A nation supporting renewables, green transition should be commended

Since April, US Treasury Secretary Janet Yellen and Secretary of State Antony Blinken have during their visits to China emphasized the issue of "overcapacity", with the latter also addressing "overcapacity" and "unfair trade practices" in China's renewable energy industry.

China's subsidy policies in this sector have garnered widespread attention. Over the past decade, there has been significant debate even within the Chinese economic community regarding this issue.

Viewed purely from a climate change mitigation perspective, the development of the renewable energy industry has positive externalities and therefore requires policy intervention.

Furthermore, China's industrial policies have accelerated the development of the renewable energy sector and inspired other countries to enhance their renewable energy policies. In this sense, China should be commended rather than criticized.

Without China's development in the renewable energy sector, the global progress on climate change would be much slower and more costly.

For example, Europe aims to have EVs make up 80 percent of new vehicle sales by 2030 to meet climate change policy goals, yet in 2023 this figure was only 17 percent, compared to over 30 percent in China.

China's new energy vehicle sales rose 33.5 percent year-on-year in April 2024, far outpacing the overall increase in vehicle sales, and the market share of NEVs reached 36 percent.

From a long-term perspective on climate change mitigation, there is far from an overcapacity in renewable energy. In 2023, BYD accounted for just 5 percent of sales among the world's top 10 auto manufacturers, less than 30 percent of Toyota's sales.

According to the International Renewable Energy Agency, to meet temperature control targets, the world needs to increase 1,000 gigawatts of new renewable power annually, yet the total increase in 2022 was only 300 GW.

Setting aside the moral banner of addressing climate change, are China's subsidies for the renewable energy industry economically sound?

First, China's industrial policy does not provide special treatment to State-owned enterprises; it focuses on rewarding the best performers. Companies like Tesla, BMW, Volkswagen, as well as private firms such as BYD and Nio, have all received support. The entry of EV brands into the European market is not limited to BYD; Tesla, SAIC MG, and Dongfeng Yijiete are all foreign companies.

Furthermore, China began to change its subsidy policies 10 years ago. In 2013 and 2018, it shifted from production-based subsidies to consumer-oriented subsidies for photovoltaic and EV companies, and the intensity of these subsidies has also decreased. After the reduction in subsidies, the competitiveness of Chinese companies continued to rise rapidly. In the photovoltaic sector, the proportion of global patent applications filed by Chinese companies increased from 45 percent in 2011 to over 90 percent in 2023.

China's industrial policy in the renewable energy sector also includes promoting infrastructure development.

By the end of 2023, China had built a total of 8.6 million charging facilities, ranking first in the world, and gradually forming a virtuous cycle in which electric vehicles and charging infrastructure promote each other.

The central government has set a target to build a charging facility network to meet the needs of over 20 million electric vehicles by 2025.At the provincial and city level, various policies have also been introduced. In recent years, China's investment in charging infrastructure has reached tens of billions of yuan. Additionally, the government has promoted the establishment of a standardized charging interface.

China has a large market. Roughly 85 percent of China's new energy vehicles were sold domestically in the first quarter of 2024. Clearly, China's industrial policy has effectively utilized economies of scale, stimulated technological innovation by enterprises, and led to more intense market competition.

According to the International Renewable Energy Agency, China has the lowest average cost of photovoltaic power generation globally. Moreover, Chinese companies have not exploited their cost advantage; for example, BYD's Atto3 is sold in Europe for between 38,000 euros ($40,724) and 39,000 euros, far higher than its domestic price.

From the perspective of creative destruction, traditional automakers need greater courage for self-transformation, while emerging EV companies are the drivers of this change.

If not for the disruption caused by China's EV companies, would the auto industry's greening process be faster than it is today? The answer is no.

Globally, the renewable energy industry still has vast room for development and a long-term substantial demand gap remains. If countries strengthen the protection of their own industries and fragment the global renewable energy supply chain, a race to the bottom will ensue. We should aim for a race to the top, jointly accelerating the process of addressing climate change.

A paper published by Helveston et al (2022) in Nature shows that international cooperation just in the photovoltaic industry chain alone would save the United States $24 billion, Germany $7 billion, and China $36 billion, compared to a decoupling scenario. To tackle the challenges of climate change, nations should enhance their cooperation.