The State of the Chinese Solar Industry

With news of President Barack Obama and Chinese President Xi Jinping’s negotiation in June of phasing out HFC usage in their countries, China’s new leadership has gained international attention in the fight against climate change. With China’s momentum on the world stage in this victory, it has the opportunity to take the next step in CO2 reduction –increasing photovoltaic energy production.

Currently, China holds 30% of global shares in solar photovoltaic cells, making it the world’s largest manufacturer of the technology. While the Chinese solar industry is largely export oriented, the country produces about 7 GW of solar energy for domestic use, roughly .5% of total energy production. However, through targets, market incentives, and subsidies made legal by the Renewable Energy Law, the government hopes to raise installed solar PV to 35 GW by 2015.

This growth in China’s PV industry has not gone unnoticed, particularly in the United States and Europe. China’s percentage of photosensitive semiconductor imports by the US has risen dramatically from just 18% in 2007 to 48% in 2011. Prompted by this competition, American solar manufacturers persuaded Congress to impose tariffs of 30% on Chinese PV cells while Europeans attempted the same. Of course, the Chinese regard their support programs as legal under the World Trade Organization, placing the blame on the United States’ subsidies on PV production and energy competition from America’s natural gas boom.

At a time when China’s leading PV firms have been struggling with falling international demand –China’s Suntech Power Holdings defaulted on its $541 million US bonds in March, followed byLDK Solar Company’s default in April– these accusations of dumping have left the Chinese administration in a hard position. The low prices enjoyed by Chinese PV manufacturers have been feasible due to state support, but more importantly, were maintained by large-scale production resulting from high foreign demand. Without the later, Chinese PV companies’ overcapacity will not be cleared and many producers will eventually have to exit the market. In order to soften this blow, the government enacted a tax rebate, refunding 50% of the value added tax from now until 2015 on PV manufacturers in order to maintain the domestic supply of PV energy. Meanwhile, the industry will have little choice but to turn to domestic consumers to minimize its losses.

In other words, China’s PV industry now has the opportunity to march in step with the government’s climate agenda. Solar overproduction can be readily reallocated for use in residential units or solar farms, thus providing an energy source other than highly polluting coal which constitutes 67% of Chinese energy production. This convenient solution is small enough that it might provide a political stage to pursue more ambitious climate programs in production, efficiency, and land conservation. Furthermore, the accumulation of solar power will also deliver China additional time to further develop its shale fracturing technology. With recoverable reserves on par with those of the United States, the Chinese natural gas industry could provide another outlet for the growth in energy demand, with an advantage of relatively cleaner emissions than coal and oil.

By confronting the high levels of industrial pollution in densely populated cities through greater reliance on solar, the Chinese government will not only reduce the costs of poor air quality on its economy, but will be seen successfully following public demand, adding to the legitimacy of the Communist Party as the ruling organization.

Internationally, China could also gain soft power through this decision. Because of China’s low carbon emissions per capita, it qualifies as a developing country in the Kyoto Protocol and was not required to draft binding targets as a signatory. Thus, extra emission cutting by the Chinese before the 2020 cutoff of the Kyoto Extension could grant China leverage over developed countries, giving it a greater say in any future decisions on climate change.

While the circumstances surrounding the Chinese PV industry have proven a disappointment, it still has the capability of making a difference domestically and can bide its time for the international environment to turn back in its favor. In the meantime, the new leadership in Beijing may use this situation to fortify its recent achievements against climate change. Whether this will be a stepping stone for stronger action will prove influential in the next round of multilateralism in 2020.

Travis Clayton is a first year Masters of Global Policy Studies and Asian Studies student with a B.A. in Economics and Chinese from the University of Texas. His interests lie in Chinese energy policy and international finance. He has foreign experience living in Taiwan and interning at a consulting firm in Shanghai, China.

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