enterprises and project developers can transform the emissions footprint of overseas infrastructure, including decisions on what carbon data must be disclosed, and which materials qualify in tenders.

This is critical now more than ever in today’s global context. Heavy industry is now central to climate policy. Some governments, such as the European Union, Canada, and US states like California, are already using green procurement to build markets for lower-emissions steel, cement and concrete. Meanwhile, some DFIs, such as the World Bank, Inter-American Development Bank, African Development Bank and Asian Development Bank have developed broader sustainable procurement standards. The carbon intensity of construction materials is quickly becoming an issue of competition under policies like the European Union’s Carbon Border Adjustment Mechanism (CBAM), which will tax high-carbon imports to the bloc.

Green procurement is not only a practical way forward but provides an opportunity for host countries. Chinese-designed frameworks that reward lower-carbon production could help local firms upgrade, reduce air pollution, build technical capacity, and stay competitive in markets where low-carbon standards are becoming more important globally.

China’s DFIs and state-owned enterprises do not need to wait for a perfect market in near-zero steel and cement. There are concrete steps they, and China’s government ministries, can take now:

● Improving carbon transparency by requiring steel and cement producers involved in Chinese-financed overseas projects to disclose verified, product-level carbon emissions, creating a consistent baseline for comparing materials and tracking impact.

● Establishing clear, tiered carbon-intensity benchmarks for steel and cement, aligned with global standards.

● Pairing standards with financial incentives for developers to make greener purchases, procurement performance metrics, and internal scoring systems, while investing in technical capacity to ensure implementation and improvement.

However, there are real barriers to achieving this. Low-carbon materials can cost more. Emissions data is often poor or missing. Some host countries lack certification systems, monitoring capacity, or domestic supplies of cleaner steel and cement. Chinese institutions themselves, meanwhile, have yet to develop a mature overseas framework for this kind of procurement.

But these policies could be phased in across China’s overseas infrastructure engagement, starting with transparency and data. Then, basic standards that tighten over time could be set, while offering technical assistance and support to suppliers that can meet them.

Green procurement can reduce the carbon footprint of projects long before the operations begin, and shape emissions for decades to come. Such purchasing can be a “new avenue” in green overseas engagement that the 15th Five Year Plan calls for – cutting embodied emissions and potentially supporting the industrial capacity of partner countries at the same time.

Cecilia Han Springer

Cecilia Han Springer is a senior researcher with the Global China Initiative at the Boston University Global Development Policy Center. Her interdisciplinary research focuses on the environmental impacts of China’s overseas investment, policymaking processes within China, and industrial decarbonisation. Previously, she was a postdoctoral fellow at the Harvard Kennedy School. She earned an MS and PhD from the Energy and Resources Group at the University of California, Berkeley, and a BS in environmental science from Brown University. She tweets @han_cecilia

(Sources: Dialogue Earth)

Will a proposed EU regulation allow the bloc to boost its clean tech sector? And what does this mean for Chinese companies? 

By Niu Yuhan, June 3, 2026

The European Commission has published a proposed regulation to boost Europe’s clean tech manufacturing. Known as the Industrial Accelerator Act (IAA), it would give priority to low-carbon and EU-made products in projects reliant on public funds.

Aiming to limit reliance on third-country supply chains, the IAA covers strategic sectors including raw materials (steel, cement, aluminium) and clean-tech products (such as solar power and electric vehicles).

Published in March, the proposal points out that China is home to 80% of global battery and solar power manufacturing, while EU wind power tech is “experiencing cost pressures from low-priced Chinese imports”.

China’s commerce ministry responded on 27 April, describing the proposal as “serious institutional discrimination” which would damage fair competition.

“The significance of the IAA isn’t in the specific rules, but in how it signals a shift in the EU’s thinking on industrial policy,” said Joseph Dellatte, head of energy and climate studies at Institut Montaigne, a French think-tank.

He told Dialogue Earth that previously the EU used general policies such as carbon markets and emissions standards to help reduce carbon. The IAA is the first time the EU has introduced binding EU-origin and localisation requirements in procurement to build up supply chains, he said.

But can the EU build industrial security and capacity without significantly raising the cost of its green transition? And how will this change the routes Chinese companies take to access European markets?

Low-carbon and EU-made

At the core of the IAA are low-carbon and EU-made requirements for public procurement and projects receiving government support.

According to the proposed regulation, 25% of steel and aluminium products in public procurement must meet low-carbon standards, though the steel does not have to be of EU origin. However, 25% of the aluminium and 5% of the cement must be both low-carbon and EU-made.

The IAA’s requirements for clean tech industrial chains have drawn particular attention. To reduce reliance on overseas supply chains in public procurement, no more than 50% of the value of a clean-tech product, and no more than 50% of the value of a product’s key components, can come from a single third country.

Some key technologies and components, such as those found in battery energy storage systems and solar power, must be of EU origin. Specific requirements are to be implemented over time.

Behind the proposal is a slide in manufacturing, which fell from 17.4% of the EU’s GDP in 2000 to 14.3% in 2024. The aim is for the IAA to increase that to 20% by 2035.

Julia Metz, director of Agora Industry, a think-tank based in Germany, told Dialogue Earth: “The positive significance of the IAA is that it expands the EU’s policy focus beyond downstream clean technologies to include the decarbonisation of energy-intensive basic materials production – an important step towards addressing emissions in heavy industry where structural change is most needed.”

Kevin Mo, principal of the Institute for Global Decarbonization Progress (iGDP), a think-tank headquartered in Beijing, told Dialogue Earth that the global division of labour has seen production allocated to the cheapest and most efficient regions. Global procurement has allowed the EU to transition to clean energy more cheaply, he said. The IAA, though, introduces another approach: local industrial capacity and market share should be secured, even if it costs more. Mo said the question is whether the EU can really rebuild entire industrial chains.

The cost of compromise

The proposed IAA now needs to be passed by both the European Commission and the European Parliament, a process that will take months, potentially years and very likely involve amendments. The act as it stands is already considered to be full of compromises.

Take the steel sector. The IAA does not clearly define what is meant by “low-carbon steel”. The European Steel Association (Eurofer) had originally hoped to use public procurement to promote development of local green steel production, but ultimately only required “low-carbon”, with no made-in-Europe rule.

According to Joseph Dellatte of Institut Montaigne, producing green steel in the EU would be a real challenge because energy costs are high and producing hydrogen is difficult. “The removal of the requirement for steel to be made in the EU was pragmatic and the bloc has sped up work on low-carbon steel standards,” he said.

Kevin Mo said the IAA is a rebalancing of interests within the EU. Upstream producers of steel, cement and aluminium generally welcome policies requiring local production – it means more orders and more protection. Buyers of those products, though, are less keen – higher raw material costs increase their own costs and reduce competitiveness on export markets.

Julia Metz has a similar view: the design of the legislation integrates various priorities across sectors, supply chains and member states, such as the relevance of Germany’s export markets. The proposal now strikes a fine balance between strengthening the European market and retaining a free trade approach, she said.

That process of balance and compromise was a constant during the drafting of the bill. The proposed regulation was originally called the Industrial Decarbonisation Accelerator Act, with “decarbonisation” removed at the end of 2025. Publication of the text was delayed three times, perhaps allowing time for lobbying efforts to weaken ambition, suggested InfluenceMap, a think-tank headquartered in London.

How much will the cost of decarbonisation go up?

The biggest controversy is over the IAA’s impact on the cost of the EU’s green transition.

In its impact assessment, the European Commission admits the policy would increase public procurement costs, but to a “manageable” degree. For example, solar panels from China cost less than half IAA-compliant ones sourced from the EU (EUR 0.087 per watt compared to EUR 0.19). But as panels make up only 25% to 30% of overall project costs, the actual increase in the cost of electricity to the consumer will be limited. The commission also argues that Chinese solar panels are priced artificially low, and benchmarks “sustainable” Chinese production at EUR 0.159 per watt.

Joseph Dellatte said the cost increases are manageable – but not evenly distributed. First, the regulation only covers public procurement and projects receiving public support. There’s also flexibility built in: the EU-origin requirement can be ignored if the EU product costs 25% more than the alternative.

Second, there will be significant differences in how sectors are affected. He thinks the wind power sector could cope with a premium of about 20%, as equipment is a relatively small part of overall costs for wind farms. The real pressure will be on the battery sector, where there is a significant cost gap between European and Chinese companies.

Cosimo Ries, a renewables analyst with Trivium China, is more cautious on costs. He thinks the EU may not be able to hold the line if the policy drives retail prices up significantly. He also warned that the policy resources may be too widely distributed: “There’s already overcapacity in solar manufacturing, and big investment in a complete solar supply chain may not bring the hoped-for returns. Resources should be focused on fields such as wind power and batteries, where there’s more potential to be competitive.”

Impact on Chinese businesses

The IAA’s rules on foreign investment will change how Chinese firms do business in Europe.

According to the proposed regulation, extra scrutiny should be applied to investments worth over EUR 100 million in emerging strategic sectors (batteries, EVs, PV solar and critical raw materials) from third countries with 40% of global capacity in that sector. Investors would need to meet at least four of six criteria, including caps on foreign ownership, the need for joint ownership with EU firms, technology transfers, R&D spending, local employment and local procurement.

The proposal does not name names, but as China has more than 40% of global manufacturing capacity for several clean technologies, it seems clear who the rules are aimed at.

Joseph Delatte explained that Chinese companies have been able to rely on strong supply chains at home to quickly capture European markets, but that this model is now facing a challenge. In the future, products alone won’t be enough to sell on the European market. Companies will need to manufacture locally, hire locally and build local supply chains.

Cosimo Ries thinks there are “echoes of Asia” in the IAA’s EU-origin and technology transfer requirements. Some analysis has found similarities between the IAA and the industrial policies of China in the early 2000s, when the country boosted its manufacturing sector with rules on joint ownership, local production and market access arrangements.

But Kevin Mo said the EU today is at a very different stage of development from China then. Opening up allowed China’s weak manufacturing sector to access new technology and form industrial clusters. The EU already has an industrial base but is trying to respond to a loss of competitiveness, industry and high energy prices. The similar policies will not necessarily have similar outcomes.

Some leading Chinese companies have already been preparing. Battery maker CATL has factories in Germany and Hungary, meeting European market demand with local facilities and offering local training.

But those firms also need to consider the costs: “High-cost locations aren’t good places for manufacturing,” said Cosimo Ries. He pointed to EV maker BYD as an example: the company is delaying planned mass production at a plant in Hungary, while getting a factory in Turkey up and running earlier than expected, in the hope of using a third country with an EU trade deal as a springboard, both meeting EU-origin requirements and maintaining competitiveness on cost.

Joseph Dellatte says the proposed regulations are “quite open”, to the point they could potentially be worked around. As countries with EU trade deals are treated as meeting EU-origin requirements, Chinese companies could, in theory, assemble products in places like Morocco and Turkey, then export from there to the EU, he said. But he also stressed the European Commission has reserved the right to exclude products retrospectively, leaving considerable flexibility in actual implementation of the policy.

Kevin Mo is optimistic about Chinese companies adapting. He thinks that rather than being put off by EU and US tariffs and stricter screening for foreign direct investment, they have continued to expand their reach by setting up in third countries and building factories overseas. This is particularly the case in the battery, energy storage and EV sector, he says. The strengths Chinese firms offer in terms of price and delivery mean they will not easily be replaced in the near term.

Dellatte says the current proposal is somewhat rough, and significant differences of opinion remain among EU member states. There is still some time before the legislation is finalised, passed and ultimately implemented, and this gives Chinese companies time to adjust their investments, he says.

Julia Metz says that many economies around the world are increasingly adopting new industrial policies in response to a changing international context. Yet climate cooperation continues between the EU and China, despite trade frictions. Moreover, the local-origin requirements of the IAA are specific to cases where public funds are being spent, rather than broad trade measures.

She stressed: “Climate cooperation goes a lot further than competing on trade and exports.” Metz thinks that despite disagreements over industrial policy, there is still scope for long-term cooperation, for example on emission-reduction technologies and the transition of heavy industry and green industrial infrastructure.