GLOBALIZATION IN AN ECONOMY

Subject: Economic Globalization and the Environment

Topic: “Should the Chinese government continue to subsidize solar panel production?” (2500 words)

Due: 21^thMay 2012 before 4pm

Your Final Policy Paper should consider the following questions:

•           In simple terms, what is the policy question you are addressing?

•           What is the government trying to achieve and why is it an important issue for your chosen government?

•           What is the current government policy/negotiating position (if any)?

•           What do the theories and/or empirical evidence covered in the course suggest about the answer to your question? Explain.

-Scale, Composition and Technique Effects

-International economics and the gains from trade

-Theory of the Second Best and the Principle of Targeting

-Development and poverty issues

-Using trade instruments to achieve environmental objectives

–Using environmental policy to achieve trade objectives

– Strict regulations as protectionism

–Weak regulations as an export subsidy

-Why do trade and environment policies sometimes conflict?

– WTO and the environment: legal and institutional aspects

-Foreign investment and the environment

-International investment agreements and the environment

-Regulatory takings & police powers carve-outs

•           Is there any other academic or other research specifically relevant to your policy question? Is there a clear preferred policy suggested by the existing literature?

•           What other factors (e.g. political, legal) affect the setting of policy in this area and how?

•           Do you think the government should change its current policy: why or why not?

–  If so, what is your recommended policy/negotiating position?

Due: 21^thMay 2012 before 4pm

There is the marking criteria:

SOLUTION

Should Chinese Government continue to subsidize solar panel production?

1. I.                Introduction

This policy paper tries to address the question ‘Should Chinese Government continue to subsidize solar panel production’ by assessing the pros and cons of subsidization of solar panel production in relation to fair international trade, impact on other countries, environmental policies, as well as legal clauses of WTO agreement.

Chinese Government rolled out two national solar subsidy programs in 2009 in its attempt to reduce conventional energy consumption and encourage use of renewable energy (China Policy in Focus). The BIPV (Building-integrated photovoltaic) subsidy program promises RMB20/watt for BIPV systems and RMB15/watt for rooftop systems. 2009 alone saw the subsidies amount to be RMB1.2billion (China Policy in Focus a). The second program, called the Golden Sun Program, offers even more extensive help to PV industry. Under this project, an arrangement has been done to subsidize 50 percent of investments in solar power projects. In case, the unit is in remote region, the subsidy rises to 75 percent (China Policy in Focus a).

As a result of the national subsidy programs, China has become host to many solar power companies. Many of these solar power companies have also started providing power to US and European countries. Suntech Power Holdings, a major Chinese solar PV manufacturer, experienced 85% of sales from Europe and only 5% from China (Liu, 2010). The large subsidies reduced entry barriers for newcomers, and Chinese solar industry saw a boom in its production capacity. In 2009, the two subsidy programs helped in installing 160 megawatts of solar PV systems in China. At present, China has nearly 700 solar power producers with a total annual production capacity of 40 gigawatts of energy (Bradsher, 2012). Predictions about consumption trends of solar power across world are also positive. Demand in Europe is expected to rise by 20%, while U.S. and Asia Pacific are expected to see 50% growth. Growing demand for renewable power is a positive driving force for this industry.

Although the subsidization of solar panel production has been a boon for the solar power industry, and a big achievement on the green energy front, several issues question whether this process of subsidization should be continued. China has been accused by the US Government of dumping under-priced solar panels in US, thereby driving the local solar power producers to extinction (Clayton, 2012). There have been arguments that high subsidization may lead to many companies swarming the market, which will eventually lead to large number of low-quality projects (Liu, 2010). There are many more arguments against the subsidization of solar panels production.

In order to provide an opinion on the question at hand, this report follows a methodical process. First of all, in Section IIChinese Government’s rationale for the process is discussed. Section II discusses some of the advantages of this process. Section IV deals with the various issues related to the process of subsidization like unfair trade, conflict with WTO agreements, protest by other countries, stagnation of innovation in the industry and more. Various factors affecting the setting of the policy are discussed in Section V. Section VI gives the author’s view on how the situation should be handled.

1. II.              Chinese Government’s Rationale behind the Program

As a result of China’s rapid industrial development, it is facing environmental degradation. One of the high producers of greenhouse gases, China’s energy sector is considered a major source of environment pollution (China Policy in Focus b). As a part of its initiative to reduce the environmental degradation by conventional energy sources like coal, natural gas and nuclear power, the Chinese Government started encouraging use of renewable sources of energy like wind, water and solar power. Post 1990s, most of the environment laws enacted encouraged renewable energy usage.

Solar Power Production requires huge investments. This was a major setback in the growth and development of this industry. Moreover, as a result of huge installation costs, the prices were very high compared to energy produced by fossil fuels like coal and oil. The industry needed support from the Government to sustain.

As a part of China’s environment policy of encouraging the renewable energy sources, the Government, launched the two solar production subsidization programs: BIPV subsidy program and the Golden Sun program.

Another major reason behind the Government’s subsidization program was to make it an independent energy producer, and to avoiding dependence on volatile countries of Middle East and Africa for oil (Bradsher, 2012).

1. III.            Advantages of Subsidization Process

The subsidization of solar power production has resulted in energy-independence of China. China’s power situation was initially vulnerable due to its dependence on volatile countries like Middle East and Africa for oil (Bradsher, 2012). Apart from giving China with solutions to its energy problems, the subsidization programs led to the opening up of many solar power producing companies. Some of the big companies even started exporting solar panels and power to U.S. and European nations. The large solar production capacity set up by Chinese producers also meant solar power for nations depending on non-renewable sources of energy.

The subsidization of solar power production made the solar power available at prices comparable to prices of power from coal and natural gas. This led to increase in use of solar power in China as well as rest of the world. The use of renewable source of energy like solar power has the added benefits of protecting environment and preventing natural resource degradation. Thus, subsidization is helping China in achieving its environmental policy objectives.

1. IV.            Issues regarding Subsidization Process

Various issues have arisen in the recent past which is pointing against the concept of subsidization of solar power production. Some of these issues are highlighted in this section.

Violation of World Trade Organization’s Rules

When a country exports a product at a price lower than the prevailing market price in the home country, it is called ‘dumping’. According to WTO framework of trade agreements, countries can take action against dumping if the dumping results in substantial economic loss of the countries (World Trade Organization). Trade remedies provisions have been made to protect the affected country’s interests.

American solar power companies led by Solarworld AG filed a complaint with the Department of Commerce stating China was supplying solar panels at very low cost due to the subsidization by Chinese Government, which was resulting in huge losses of the U.S. production companies (Jose, 2012). During the same time, US-based solar company SpectraWatt was closed due to heavy losses. US Government had to give a $535 million federal loan to Evergreen Solar Inc. and Solyndra; however they too failed to survive (Clayton, 2012). The solar panel makers of US have charged China of trying to corner the market and driving away the competition around the world. As a result of investigation into the matter, The US Department of Commerce has levied around 31 percent of anti-dumping tariffs on solar panels imported from China (Leone, 2012).

Creation of Monopoly in the Market

The closure of three big American solar panel makers has led the solar makers across the world to worry. The availability of cheap solar panels from China is killing away their domestic market share. Moreover, the plunging prices have resulted in bankruptcy of many of these companies. If this trend continues, it can be assumed that China will assume monopoly in the production of solar power. As research has shown, monopoly never works well for the customers. There may be little or stunted innovation. After driving away the competitors from the market, Chinese producers of solar panels will be the sole controller of the technology and hence would control the prices. Although, such an extreme case is difficult to happen, it is not impossible.

Stunted Innovation

Large number of companies coming to play as a result of availability of subsidies will result in a large amount of low-end projects. In countries with availability of cheap solar power from China, companies with newer technologies may find it difficult to sustain because of the huge initial costs. Also if viable big players keep on closing due to cheap power available from China, there will be very little domestic competition in other countries. Even companies with innovative technologies won’t be able to succeed in such a scenario.

1. V.              Factors affecting Policy Setting

There are various factors governing the setting of the policy regarding subsidization of solar power production.

Environmental: Energy development and energy protection are top priorities for the Chinese Government through its different Environment Protection Acts. Moreover, in January 2010, China submitted a proposal to United Nation Framework Convention on Climate Change to reduce its carbon intensity by 40-45% within 2020 compared to 2005 level (China Policy in Focus b). Environmental protection requirements need the sustenance of solar power manufacturers. Without subsidization, solar power manufactures cannot afford for the huge investments required for this industry. Apart from that, the expensive infrastructure will lead to high price of solar power. Customers will prefer cheaper fossil-fuel power to the expensive solar power. All this have to be kept in mind while formulating the policy.

Regulatory: Fair trade agreement principles oppose countries from spending government money to help in the exports. Subsidization of goods and commodities used for domestic consumption is fine. However, subsidization of production process of goods and dumping them in other countries violate fair trade principles. With U.S. already raising voice against China’s violation of WTO agreement, other countries may soon join in with U.S. in levying extra-tariff on the imported products from China. This is going to hamper China’s international trade relationships with other countries. Moreover, the levy of anti-dumping tariff will bring the prices of Chinese power panels at par with that of the domesticproducers. It will eventually hurt the Chinese solar power makers in the long run.

Economic:The solar power industry is also affected by the economic cycles. As it is somewhat expensive than normal electricity from coal and natural gas, at times of economic crises, the demand for solar power falls. This happened during the global economic recession of 2009. From 2008 to 2009, the external demand for solar power froze (Liu, 2010). For example, SunTech Power’s key customers like US, Australia, and Europe were all affected by the global recession, and had reduced demands during that period. The subsidization of the production process helped the PV companies to sustain the losses and survive the crises.

Another issue arising out of the economic factors is China Government is also feeling overburdened financially with the decrease in overseas demand. The solar power market has not made the profits that Chinese Government has expected. The China Securities Journal carried a report as to how the funds shortage is blocking the Government’s initiative to introduce feed-in-tariff.

Political: A sudden removal of the subsidization of solar power production may not go down well with the PV manufactures. There are about 700 PV manufacturers operating in China at present (Bradsher, 2012). Removing the subsidization program is going to hit their profits, and make it difficult to survive for some of them. Companies having no exports business and completely dependent on the Government’s subsidization program will get hurt badly. Agitation and strikes may take place. Political motivations to satisfy the industry may affect how the policy is set in this area.

Social:The subsidization programs: BIDV program and Golden Sun Program have led to many companies cropping up in the industry of solar power production. Apart from being a contributor to the overseas revenues, these projects have led to the creation of large number of employment opportunities for Chinese population. Removal of subsidization programs will hurt many of the PV manufacturing companies and lead to closure of these companies. It can have a wide-scale impact on the employment opportunities for Chinese citizens. This has to be kept in mind while making the subsidization policy.

Technological: The process of subsidization has boosted the production and consumption of solar power. Some of the main causes of slow deployment of solar technologies are:

• The high installation cost compared with other forms of energy like fossil fuels.
• And the intermittent nature of energy inputs requires energy storage systems to match the electricity supply with electricity demand (GCEP, 2006).

For greater deployment of solar technologies and innovation in this field, large investments from larger financial and intellectual resources are required (GCEP, 2006).

There have been minor innovations in the industry. For example, SunTech has been able to increase the efficiency of its solar panels from 14% to 18%. But these efficiencies are too low compared to conventional energy sources. Laboratories have come up with solar cells that have 40 percent efficiency, but they are very expensive. In attempts to take advantage of subsidization opportunities by the Government, the manufacturers are focusing only on current generation rather than investing in R&D (Myhrvold, 2011).

1. VI.            Author’s View and Recommendations

The author feels that Chinese Government should gradually discontinue subsidization of solar panel production. Some of the critical justifications for author’s view are:

• The Chinese strategy of approaching the solar power industry shows to an extent the country’s desire of becoming a major global exporter rather than increasing its domestic consumption. An example of this is the very low solar power consumption of China as compared to US and Europe. If indeed, China wanted to support use of sustainable energy, it would have first targeted increasing consumption in the domestic market rather than creation of an exports-oriented solar power market. The cases filed by US Department of Commerce which accuses China of dumping its cheaper solar panels in the country is a proof of this strategy. Moreover, US Government levying anti-dumping tariffs on the imported products from China will lead to stiff competition for the Chinese manufacturers abroad. They will have to turn to the domestic market to survive in the industry. The Government should focus on creating awareness about consumption in the domestic market first.
• Most of the renewable energy production today is inefficient. Subsidies are the only way these inefficient technologies can make any profits. These projects do not make any economic sense unless they are highly subsidized. Instead of increasing deployment of inefficient technologies, isn’t it better to invest in coming up with better and efficient renewable technologies. Spending on research and development of newer renewable energy technologies should be done which can operate without the help of subsidies.

Some of the recommendations for the Policy setting are:

• Gradual discontinuation of the policy should be done instead of abrupt withdrawal of support to the existing PV companies in the market. A phase-by-phase reduction of the subsidies should be effected.
• For new companies applying for subsidies, proper analysis of the company’s strength to survive in the future without subsidies should be done instead of giving them every benefit of doubt.A proper framework for analyzing the suitability of company to be given subsidies should be created.
• Tax Incentives should be provided to users of solar power energy to boost consumption in the domestic market. Awareness programs should be conducted among the big industrial consumers of energy to switch to renewable solar energy.
• Investments should be made in research and development of more efficient renewable energy technologies that can operate without subsidies.

References:

Bradsher, K. 2012, ‘A Measured Rebuttal to China Over Solar Panels’, The New York Times, Viewed on 19 May 2012, Available at http://www.nytimes.com/2012/03/21/business/energy-environment/us-to-place-tariffs-on-chinese-solar-panels.html?_r=1&pagewanted=all

China Policy in Focus a, ‘China’s National Solar Subsidy Programs’, Viewed on 19 May 2012, Available at https://sites.google.com/site/chinapolicyinfocus/china-s-solar-subsidy-programs/china-s-solar-industry/china-s-national-solar-subsidy-programs

China Policy in Focus b, ‘The Development of China’s Energy Policy’, Viewed on 19 May 2012, Available at https://sites.google.com/site/chinapolicyinfocus/china-s-energy-and-environment-policy/the-development-of-china-s-energy-policy

Clayton, M. 2012, ‘China subsidized solar panels, US finds. Are tariffs the right response?’, The Christian Science Monitor, Viewed on 19 May 2012, Available at http://www.csmonitor.com/USA/2012/0320/China-subsidized-solar-panels-US-finds.-Are-tariffs-the-right-response

GCEP 2006, ‘An Assessment of Solar Energy Conversion Technologies and Research Opportunities’, Global Climate and Energy Report, Stanford University, Viewed on 19 May 2012, Available at http://gcep.stanford.edu/pdfs/assessments/solar_assessment.pdf

Jose, S. 2012, ‘U.S. levies low tariffs on China solar panels’, EE Times, Viewed on 19 May 2012, Available at http://www.eetimes.com/electronics-news/4238416/U-S–levies-low-tariffs-on-China-solar-panels

Leone, S. 2012, ’31 percent Anti-Dumping Tariffs Announced for Chinese Solar Panels’, RenewableEnergyWorld.com, Viewed on 19 May 2012, Available at http://www.renewableenergyworld.com/rea/news/article/2012/05/31-percent-anti-dumping-tariffs-announced-for-chinese-solar-panels

Liu, C. 2010, ‘Is China Putting the Brakes on its Solar Program?’, Greentechsolar, Viewed on 19 May 2012, Available at http://www.greentechmedia.com/articles/read/is-china-putting-the-brakes-on-its-solar-program/

Myhrvold, N. 2011, ‘Energy subsidies stymie wind, solar innovation: Nathan Myhrvold’, Bllomberg Businessweek, Viewed on 19 May 2012, Available at http://www.businessweek.com/news/2011-11-29/energy-subsidies-stymie-wind-solar-innovation-nathan-myhrvold.html

World Trade Organization, ‘Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (Anti- Dumping Agreement)’, Viewed on 19 May 2012, Available at http://www.wto.org/english/res_e/booksp_e/analytic_index_e/anti_dumping_05_e.htm

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