Guest post by: Liu Wenman, research associate at the Stockholm Environment Institute
China has agreed to halt subsidies to wind-power equipment manufacturers after the United States filed a complaint at the World Trade Organisation (WTO), claiming that China’s industrial support in this sector violated the body’s rules and regulations.
According to a report conducted by REN21 (Renewable Energy Policy Network for the 21st Century), China installed 13.8 gigawatts of wind-power capacity in 2009, making it not only the top installer that year, but the biggest on record.
At the end of 2009, China’s total installed wind-power capacity reached 25.8 gigawatts, ranking it second in the world. (The United States was the country with the highest installed wind-energy capacity, with a total of 35.1 gigawatts.) Out of the world’s top 10 wind-turbine manufacturers by annual market share, four are Chinese. Together, they account for 31.5% of the global market. China is already producing more wind turbines than anywhere else.
Before China’s Ministry of Finance launched its wind-power equipment subsidies programme – the “Interim Measure on Management of Special-Project Funds for Industrialisation of Wind Power Generation Equipment” – in 2008, no Chinese wind-turbine manufacturers had made it into the top 10 manufacturers globally.
If the government provides subsidies to the renewable energy industry, and thereby helps it to grow, surely this is a good thing. Why, then, would it be a violation of WTO rules?
Certainly, when the Chinese government directly subsidises equipment such as wind turbines, it can lower the market price and increase share in both the domestic and global market. However, the production cost of the wind turbines does not fall, nor does the efficiency of the process increase. This is because, with government financial support, the whole wind-power manufacturing industry lacks the incentive to cut costs and increase efficiency.
As a result, wind-power equipment with higher production cost and lower efficiency might rapidly take up the market share, due to their advantages in price. And those with lower production costs and higher efficiency may be marginalised, as they are lose market share as well as profit.
Providing subsidies for equipment is not, in fact, a good way to lower costs and boost efficiency. The beneficiaries of such a policy will include neither equipment manufacturers with advanced technology, nor local government coffers.
Conversely, providing support to the renewable-energy industry by, for example, subsidising the cost of electricity, can help this sector to compete more effectively with conventional energy sources and encourage investment to flow through the entire industry, from manufacturing the equipment to distributing the electricity.
Moreover, the competitiveness of different renewable energy sources would rely on cost reduction and increased efficiency. The Companies that perform best on these two counts would be able to penetrate the market. Eventually, the subsidies would benefit equipment manufacturers with advanced technology, service providers and distributors, as well as the end-users, who can enjoy cleaner and more sustainable energy (that may cost even less in the future).
The Chinese government should encourage local businesses to develop advanced technology, lower operational costs and increase efficiency. This is the only path to success.