Next week’s meeting of the G20, hosted by Indonesia, will feature discussions on climate change and the need to accelerate the global energy transition ^[1] from fossil fuels to renewables. Jakarta is also expected formally to announce ^[2] that it’s joining the Just Energy Transition Partnership ^[3], a multibillion-dollar G7 initiative led by the US, France, Germany, the UK and the EU that’s designed to assist emerging economies with accelerating their transitions to renewables.

The expansion of the partnership to include Indonesia (South Africa joined last year) reflects the G7’s concern that the Paris climate agreement’s targets ^[4] won’t be achieved without major financing and other support for the energy transition in emerging markets. But it also reflects the group’s attempt to counter China’s increasing prominence in renewable energy investments, particularly in Asia.

China is the largest financer of renewable energy projects in the Indo-Pacific. More than half of its overseas energy investments under the Belt and Road initiative ^[5], amounting to US$20 billion in 2020, are in the renewables sector. This significant funding is critical to supporting the regional energy transition. But G7 leaders have also expressed concerns ^[6] that Beijing will leverage this financing for political influence ^[7] and strategic advantage ^[8], including by creating financial and technological dependence on China.

These concerns are heightened by China’s dominance of renewable energy products and control over the supply chains for rare-earth mineral ^[9]s and the processing capacity to produce them. The International Energy Agency ^[10] estimates, for example, that China’s global share in all the key manufacturing stages of solar panels, which currently exceeds 80%, will rise to more than 95% in the coming years.

The country also produces ^[9] about 85% of the world’s rare-earth oxides and about 90% of rare-earth metals, alloys and permanent magnets. And China has demonstrated its willingness to use its control of the supply chain in pursuit of its wider geopolitical interests, most notably in 2010 ^[11] when in retaliation for a maritime dispute with Japan it restricted rare-earth mineral exports to that country.

China’s leverage is particularly pronounced in the Mekong ^[12] region. Myanmar, Laos, Cambodia and Vietnam rely on hydroelectricity produced along the Mekong River system for more than 50% of their electricity production, and China is their main source ^[13] of financing for hydropower dams. More importantly, though, China’s upstream dams increasingly enable it to control the flow of water to its downstream neighbours, where 60 million ^[14] people depend on the Mekong for their livelihoods.

China has pledged ^[15] to use the dams to ensure a more even distribution of water during dry and wet seasons. But recent analysis suggests that on at least one occasion, during the extreme drought ^[16] affecting the region in 2019, it did not do so. At least one expert ^[16] in the region saw China’s control of Mekong water during the drought as an act of political manipulation.

But it’s important to keep in mind that China’s energy investments are motivated by multiple, overlapping objectives, including to secure economic advantage, achieve energy security, build greater geopolitical influence and leverage, and reduce climate risks. All of these objectives are on display in the Mekong, including in the key role hydropower plays in China’s plan to become carbon-neutral by mid-century. Chinese objectives are also evolving. As Huong Le Thu ^[12] has observed with respect to Beijing’s investments in the Mekong, ‘Energy security has become almost secondary as dams gain geopolitical in addition to economic importance.’

China’s financing of renewable energy projects in the Indo-Pacific has increased markedly, but the investments may not be delivering the broader political benefits one would expect. Despite significant recent investments in Indonesia, for example, a 2021 public opinion poll ^[17] found that 60% of Indonesians agreed that ‘Indonesia should join with other countries to limit China’s influence’, an increase of 10 percentage points since 2011. A recent survey ^[18] of Southeast Asian elites found that China was the most distrusted power in the region. Similarly, public opinion surveys in other Asian subregions that have received significant Chinese investments, such as Central Asia ^[19], have noted a steady decrease in positive public sentiment towards China.

China’s multidimensional engagement in the region’s renewable energy systems has some important implications. One clearly positive implication is that Chinese domestic and regional investments in renewable energy are a fundamentally important contribution to efforts to prevent dangerous climate change. Indeed, it will be impossible to achieve the objectives in the Paris agreement without China’s financing, support and engagement.

Both the Covid-19 crisis ^[20] and the Russian invasion ^[21] of the Ukraine have starkly demonstrated the importance of securing critical supply chains. In this respect, China’s domination of the renewable energy market is a significant risk. And that risk may be growing; for example, recent reporting ^[22] suggests that China sees Russia’s disruption of gas supplies to Europe as a major opportunity for China’s wind and solar energy firms to expand their European markets and presence.

There are at least two dimensions to the supply-chain risk. The first is the opportunity it affords China to leverage its control over resources and technologies to extract geopolitical concessions from its competitors or adversaries, as it attempted to do with Japan in 2010. The second is the exposure and vulnerability of China’s own domestic renewable energy infrastructure to disasters that are rapidly intensifying ^[23] due to climate change, which is a risk China itself should seek to reduce. As the International Energy Agency ^[24] has observed:

Today, China’s Xinjiang province accounts for 40% of global polysilicon manufacturing. Moreover, one out of every seven [solar] panels produced worldwide is manufactured by a single facility. This level of concentration in any global supply chain would represent a considerable vulnerability; solar PV is no exception.

Clearly, it must be a high priority for Australia and like-minded countries to diversify the renewable energy supply chain as rapidly as possible. China is playing the pivotal role in the transition from fossil fuels to renewables, including in the Indo-Pacific. Australia and its allies must find ways to engage with China in accelerating the transition to reduce the increasing risk ^[25] of catastrophic climate change. Identifying opportunities to do so at a time when China is increasingly challenging the geostrategic order, and without undermining other important interests, is an urgent, daunting and fundamentally important task. As the Brookings Institution ^[26] recently observed concerning the US and China:

The relationship remains too consequential to people in both countries and the rest of the world to be guided by a fatalistic acceptance of deepening enmity. And while competition resides at the core of the relationship, it is a mistake to view the relationship solely through the lens of rivalry. Doing so limits tools available to Washington for developing a more durable, productive relationship that serves America’s interests.