China's Green Ambition

China is rapidly becoming a global colossus in renewable energy as it seeks to reduce reliance on polluting fossil fuels and establish itself as the top clean-power manufacturer and exporter.

The US government has belatedly recognized the challenge and in December convened the first meeting of a high-powered private-sector advisory committee charged with developing a clean-energy export-expansion plan. At the same time, the US Export-Import Bank announced increased financing for “green” exports, about US$500 million for the next fiscal year.

The US is destined to lose this battle for dominance if Congress refuses to pass an energy policy. As part of a compromise on the US tax bill, lawmakers agreed on 17 December to extend a tax-credit scheme for another year, offering developers of wind, solar and other renewables grants worth up to 30 percent of development costs.

But America needs a more coordinated approach if it’s to compete with China in clean-energy manufacturing and exports.

A study published by the Harvard Kennedy School’s Belfer Center found that, unlike industrialized countries, China and most other major emerging economies coordinate and support energy R&D through government-owned enterprises. The study covered Brazil, China, India, Mexico, Russia and South Africa. By some estimates, investments in renewable-energy assets may total US$2.3 trillion by 2020, yielding increased jobs and exports as well as reduced greenhouse gas emissions, for countries that harness green technology.

On 7 December, frustrated US Commerce Secretary Gary Locke told the first meeting of the task force that China pumps almost US$12 billion monthly into its renewable-energy sector: “They’re doing this because they really want to be the world’s supplier of clean energy and they recognize this will support millions of jobs.”

China’s rise in key sectors of the green-energy business has been breathtaking. In 1999, China made around 1 percent of the photovoltaic cells put into solar panels to generate electricity. A decade later it’s the world’s leading producer, with a 40 percent share of the market.

Companies in China are expected to make more than half of all solar panels manufactured this year and nearly 80 percent of solar hot-water units. The nation’s also on course to produce nearly half the world’s wind-power turbines, selling them at prices significantly lower than those of manufacturers in the West and preparing for large-scale exports.

If China becomes a green-power export juggernaut, it will consolidate its lead in global high-technology sales, leaving the US well behind. In 1998, the US share of worldwide high-tech exports was nearly 25 percent while China’s was less than 10 percent. By 2008, China’s share was 20 percent, with America’s below 15 percent.

Leadership in clean-energy manufacturing is shifting from the West to Asia. Within the Group of 20 leading economies, China, India, Japan and South Korea are projected to account for approximately 40 percent of clean-energy investments in 2020, leaving the US and Europe trailing.

A recent survey by Bloomberg, in collaboration with the UN Environment Program, found that China became the largest recipient of renewable-energy financing in 2009, attracting more than 20 percent of the US$162 billion invested worldwide in wind, solar, biomass, small hydro, biofuel and marine energy.

While such investment in China grew by 53 percent, it shrank in the US by 45 percent. The US exported at least $2 billion of solar, wind, biomass, geothermal, hydropower and other renewable-energy products in 2009, almost double the sum in 2007. But it ran a trade deficit in the combined sectors, with imports of wind-power equipment alone amounting to more than $3.6 billion.

Reasons given for the West’s decline and China’s rise are a new source of friction in Sino-US relations. Both Washington and Beijing consider the clean-technology sector crucial to energy security and economic growth. However, renewable-energy companies in the US struggle to find investments. They’ve cut jobs and, in some cases, moved operations to China.

US President Barack Obama maintains that the industry should be a vibrant source of employment and exports for America, in September calling for “a home-grown clean energy industry.”

In October, the US Trade Representative’s office announced that it would investigate Chinese government support for manufacturers of wind and solar energy products, advanced batteries and energy-efficient vehicles – the result of a petition from a powerful US union, the United Steelworkers, with 850,000 members in a range of energy-related jobs.

The petition claims that China protects and unfairly supports its clean-energy producers in breach of World Trade Organization rules. The main thrust is that the Chinese government makes widespread use of cheap loans and land grants to subsidize exports of clean energy equipment.

Chinese President Hu Jintao is due to make a state visit to Washington in mid-January. Clean energy is on the agenda. The Obama administration recently took the first step in filing a trade case against China at the WTO, alleging that Beijing has given several hundred million US dollars in wind-power grants that exclude foreign-made parts and components.

In a 22 December statement, the US trade representative suggested that China is illegally subsidizing wind-equipment production, and the "subsidies effectively operate as a barrier to US exports to China." The US and China have 60 days to resolve the disagreement. If negotiations fail, Washington could ask for a WTO dispute settlement panel to hear its complaint.

The WTO prohibits virtually all subsidies to exporters to prevent governments from trying to help their companies gain unfair advantage in world markets. WTO rules permit member states to subsidize goods and services in their home markets, as long as those subsidies do not discriminate against imports.

In an angry reaction to the US probe, Zhang Guobao, head of China’s National Energy Administration, implied that the Obama administration deliberately courts protectionist sentiment in the US where nearly one in ten adults are unemployed.

The US, too, spends billions of dollars to subsidize research and development of clean energy, arguing the intent is to help build a “home-grown” industry, not flood the world with cheap exports.

Clearly, part of China’s clean-energy success is due to the same factors that made it the world’s manufacturing workshop: low labor and construction costs, expanding universities that churn out engineers and technicians, improving telecommunication and transport systems.

China has also set clean-power targets. By 2020, it aims to have 15 percent of electricity generated by renewable energy – excluding large hydro-power dams – up from 4 percent today. In addition, it plans to reduce carbon intensity of economic output by more than 40 percent by 2020.

China has overtaken the US as the world’s biggest emitter of carbon dioxide, the main global-warming gas from human activity. So Chinese officials argue that they should be praised, not punished, for helping to curb greenhouse emissions at home and combat climate change abroad by selling low-cost clean-energy products.

The US Congress in 2009 passed economic-stimulus legislation that included a so-called buy-American clause. This obliges firms and local governments receiving stimulus money to purchase only steel and other construction materials, including solar panels and wind turbines, made in the US or in other countries that signed the WTO side agreement mandating free trade in government procurement.

Nearly all industrialized economies have signed the side agreement to open their procurement projects to international competition. But China has not yet done so because municipal and provincial governments, particularly in less developed inland provinces, say they’re not ready.

If cool heads prevail, there’s time to defuse the US-China clean-energy row. Talks have already settled some issues. Beijing could hasten the process by signing the WTO procurement agreement and shifting subsidies away from exports toward encouraging Chinese consumers to use clean power, a move that could increase demand for foreign imports of clean-energy products and components.

Michael Richardson, a former Asia editor of the International Herald Tribune, is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore. This reprinted with the permission of the Yale Center for the Study of Globalization