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Innovation Policy Blog

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What the US can Learn from China's Solar Industry

What the US can Learn from China's Solar Industry

Yesterday, the New York Times described a “looming financial disaster” for China’s clean energy industry: “Though worldwide demand for solar panels and wind turbines has grown rapidly over the last five years, China’s manufacturing capacity has soared even faster, creating enormous oversupply and a ferocious price war.” This development offers three important lessons for U.S. clean energy advocates.

1. Green Mercantilism is not a long-term sustainable clean energy strategy. China’s clean energy policies can best be described as brute force – they “employ nearly all types of mercantilist policies to artificially drive down the price of clean energy technologies” through the use of illegal subsidies, content requirements, export dumping and the like. In other words, China wants to become global leaders in exporting today’s clean energy technologies by any means necessary. As ITIF discusses in two recent reports, Green Mercantilism: Threat to the Clean Energy Economy and Enough is Enough: Confronting Chinese Innovation Mercantilism, this strategy isn’t sustainable in the long-term. Clean energy is more expensive than fossil fuels, so the only way to increase exports in the near-term is by buying down the cost difference. But as the Times piece points out, this single-minded effort is not without negative consequences:

China’s biggest solar panel makers are suffering losses of up to $1 for every $3 of sales this year, as panel prices have fallen by three-fourths since 2008. Even though the cost of solar power has fallen, it still remains triple the price of coal-generated power in China, requiring substantial subsidies through a tax imposed on industrial users of electricity to cover the higher cost of renewable energy.

In other words, any clean energy industry – China’s included – cannot be solely based on exporting today’s uncompetitive first and second generation technologies at greater and greater amounts.  There are limits to the amount of subsidies government can provide.  China is, if the reports are to be believed, nearing their limit, similar to how other countries like Spain and Germany have scaled back their deployment subsidies during the last year.

2. The U.S. shouldn’t rely on artificially cheap Chinese clean energy exports. In the United States, clean energy advocates have often highlighted rapid cost declines in solar brought on by mercantilist Chinese subsidies and export dumping. In their opinion, it’s a good thing – the U.S. gets cheap solar and if China wants to subsidize it, all the better. But it’s a strategy that is decimating competing firms in the U.S. and abroad. Under the status quo, ITIF’s Green Mercantilism report observes, “firms can rely on subsidies to grow to a larger industry market share, stifling competition not on the merits of better technologies, but on the subsidized price of less-innovative technologies.”

Put another way, the only way clean energy becomes cost and performance competitive with fossil fuels and is viable everywhere is through innovation. By relying on Chinese clean energy imports and looking the other way on green mercantilism, we greatly limit our ability to spur the innovation we need. Sure, in the short-term it drops the price of solar and boosts installations some, but over time it also reduces the incentives to making solar truly competitive with fossil fuels.

3. U.S. efforts to fight Green Mercantilism are starting to work. China’s clean energy trouble is also evidence that recent U.S. tariffs on Chinese solar imports aimed at leveling the playing field is succeeding in doing just that. The Department of Commerce’s tariffs haven’t been popular with many players in the solar industry because Chinese subsidies were greasing the market. Chinese subsidies boosted installations and project development, and as a result, any policy that alters the current environment is akin to cutting jobs or eliminating deployment subsidies. Jigar Shah, president of a coalition of U.S. solar manufacturers, recently put it thusly: “The solar industry’s growth, which results in adding jobs and infrastructure investment, is correlated to the reduction in solar system costs.”

But what Shah and other advocates must recognize is that the tariffs were clearly well-justified and by leveling the playing field, they’re simply bringing the industry back to Earth. Removing China’s unfair advantage shows that significant cost and performance work is needed to deploy solar everywhere and the subsidies were simply masking some of that need. Chinese subsidies may have offered a quick fix, but the industry shouldn’t lose sight of the fact that only robust innovation can fulfill that need in the long run and ensure sustainable industry growth and job creation.

By. Matthew Stepp and Clifton Yin

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