27 April 2016

The paradox of China’s photovoltaic industry

Margot writes*:

China, with once its fledgling solar photovoltaic industry has now become the world's largest manufacturer of solar-cells with an anticipated manufacturing capacity to produce 51 GW of photovoltaics per year by 2017. China’s policy approach has prioritised developing its export-orientated renewable manufacturing industry as opposed to the generation of renewable energy and ensuring sustainable practices to protect the domestic environment. This has ultimately led to exporting “the positive externalities of consumption” whilst leaving the “negative externalities of production” largely unaddressed in a country with mounting environmental costs.

Ironically, the manufacture of PV-systems that ultimately produce clean energy are not so ‘clean.’ Polysilicon production within the industrial chain is highly pollutive as it creates a toxic and degradative byproduct: silicon tetrachloride. To avoid incurring higher costs of reprocessing the waste, enterprises dump this compound along with other pollutants (see PDF of this interesting Greenpeace report). Lax corporate responsibility, lack of adequate regulations, insufficient enforcement capacity to discourage such behaviour is one area that is largely to blame. However the institutional opacity, high transfer costs and collective action issues make regulatory change very difficult in the short-term. However, inducing greater innovation to increase sustainability and efficiency of photovoltaics may be an alternative.

A severe capacity surplus induced by government initiative to bolster PV industry has led to favourable loans and subsidies for PV manufacturing resulting in vicious competition between a multitude of enterprises. The low profit in the industry inhibits research and innovation within the sector whilst reinforcing “cheap” manufacturing and scaling back on greater environmental regulations. Additionally China lacks a substantial domestic market for solar. Its growth of production has outstripped of installed solar capacity, thus over 90% PV devices are exported to the US and EU where solar energy is subsidised. It is highly dependent on foreign markets, but due to its maintained low prices of its devices China has incurred anti-dumping and anti-subsidy duties that only decrease profitability.

China’s PV is stuck in the middle of the industrial chain -- at the bottom of the "smile curve" -- with backward technology, meaning low-tech and low-profit production, lack of core technology and weak international competitiveness.1 These limits underly the incentive structure in the industry restricting producers to cheap and more unsustainable production methods just to break-even. To address the pollutive nature of production calls for a more expansive approach that reaches farther than domestic regulation involving trade relations, complex value chains and many struggling enterprises.

Bottom Line China’s Photovoltaic industry ensures clearer skies abroad, but damages already vulnerable domestic ecology. The production of cheaper photovoltaics comes with a higher environmental price-tag that is enforced by both domestic and foreign policies. Altering the incentive structure within industrial policy could encourage sustainable innovation and pose as a viable solution.

(1) Illustrates a concept in value chains where the added value is generally distributed along the production where high value added is located in both the far upstream (basic and applied R&D, and design) and far downstream (marketing, distribution, and brand management) stages, with the lowest value-added activities occurring in the middle of the value chain (manufacturing and assembly). This is where China is “stuck.”

* Please comment on these posts from my environmental economics students, to help them with unclear analysis, alternative perspectives, better data, etc.

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