China’s ’Green Sputnik’?

Last month I testified before the Congressional-Executive Commission on China in Washington, D.C. The commission, which is co-chaired by Senator Byron L. Dorgan and Representative Sander M. Levin, monitors closely China’s record on human rights and the rule of law, and sets out recommendations for improvements in both of these areas.

During the hearing, one commission member raised an important issue that has become fodder for a number of well-meaning, if not always well-informed journalists: will China beat the U.S. in the race to become the world’s first green superpower? Or – as Tom Friedman at the New York Times has recently articulated – is China a “green Sputnik”? Recent news about the vast expansion of wind and solar power in China, as well as the country’s significant new investment in green technologies, such as electric cars, have many deploring the state of innovation and manufacturing as well as policy implementation within the U.S.

The truth, however, is somewhat complicated. China certainly has the potential to be the global manufacturing center for clean technologies. Already, China is by far the leader in the production of photovoltaic cells. With more than 100 wind-turbine manufacturers and some 400 solar-panel companies are located in China, the country is expected to become the largest producer of wind power equipment by the end of 2009. China is the world’s largest producer and consumer of solar water heaters, accounting for 65 percent of installations worldwide. In addition, China is working its way to become a leader in the electric vehicle market. It has announced a $1.5 billion research subsidy for automakers to improve their electric vehicle technology, and China’s leaders have also called for 500,000 “new energy” vehicles, including hybrids and electric vehicles, to be produced this year.

Yet deploying these technologies on the ground is proving to be a different matter entirely. First, China lacks the political and economic incentives necessary to make clean energy technologies worthwhile to use. For example, China recently passed a law requiring new coal-fired power plants to install desulfurization equipment in order to limit the country’s industrial emissions of SO2 (a pollutant that causes acid rain). In early 2008 the Massachusetts Institute of Technology completed a study of 85 power plants that adopted the equipment, and found that there was a very low rate of compliance with the law. Even though the power plants had the equipment, they wouldn’t use it because it made operating the plants more expensive.

For wind power, several challenges have emerged. In some cases, the turbines are of such poor quality that they are not effective; in others, the wind power plants are not connected to any power grid, so they simply stand idle. In September 2009 the China Daily reported that more than 20 percent of the country’s wind power equipment did not generate any electricity last year because the equipment was not connected to the grid. The incentive—as often provided by the international community—is effective in building the technology, but not in using it.

The lack of this latter incentive is why some automaker executives have recently expressed reservations about the prospects for a Chinese electric car market. Carlos Ghosn, Nissan Motor’s CEO, said at a conference in late October that his company has no plans as of yet to produce electric cars in China, despite the company announcing in late 2008 plans to begin selling electric cars in China as early as 2011. Ghosn stated that the decision of whether or not to produce all-electric cars in China will depend on the country’s demand for them. Meanwhile, Nissan is moving ahead with its plans to make the Leaf, its latest all-electric model, available in the U.S., Japan and Europe by late 2010, and to begin production in the U.S. in 2012. In September, the head of BYD, China’s leading electric car maker, urged the Chinese government to subsidize private purchases of electric cars, stating, “We’re at a critical make-or-break juncture in our effort” to make the electric car mainstream in China.

These developments have led me to a central conclusion about the way the Chinese system works: when a policy appeals to the entrepreneurial spirit of the Chinese people, success is guaranteed; however, when a policy is designed to provide a public good, often with an economic cost attached, the policy’s failure is almost always assured.

The debate in the United States then should avoid getting distracted by the question of whether China will become a world leader in using green technologies. China may well become the global center of clean technology manufacturing; but it will find it far more difficult to employ such technologies on the ground. Rather, the U.S. should be wondering how it will compete with China to become a leading innovator and manufacturer of green technologies.