So the US and China made nice on climate change right? On Tuesday they signed a memorandum of understanding (MOU) that Secretary of State Hillary Clinton says “provides our countries with direction as we work together to support international climate negotiations and accelerate the transition to a low carbon economy.” Great.

But then you read further down the Reuters story “U.S. and China sign memorandum on climate change” in today’s Lead Stories and State Department spokesman Ian Kelly says “It is not an agreement per se for each side to commit themselves to some particular target. It sets a structure for dialogue.”

Great, let’s talk about how we’re going to talk about it.

In the exchange world where I’ve worked for the past 13 years, MOUs have become a running joke of sorts where a multitude of Chinese equity and futures exchanges sign agreements to work with various US, European and other Asian markets. The fact is, I can only think of a couple of instances where an MOU amounted to more than a fancy ceremonial signing and lunch.

So far, the US efforts to work with China have amounted to “a $15 million joint project to create more energy-efficient buildings and cars and study the development of cleaner-burning coal,” according to the Reuters story. If we assume its even, that means these two economic powerhouses have each put up a whopping $7.5 million. Call it a day boys, that ought to cover it for the world’s top two polluters. Who said climate policy was going to be expensive?

What MOUs and puny joint investments like these indicate is that either the US or China, or both are not very serious about this issue. This is not only a global climate change issue, but a national security, sustainable energy and economic growth issue.

Yet the overriding fact is that China must keep growing – its government depends on it. After a decade of double-digit growth rates, the International Monetary Fund estimated GDP growth of just 5% in 2009, down from about 9% in 2008.

“Growth is all that matters,” said international analyst Kevin Kajiwara of Eurasia Group in an article for CME Magazine. “You can see massive internal investment in the stimulus package they put in there. They are building domestic demand and a domestic consumer economy. They are not trying to save the world’s financial system.”

If China cannot continue its high growth rates, the quasi-capitalist/communist government will be in trouble. This does not suggest a full-scale civil war, but the bureaucrats versus capitalists battle may escalate.

Much is at stake and I believe China knows it. China is stuck in between knowing full-well the devastation from growth that is fueled by cheap fossil fuels and the need to address climate change and more sustainable energy policy. The problem is that the cheap fossil fuel growth is outpacing the clean energy growth and that train is tough to slow down, much less turnaround.

This leaves the Obama administration in a tough spot. It may have to implement some kind of consumer tax to bring China into the fold. On July 20th, U.S. Commerce Secretary Gary Locke said “It’s important that those who consume the products being made all around the world to the benefit of America — and it’s our own consumption activity that’s causing the emission of greenhouse gases, then quite frankly Americans need to pay for that,” speaking to the American Chamber of Commerce in Shanghai after meetings with Chinese officials in Beijing, according to a story from Reuters.

In other words there may be more carrots for China and more sticks for the US to get them to get on board. And if Obama’s crew cannot get a deal done, the US cap-and-trade market won’t sustain much support either. It’s possible it could still get off the ground but I suspect it would get yanked the next chance the Republicans get. (This again, speaks to the need for bi-partisan cooperation on climate legislation.)

What is the answer for China? It may lie in the markets. There is already the Tianjin Climate Exchange for emissions and water pollution rights, a joint venture between the Chicago Climate Exchange partnership and CNPC Assets Management Co., Ltd. BlueNext announced last month a deal with China-Beijing Environmental Exchange (CBEEX) to link their databases of Certified Emission Reductions (CERs). There are also other domestic carbon exchanges apparently in the works. China, a behemoth in global financial and commodity markets, understands “trade” but will it go along with a “cap?”

The essential question will be – can the US and China figure out a growth path that is both clean and economically feasible for China, and palatable for the US? Obama’s energy and climate team have a tough task ahead of them, and the current gestures and MOUs aren’t going to get this done.

Jim Kharouf

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