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How China Became the World’s Leader in Green Energy

   March 4, 2020        298        Scott Malcomson

China has never been the most enthusiastic party to international climate accords, but Beijing might end up saving the planet anyway. In little more than a decade, China has made itself a world leader in electric vehicles, renewable energy, and energy storage. In response to its own poisoned environment, shrinking workforce, and security fears about foreign dependence, the country has incubated a green industrial policy that is both generous and ruthless.

China did this to solve its own problems—with a lot of help from Japanese and Western companies and investors—but the results benefit everyone. For now, China’s green energy sector remains deeply connected to other, very different, economies in Asia and the West. Washington’s current policy of “decoupling” Western economies from China threatens to disrupt green-tech innovation just when we need it most. The consequence could be a blow to the environment, not just in China but throughout the world.

GETTING GREEN

China became an economic power after 1989 in part because it offered abundant cheap labor, was willing to use dirty manufacturing processes, and opened its doors to global players. Today, Chinese labor is relatively expensive, the country’s environment is toxic, and the Chinese Communist Party is striving to reduce foreign dependence. The remarkable rise of China’s green economy is fueled by all three of these factors.

In the 1990s, China began to build a solar-panel industry, more or less from scratch. Demand for solar panels was surging in Germany at that time—the result of German government policy—and German companies invested in Chinese panel manufacturers, transferring the intellectual property and experts necessary to seed the new industry. Chinese companies took the opportunity and ran with it. Other European countries soon sought to green their economies, and demand for solar panels increased.

China, well aware of its dependence on foreign energy supplies and the dirtiness of its coal-dominated domestic energy industry, then began to cultivate a domestic market for solar power. The state subsidized production, created incentives to spur domestic demand, and drew on Australian academic expertise and Californian venture capital to expand the industry. By the 2010s, China had a huge domestic market for solar panels and dominated the world market. It also brought the price of panels down far enough to stimulate the growth of solar energy markets around the world, including in the United States. With business booming, China began to reduce its subsidies to the solar industry in 2014.

The wind power industry followed a somewhat different trajectory. There is no retail market for wind: turbines are neither cheap nor easy to build, and they need to deliver energy to a grid. In 1994, China began to require state-owned energy grids to buy whatever wind power energy was available as a way to boost the renewables industry. Tax incentives and other encouragements—as well as joint ventures with Danish and German companies—led to rapid growth in the wind power sector. By 2008, China had a little more than 12,000 megawatts in wind power capacity. Soon, the first Chinese-made wind turbine was installed in the United States as part of a joint venture. Today, China dominates the global wind power industry. It generates more power than its grids can integrate, and the state is looking to reduce subsidies.

Unlike a coal-fired power plant, neither the sun nor the wind can be switched on at all times, so the key to making renewable energy viable is energy storage. One way to store solar or wind power is to use it to pump water up a dam: when energy is needed, the water flows back downward. An alternative is grid-level battery storage, which in China went from near zero megawatts in 2010 to more than 800 in 2019.

China’s leading battery maker, CATL, builds storage facilities for such grid-level batteries and has recently entered the U.S. market. The company also makes batteries for electric vehicles. That sector, which includes electric buses and trucks, as well as cars, is the most recent green initiative to take off in China. Between 2009 and 2017, Beijing spent more than $35 billion to subsidize the electric-vehicle industry. The government committed additional billions to building “electric-vehicle towns,” mini-Detroits for the electric era. Once again, China flirted with overcapacity and cut some subsidies in June 2019.

State-owned companies, as well as some private players, are building a nationwide network of charging stations, and the innovation loop from grid-level battery storage to cars and trucks and back again continues to thrive. Major car makers, such as BYD, are also major battery makers. China’s battery industry is now a market leader, as is its battery-recycling sector. Recycling batteries helps reduce pollution and the dependence on foreign raw materials. These green industries are global in scale and volume. And China achieved all this in less than two decades.

GREEN INTERNATIONALISM

China’s green revolution did not occur in splendid isolation. American, Australian, Canadian, Danish, German, Japanese, and other non-Chinese companies were involved in China’s green technology sector from the beginning and still are. But their contributions were not quite a question of forced technology transfer. Low Chinese labor costs, low environmental standards, and openness to foreign manufacturing companies—together with state-created demand—created a market for non-Chinese green innovation and production that did not previously exist.

In effect, China seeded the global green energy industry by lowering initial costs and creating artificial demand. Today, most major American, German, and Japanese auto manufacturers—together, most of the global industry—are deeply involved with their Chinese counterparts in building electric vehicles and the capacity to power them. BYD holds some 90 percent of the global electric-bus market and will have a role to play in most cities with green plans for urban transport, which is to say, most cities. CATL, BYD, and Guoxuan High-Tech are China’s premier producers of electric-vehicle batteries, and all of them have joint ventures or significant contracts with major Western auto manufacturers. CATL is now building a battery factory in Germany.

Similar arrangements prevail in the wind and solar industries. Envision, a major Chinese wind-turbine maker, has a joint venture with France’s Total and has bought up Nissan Motors’ car-battery unit. The largest North American solar-panel producer, Canadian Solar, was founded by a survivor of the Cultural Revolution and has long worked with Chinese state-owned companies; much of its management team and manufacturing is in China.

When it comes to green innovation, technology transfer goes both ways. Tesla recently opted to use a cobalt-free, long-range battery that CATL produced after years of research and development. Both Ford and Toyota hope that their current investments in Chinese electric-vehicle companies will enable them to eventually bring electric cars into the American, Japanese, and European markets. One of the two major U.S. solar-panel makers has begun a joint manufacturing venture (in Mexico) with a Chinese counterpart that brings its own innovations to the table. The world needs China’s green industry to succeed.

GREEN NETWORKS

The U.S.-Chinese trade conflict has often been framed as a tech war, with the bloodiest battleground surrounding Huawei and 5G. So it would be pleasant to think that all of this green industry remains at a safe distance and will continue to improve the world’s chances of energy sustainability regardless of developments in 5G, data surveillance, and the like. The opposite, however, is the case.

China’s last five-year plan made the development of electric and autonomous vehicles a priority. China’s tech majors, such as Baidu (search), Tencent (social media and online gaming), Xiaomi (phones), and Alibaba (e-commerce and, through Ant Financial, e-finance), are all heavily invested in electric vehicles and related industries. So are major non-Chinese venture capitalists and chipmakers, such as Taiwan’s Foxconn and the U.S. giant Qualcomm. And yes, so is Huawei: since 2017, the telecommunications company has been forming partnerships with both Chinese electric-vehicle makers, such as BAIC, and foreign companies, such as Audi.

China’s tech industry has taken electric vehicles to heart. That is a major reason why the sector has grown so fast: tech and venture money has allowed it to innovate independent of the established gasoline-powered industry. And that independence is one reason that the non-Chinese auto, truck, and bus giants have gone so heavily into partnerships with Chinese startups. In effect, China provided a way for the world’s legacy motor-vehicle industry to renew itself for a greener future.

The industry would not likely have taken this turn, or at least not at the current pace, if it had been left to itself. Two major exceptions, however, are Google, which has undertaken strenuous autonomous-vehicle efforts at a distance from China, and Tesla. But then, Tesla has itself recently become one of China’s leading electric-vehicle manufacturers, spurred, of course, by Chinese subsidies and Chinese tariffs on U.S. goods, which have resulted from the trade conflict. Jumping tariff walls has long been a driver of foreign direct investment, at least since U.S. tariffs in the nineteenth century brought European investment into what was then an underdeveloped country.

For better or worse, China’s green innovations cannot be separated from the tech giants that are the focus of so much anxiety in many East Asian and Western capitals. An extended tech war is likely to have environmental consequences.

COLLATERAL DAMAGE

The current animating dream of the Chinese technology sector is a “5G Internet of Vehicles” powered by artificial intelligence and with core computing power housed in megascale data centers. Whether a 5G Internet of Vehicles is actually a good business plan remains to be seen, but to some degree that is beside the point. The connection between the intention of investment in technological innovation and the results is rarely tight. A lot of money was lost laying fiber-optic cable around the world. WorldCom’s purchase of MFS’s unprofitable cable business made it the largest owner of global cable prior to its own 2002 bankruptcy—then the largest bankruptcy in U.S. history. But the result was a telecommunications infrastructure that brought the Internet to the world, leading to a host of technological and industrial advances unimagined by the investors who nonetheless made them possible, even if they did not succeed in profiting from them.

China’s green energy revolution could take a similar path. Excessive bets on, say, networked autonomous passenger vehicles could lead to bankruptcies and the destruction of the industrial capacity for making electric vehicles or to a shrinkage of investment in green technology. The difference is that, unlike in the case of WorldCom’s collapse, the planet would be a great deal worse off if this industry failed.

China’s advances in green technology have universal benefits that policymakers must not discount, lest the U.S.-Chinese tech war exact collateral damage that benefits no one. The zero-sum logic of decoupling is disingenuous. Germany’s economic minister, Peter Altmaier, has argued that German auto companies need to start manufacturing their own electric-vehicle batteries. But if Germany raised its auto-battery game, it would do so on the back of ten years of collaboration with innovative Chinese companies, such as BYD and CATL. The story is not all that different with solar panels, wind turbines, or grid storage. China’s green advances are one reason that older industrialized economies have gotten as far as they have in reducing the global economy’s carbon footprint. Now is not the time to slow that process down.

World Energy

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