The Green Cold War - Part 1

The West wakes up to a new form of Cold War of its own making.

The supreme art of war is to subdue the enemy without fighting. – Sun Tzu

On February 26^th, days after the second anniversary of Russia’s invasion of Ukraine, European leaders gathered in Paris as a show of resolve. At a press event, French President Emmanuel Macron told reporters (emphasis added):

"There is no consensus at this stage ... to send troops on the ground. Nothing should be excluded. We will do everything that we must so that Russia does not win."

The U.S., Germany, Britain, and others quickly rejected Macron’s mindless veiled threat. All NATO members understood the implications, especially the U.S.

Two days later, Russian President Vladimir Putin responded to Macron’s opening the door to European troops on the ground in Ukraine in the most ominous tone since the end of the Cold War nearly 35 years ago. Speaking to a group of lawmakers and Russian elites, he said:

"(Western nations) must realize that we also have weapons that can hit targets on their territory. All this really threatens a conflict with the use of nuclear weapons and the destruction of civilization. Don't they get that?!"

Hours before Macron’s latest lapse of judgment, Ukrainian President Volodymyr Zelensky disclosed to his nation’s citizens that 31,000 Ukrainian troops had been killed in the war’s first two years.  For perspective, the U.S. lost about 58,000 servicemen in Vietnam over more than a decade, when its population was over four times larger than Ukraine’s.

We mourn the loss of lives, blood and treasure in Ukraine, and hope a lasting resolution comes soon. As the war enters its third year, we have grave concerns that the same Western leaders responsible for major environmental, energy and economic policy mistakes fail to understand the gravity of the situation in Ukraine. Macron’s comments only crystallized those concerns.

Beneath the surface of the present kinetic proxy war in Ukraine between Russia and NATO lies a different conflict. This one is unrelated to Russia’s centuries old land disputes or cultural identities or establishing defensive buffers from its enemies.

We think of this conflict as a twenty-first century form of Cold War. There are important distinctions from the twentieth century’s version. Thankfully, this one is not a nuclear arms race. All the superpowers were already nuclear “strapped.”  Also, in the twentieth century version, both parties knew they were in it. In this version, one side inadvertently invited it yet, somehow, did not even appear to be aware it was in it until recently. The other side accepted the invite and used its resources and the advantages it was given to considerable gain.

With the benefit of hindsight, bolstered by empirical evidence of the last two years, we believe that leaders in the U.S. and Europe have just begun to realize that, for nearly twenty years, China and Russia have been using the West’s obsession with, and commitments to, “zero carbon” energy as a form of economic Cold War against it. We call this The Green Cold War™.

A complex game, indeed | Microsoft AI

What is The Green Cold War and what were its roots? How has it manifested? And what might we expect now that the West finally appears to be waking up to the fact that it is actually in one of its own making?

The Green Cold War (TGCW) is a (mostly) non-kinetic battle of superpowers conducted on three physically interrelated and politically interdependent fronts: energy, environmental and economic. Largely as a direct result of the West’s prioritization of “climate change” above all else, China and Russia have exploited all three of these fronts for almost two decades, to their strategic advantage and at the West’s expense.

The preconditions for TGCW began decades ago, and the history is a complex fusion of political philosophy, economic systems, energy development, industrialization, environmental policy and many other factors. Each of these are multi-layered and could rightly be the subject of dozens of Substack posts.

After the fall of the Soviet Union in 1991 and the subsequent rise of China, changes in how the world’s major industrialized countries viewed the risk of climate change resulted in a dividing line, with America and Europe (along with Japan, Australia and Canada) on one side, and China and Russia on the other. The creation of the United Nations Framework Convention on Climate Change (UN FCCC), its Intergovernmental Panel on Climate Change (IPCC), and most importantly the findings of the IPCCs first four “Assessment Reports” (1990, 1995, 2001, and 2007) became the bright line.

The details are irrelevant for our purposes. It is sufficient – and factual - to say that Western nations’ energy and environmental policies resulted directly from IPCC’s Assessment Reports. What ensued was the attempt to force a rapid, costly, and heavily subsidized “transition” to “alternative” energy.

From the late 1990s to today, most of this effort went towards subsidizing wind and solar energy. As the theory went, this would inevitably lead to cost parity (or better) with existing, high emissions (yet highly dependable) thermal electricity generation sources (coal, natural gas, and nuclear power plants).

At the same time, globalization had shifted enormous amounts of manufacturing at the low-end of the value chain to China. China enjoyed an enormous labor cost advantage combined with a seemingly endless supply of government sponsored cheap capital. Part of that cheap capital was used to build an enormous fleet of coal-fired power plants to support its rapid industrialization and growing middle class. Today, China has more megawatts (MW) of operating coal-fired power plants than the rest of the world combined. 70% of the almost 1 million MW of new coal-fired power plants in various stages between announcement, permitting and construction globally are in China.

That cheap coal-fired electricity gave China another key manufacturing advantage, one that applies whether you are manufacturing sunglasses or solar panels. The graph below visualizes China’s dramatic growth in solar panel production over the early part of this story (1995 - 2012):

As a developing nation without the stringent environmental regulations and enforcement seen in America, Europe, Canada, Japan and Australia, China gained yet another economic advantage. When your polysilicon and solar panel production must adhere to rigorous and largely effective environmental regulations at significant cost, but your competitor’s waste treatment plant is the nearest stream, river, lake, or bay, that competitor has a non-trivial economic advantage. We encourage readers to see Doomberg’s fall Substack post Geopollutical Warfare for more details than space permits here.

Fast forward to today, China produces ~75% of the world’s polysilicon and ~80% of the world’s solar panels. In just the first half of 2023, China exported more solar panels (~113 gigawatts) than the entire installed solar capacity in the U.S.

Returning to China’s labor advantage, a significant portion of China’s growth in polysilicon and solar panel production over the last fifteen years has been achieved using forced labor. The plight of ethnic Uighurs in China’s Xinjiang province working in these factories is no secret - even to Western environmentalists.

In addition to becoming the world’s leading producer of polysilicon and solar hardware, China developed substantial wind power generation production capacity. Data compiled by the Brussels-based Global Wind Energy Council found Chinese wind power generation firms supplied nearly 60% of global installed capacity in 2022, and Chinese manufacturers make up ten of the top 15 wind power suppliers worldwide.

Western environmentalists commonly hold out China’s massive domestic growth in installed solar and wind power generation as a “success.” It never occurs to them (or they are not honest enough to admit) that it was the West’s $5 trillion (and counting) “alternative energy transition” subsidization, powered by coal and partly using forced labor that enabled it. The data on the relentless growth in coal-fired power plants above should dispel any notion that our investment in China’s domestic wind and solar build out “offset” growth in hydrocarbon-based power generation in China. It did not happen.

China’s industrialization over the last thirty plus years has lifted the largest number of people from abject poverty in human history. The West’s demand for solar and wind power generation hardware is a small part of this story. But it is highly relevant to TGCW.

Source: CSIS

The Chinese Communist Party keeps a tight lid on material, high-resolution environmental performance data (air, soil, surface water, natural resources, etc.) and major industrial accidents and emissions. As professionals who have each spent three to four decades helping to clean up the worst, most dangerous “externalities” of U.S. industrialization, we can confidently surmise that China’s industrialization has caused, and continues to cause, significant environmental harm to its citizens and ecosystems.

In America, Europe, Canada, Japan, Australia and other democratic nations, a rising middle class (and elites) who recognized the harm of industrial pollution demanded change (if you’re old enough, you might remember Love Canal, NY; Times Beach, MO; the Cuyahoga River on fire; smog in major U.S. cities).  In China, no such pressure from citizens, and no Communist party effort to materially reign it in, are forthcoming any time soon at any level that would impact the economic advantage Chinese manufacturers enjoy over their western competitors.

Taken together, the West’s obsession with climate change and the energy transition combined with China’s ability to outcompete western nations now relying on those systems gave China an advantage on which it has capitalized.

Meanwhile, through laws and regulations, the same Western “energy transition” increased reliance on wind and solar throughout Europe and many American states. This turns out to be key to TGCW.

America was fortunate. In retrospect, the political push toward wind and solar in America corresponded with the rapid evolution of hydraulic fracturing. The enormous growth in natural gas production that followed enabled a rapid switchover from coal-fired electricity generation to natural gas. While overreliance on wind and solar grew in America, it was also domestically producing a new form of thermal generation fuel with around half the CO2 emissions as coal. This also turns out to be key in TGCW and puts the U.S. in a far superior position compared to Europe at the end of our story.

Europe, having heavily discouraged all forms of hydrocarbon extraction within its borders (coal, oil, and natural gas) on the shoulders of the IPCC’s Assessment Reports, was not so lucky. Germany, Europe’s industrial center, embarked in 2008 on a far more ambitious plan relying on wind and solar than America. Its “Energiewende” was glorified as the standard by which the West should be measured in the fight against the “existential” climate crisis. Under the plan Germany would phase out its coal-fired electricity generation and dramatically increase wind and solar energy capacity. Its knee-jerk reaction to close its fleet of nuclear power plants after the nuclear incident in Fukushima, Japan in 2011 increased its future reliance on wind and solar even further. This is where Russia, who understood precisely what was happening, enters our story.

As Germany embarked on its Energiewende, Russia was no doubt watching the U.S. fracking revolution unfold after 2007. A large new supplier of oil and natural gas in the global market would have economic and geopolitical implications for Russia in Europe. Putin surely understood this, but prior to 2015, the U.S. was still importing natural gas in the form of LNG.

In 2011 Russia completed the Nordstream I pipeline under the Baltic Sea to Germany’s coast. The U.S. opposed the project from its conception on the basis that it would increase Europe’s dependence on Russian natural gas. That is exactly what happened.

Cheap Russian natural gas became the predominant fuel for the remaining thermal electricity generation plants in Germany, and its use as a replacement for coal spread accordingly throughout Europe. The graph below shows Germany’s increasing reliance on Russian natural gas over the period of this story, with key Russian geopolitical actions over the past decade denoted.

Germany’s Putin Dependence Meter | IEA

For Europe as a whole, by the end of 2021, estimates of Russian natural gas imports gas averaged around 150 billion cubic meters annually. The amount constituted around 40% of Europe’s natural gas pipeline imports.

In retrospect, it now seems clear that Russia exploited Europe’s relentless economic death march towards “net zero” by recognizing that, while it would never ultimately work, even attempting to achieve such folly would require increasing dependence on low-cost Russian natural gas. And it was happy to oblige, economically and strategically.

In Part II, America and Europe realize they are in The Green Cold War, why it will be difficult to extract themselves, and other economic weapons China and Russia are likely to use to maintain their advantage.

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