Renewable energy and the ‘China card’

interns Contributor
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In his address to the nation on the response to the BP oil spill, President Obama played the “China card” – invoking fear of falling behind the emerging economic superpower – to spur support for more subsidies for renewable energy. The President said “countries like China are investing in clean energy jobs and industries that should be right here in America.” The use of China as an exemplar of green energy investment is odd. Most analysts are more concerned about the “environmental crisis” caused by China’s rapid, fossil fuel-based industrialization. Last December, China refused to sign on to the non-binding Copenhagen greenhouse gas reduction goals and in March 2010 was only willing to agree to reduce its “carbon intensity.” Were China a leader in green energy investment and employment, one would expect its government to exploit this competitive advantage by championing a global climate accord.

It is also difficult to reconcile the President’s statement with a speech given last month by his Commerce Secretary, Gary Locke. Secretary Locke explained that “in the past six months,” China was responsible for “the largest increase in human generated greenhouse gases of any country in history.” The Secretary chastened China for its over-reliance on fossil fuels for its growth, pointing out that “coal and oil sales in China jumped 24 percent” in the first quarter of 2010, which was “twice as fast as their economy grew” during that period. Secretary Locke’s worries are for more consonant with a fair reading of the data on China’s energy mix and growth than President Obama’s. When excluding hydroelectric, China accounts for about 1% of worldwide renewable electricity generation. At current market prices, fossil fuels are the most cost-efficient way for China to power its industrial base. Turning to more expensive sources of energy like wind and solar power would make little sense for a developing economy focused on growth.

Given China’s environmental record and staggering fossil fuel consumption growth, why wasn’t the President’s invocation of China’s green investment and jobs simply laughed off? Part of the reason could be the commercial success of columnist Tom Friedman. In his book to promote green energy, the New York Times columnist proposed a competition to “out green” China. Given air and water pollution levels in China, this is not a competition that would be particularly difficult for America to win. Yet, Friedman relies on anecdotes of large Chinese green investments and conversations with government officials to convince his readers that China is determined to press forward with green energy investment. The implication is that the U.S. will be left behind unless our leaders make a similar strategic decision to press forward with a “green energy revolution.”

The notion that the Chinese leadership has, in fact, made a strategic decision to embrace green energy is at odds with a recent United Nations Development Program report. The UN cautions China that it needs to “shift to a more efficient pattern of economic growth” and “transition from its heavy dependence on energy and resource consumption.” The UN does estimate that jobs at companies involved in renewable energy total about 1 million (barely one-tenth of one percent of China’s workforce), but it’s not clear how many of these companies produce items for domestic energy consumption. The market value of renewable energy companies in China accounts for 14.7% of the S&P Global Clean Energy Index, but most of these companies use China’s low-cost production base to build renewable energy products that are exported to other markets. For example, Suntech Power Holdings, a manufacturer of solar panels and related equipment, is the largest constituent Chinese company in the index and its three largest markets are Germany, Italy, and the U.S. China’s green energy investment looks like most other industrial investment in China – export-oriented, with an aim to provide low-cost manufacturing and assembly of products designed in, and destined for, the U.S. and Europe.

While China is likely eager to make the turbines, generators, and associated products for use in Western renewable energy production, they are unlikely to embrace the large scale use of these products themselves. The reason is that renewable energy is expensive relative to carbon-based alternatives. The main sources of non-hydrocarbon renewable energy – solar and wind – provide power that is diffuse, intermittent and unreliable. The Energy Information Administration (EIA) has consistently estimated that investments in wind energy capacity are made in direct proportion to the magnitude of the subsidies provided for it. This has also been the case internationally.

Expensive, inefficient products generally do not succeed in market environments without subsidies. The problem is that subsidies represent resources extracted from others sectors of the economy. Positive subsidies (tax expenditures and government spending) must be financed through taxes on other parts of the economy, while negative subsidies (a carbon tax orcap and trade regime) make fossil fuel use artificially expensive and raise overall energy costs. Either way, the promise of a green energy revolution is tantamount to asking households and businesses to incur greater costs, either in the form of higher energy bills or higher taxes.

The externalities created by fossil fuel use are expensive and obvious: devastating oil spills, the potential for global climate change, and economic entanglement with volatile regions of the world. Less obvious are the costs businesses and households would have to incur to break our “addiction” to fossil fuels. Instead of speaking frankly about these costs and making a case for why they should be incurred, the President chose instead to get the nation’s competitive juices flowing by creating the impression that the U.S. was somehow falling behind in a race towards a green future. Given the unease with which many Americans regard China’s rise and the bilateral trade deficit, this was the obvious nation to point to as winning this race, whatever the size of its actual renewable energy footprint. Unfortunately, playing the “China card” is not going to make renewable energy subsidies any less costly.