Sunday, January 31, 2010

China comes clean

The New York Times has an article on China's efforts to develop a clean energy industry that could well prompt renewed howls from policymakers about the danger of the U.S. being left behind in developing these supposed jobs of the future. While the silliness of looking to a poor country led by an authoritarian regime for guidance ought to be obvious, a close reading of the piece reveals even more questions about the wisdom of fostering a clean energy industry.

It suggests that China's burgeoning clean energy sector is booming not because it suddenly makes economic sense, but because of government subsidies and special treatment:
Regulators have set mandates for power generation companies to use more renewable energy. Generous subsidies for consumers to install their own solar panels or solar water heaters have produced flurries of activity on rooftops across China.

...Interest rates as low as 2 percent for bank loans — the result of a savings rate of 40 percent and a government policy of steering loans to renewable energy — have also made a big difference.

As in many other industries, China’s low labor costs are an advantage in energy. Although Chinese wages have risen sharply in the last five years, Vestas still pays assembly line workers here only $4,100 a year.

China’s commitment to renewable energy is expensive. Although costs are falling steeply through mass production, wind energy is still 20 to 40 percent more expensive than coal-fired power. Solar power is still at least twice as expensive as coal.
In other words, China's government is devoting precious resources to an energy source which is considerably more expensive than conventional alternatives. Not only that, but this vaunted industry of the future generates jobs which pay terribly.

But for the sake of argument let us concede that clean energy is destined to comprise a significant component of the economy, and that China will play a leading role. So what? Basic economic theory teaches us that if China can build wind turbines or solar panels cheaper and more effective than the U.S. then this specialization will benefit everyone. There is no point in purchasing such equipment simply for the "Made in the USA" label if it is either more expensive or of a lesser quality. Each country should focus on those products it makes best (although even this is an increasingly abstract concept given that fewer and fewer goods are entirely built in one country).

Government policy should be to back off and let the chips fall where they may. If market forces dictate that China becomes a solar panel superpower, then so be it. And if the Chinese government wants to subsidize wind turbines to make them cheaper for U.S. consumers we should thank them for their generosity.

Also see this related post.

Update: Similar thoughts from John Stossel.

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