from Energy, Security, and Climate and Energy Security and Climate Change Program

The Problem With Chinese Clean Energy Subsidies

September 14, 2010

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I wrote last week about how Chinese gains in solar energy could help, rather than hurt, U.S. businesses. My argument was that if China focused on those parts of the value chain where it had a natural edge, and the United States focused on those parts where it was most suited, they could together bring down the cost of solar. That would increase the market for solar, and they would both win. In particular, I argued that Chinese strength in the later stages of solar manufacturing wasn’t necessarily a bad thing.

But that does not mean that it’s always a good thing.

What matters is whether the source of Chinese competitive advantage is genuine comparative advantage of the sort I just described, or whether it’s the result of unfair industrial policy. China can move into new parts of the solar value chain because it’s genuinely better suited to being there. In that case, the United States should applaud. Or it can move into new parts of the value chain because of illegal government supports of the sort that the United Steelworkers are accusing the Chinese government of using. That’s a much more problematic situation. It’s also the one we often find ourselves in these days.

That leads to a big question: Do we lose or benefit when China subsidizes its solar industry? Several smart commentators suggested last week that the United States is a winner from Chinese subsidies, since we get cheaper clean energy solutions. That’s potentially a myopic and short-term view. The availability of cheaper electricity made by Chinese solar panels stimulates some of the U.S. economy (i.e. those who use solar electricity) a bit, as many note. But it hurts certain U.S. solar producers, as most of the same commentators have neglected. Whether that’s a net positive for the U.S. economy is an open question, particularly in the present situation, where there’s a dearth of demand.

There’s also a timing problem: Chinese industrial policy may give us nice cheap solar panels in the near term, but if it drives competitors out of the market, and China then withdraws its supports, things could be much uglier in the long term. We don’t like it when firms abuse market power to drive out competitors, and we shouldn’t like it when countries do it either.

Relatedly, Chinese subsidies may be squeezing innovative (and eventually lower cost) technologies out of the market. I’m told, for example, that the big Chinese government push to build up its silicon-based PV industry is stifling the thin-film solar business, damaging the prospects for that potentially valuable technology. That, again, may make solar cheaper in the short term, when it’s least important, but more expensive over the long haul, which is when it matters most.