Solar Panels in China: An Emerging U.S.-China Trade Dispute?

The gloom spread by the failure of the recent Durban climate talks, and of the Kyoto process more generally, to set any effective cap on carbon emissions, is palpable. But there never was going to be an agreed-upon and enforceable cap on carbon emissions that would stop Chinese and Indian industrialization in its tracks. It is the whole “Kyoto process” established within the framework of the United Nations Convention on Climate Change (UNFCCC) and its unrealistic goals which should be faulted.

Yet the fact is that substantial progress has been achieved in the only real solution available to curb carbon emissions: building up renewable energy industries. And it is China that is leading the way in this transformation of energy and resource industries. As fast as it is building its fossil-fueled “black” economy, it is also building the world’s most amazing “green” economy. Thomas Campanella was one of the few analysts to pick up on this trend. But most commentators on the issue miss this aspect.

So too, it seems, does the United States — the biggest party to miss the significance of China’s rise as a green power is the United States itself. The Obama Administration sees China making extraordinary progress in building solar and wind power industries, and it interprets this, apparently, as evidence of unfair trade practices — rather than global insurance against climate change.

Let us be clear. American solar panel producers are currently experiencing difficulties because the market has not grown fast enough in the United States, and, as a result, costs have not been reduced quickly enough. Bankruptcies like that of Solyndra bear testimony to this. Now it is China that is driving market expansion, and its firms are reaping the fruits as a result. They are following the exact course laid down by America itself in one industry after another in the 20th century.

For the past five years, China has been building its renewable energy industries at a rate unprecedented in industrial history. Its wind power capacity was doubling every year until 2010, and its solar photovoltaic industry has been ramping up to the point that it accounted for 60% of world production in 2011 — and the country is exporting 95% of its production.

China is now able to produce panels at lower costs than its competitors not just through lower wages and subsidies, but primarily through the benefits of expanded production and falling unit costs — i.e., through economies of scale. Wholesale prices of panels produced in China have been falling from $3.30 per watt of installed capacity in 2008 to $1.80 per watt in January 2011 and around $1.00 to $1.20 per watt now.

Now here is the irony: These costs were precisely those targeted by the United States itself in the Federal Photovoltaic Utilization Program (FPUV), which was formulated as a means of expanding the market and bringing costs down — in the 1970s! It was ramped up, and then discontinued, under the Carter Administration. This program identified market expansion through government procurement as the means of driving down unit costs and expanding the market, with the goal of producing photovoltaic cells for $1 per watt by the late 1970s.

Had the Carter Administration pursued the program, and had it been continued thereafter, American solar cell producers would now be the strongest in the world, and would be exporting clean power — including to China. But with inadequate market incentives, the solar photovoltaic industry has instead foundered in the United States — and elsewhere — to the benefit of fossil fuel producers. Now the costs are starting to come down again through China’s efforts in renewable energy industry building, and the world market opens up as a result, with costs tumbling.

Of course China is using all the tools at its disposal to ramp up its solar panels industry — from subsidies to reduced tax rates and low-interest loans. These are always the tools of new industry creation, when a fledgling industry is confronted by powerful incumbents in the form of the coal, oil and gas corporations, as well as fossil-fuel-using electric power producers.

If China were not using these tools — all pioneered by the United States and advanced countries as they created their own industries — then China would not be able to expand its low-carbon industries, and would not be able to drive a “green development” strategy.

Under China’s 12th Five Year Plan, the country proposes to generate 30% of its electric power from hydro, renewable and nuclear sources by 2020. If achieved, it would give China by far the largest renewably powered electricity system in the world — with huge benefits in terms of reduced carbon emissions.

In this way, China has been doing exactly what the rest of the world, and in particular the United States, has been asking of it in the forums on global warming. Instead of threatening to take Chinese producers to the World Trade Organization, the United States could be recovering its classic strategies for expanding markets and driving down costs, and engaging in intense competition with China to produce photovoltaic cells at lower and lower unit costs, in a race to see which country can make the greatest contribution to reducing the global threat of climate change.

So forget about seeing the green economy as a warm and fuzzy issue. It is now clearly an issue of global competition, where China is using the very strategies for building markets that were pioneered in the United States. Through globalization, these strategies are now being implemented by China with great success. The Obama Administration would be poorly advised to seek to punish China for emulating American policies so well.