Blog Post

China Losing Money on Solar - a Good Thing, But Not For the Reason You Think

Oct 5, 2012 | Nathan Richardson

The NYT reports (h/t Alex Tabarrok) that Chinese subsidies for solar panel production via state-owned banks have led to huge overcapacity, with up to 33% losses on panel sales. Tabarrok points out the parallels between Chinese officials' reactions and the political fallout from failed U.S. government investments in solar. The rhetoric is similar but there are important differences. China seems to have overinvested in manufacturing capacity (at least given current demand), while U.S. investments are primarily in the R&D or initial commercialization phase. Failure rates in these early phases of development should be expected to be much higher (though Solyndra is to date the only one of 16 solar firms to receive Department of Energy loan guarantees to fail). Ongoing manufacturing subsidies also have to be much bigger: China directly or indirectly gave solar firms $18 billion in low-rate loans, plus other benefits like cheap land - and entered into long-term contracts that could reach $50 billion in subsidies over 20 years. In contrast, DOE guaranteed $13.6 billion in loans. Both are big numbers, but the Chinese are on the hook for a lot more, for a lot longer.

American observers are likely to cheer news of Chinese solar troubles. Simple schadenfreude is part of that. Some may feel the news vindicates beliefs that Chinese clean energy subsidies are "cheating" or breaking trade law. Others will find confirmation of preexisting skepticism about solar power.

I agree that apparent Chinese oversubsidization of solar is good news. But for a simpler reason: cheap solar panels are fantastic in their own right. It doesn't really matter who makes them. If we can buy cheap panels from China, we can spend the resources we'd otherwise use on other things. Not for the first time, China is subsidizing U.S. consumption.

China's solar policy may not be a good idea economically (for China). But they are doing their bit, perhaps unintentionally, to build the technology that can avert climate change - China should rebrand its subsidies from a nationalist/mercantilist industrial policy to global public benefit. Trying to kill that policy with trade lawsuits is a mistake.