#86 Deciphering the US Tariffs on Chinese Green Tech
Today, Rakshith Shetty incisively examines Chinese climate and green tech exports and the US and EU’s response, most notably in the form of last week’s increase in tariffs signed off by President Biden. Rijesh Panicker follows this up with a piece on how to effectively fund innovation in open source.
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Matsyanyaaya: China's New Energy Exports and the US-EU Response
— Rakshith Shetty
China currently dominates the global production of solar panels, electric vehicles, wind turbines, and lithium-ion batteries. Its exports of these technologies have soared in recent years, reaching $146 billion in 2023. However, China's dominance in the clean technology market has raised concerns among officials in the United States and Europe. They fear that an influx of cheap Chinese products could hinder their efforts to expand their own renewable energy industries. U.S. Treasury Secretary Janet Yellen recently expressed concerns over China's "excess capacity" in solar, electric cars, and batteries, which she believes distorts global prices and harms American firms and workers. In response to these concerns, on May 14, President Joe Biden announced substantial tariff increases on a variety of Chinese imports essential to the clean energy transition, including electric vehicles (EVs), solar cells, lithium-ion batteries, and critical minerals. This announcement came just days after the seemingly amicable climate discussions between the newly appointed United States (U.S.) and Chinese climate envoys, John Podesta and Liu Zhenmin.
As the world's largest producer and exporter of renewable energy technologies, particularly in the solar and wind sectors, China is not only shaping the global transition to clean energy but also extending its economic and political influence across continents. This trend has been further bolstered by the Belt and Road Initiative (BRI), which has recently undergone a 'green' reboot. President Xi Jinping has raised clean energy among the priorities of the BRI, promising an extra $100 billion in development funding for green infrastructure and energy projects in developing countries. This strategic move not only aligns with China's economic interests but also positions the country as a leader in the inevitable global shift towards renewable energy. As China deepens its cooperation in green technology with countries across Europe, Asia, Africa, and Latin America, it is crucial to analyse the patterns, drivers, and consequences of these exports.
China’s Solar Technology Exports
China's solar technology exports have been rapidly growing, with a diverse range of countries across the globe importing these technologies to meet their renewable energy goals. Europe has emerged as the primary destination for China's solar exports, accounting for an impressive 52.5% of the total export value in the first half of 2023. Over the last 12 months, China exported 111 GW of solar modules to Europe, equivalent to the entire installed PV capacity of the United States.
(Data Source: Ember’s Report. Data Visualization by the author)
Following Europe, Brazil is the second-largest single national market for Chinese solar modules, with imports totalling 18.6 GW over the last 12 months, equivalent to 4% of the country's annual electricity demand. Latin America, as a whole, is the third-largest export market for Chinese solar panels, with rapidly growing imports in countries like Chile and Colombia. Chile's imports increased by 70% in the first half of 2023, with the total 12-month exports capable of generating 6% of the country's electricity demand. Similarly, Colombia's imports grew by 135%, with the 12-month total equivalent to 3.5% of its electricity demand. In the Middle East, Saudi Arabia and the United Arab Emirates have seen significant growth in solar panel imports from China, driven by large-scale projects and renewable energy targets. Africa has also experienced a surge in imports, with South Africa leading the way due to frequent load-shedding and the introduction of short-term tax incentives for rooftop solar. The 12-month total of 4 GW imported by South Africa could generate around 3% of its annual electricity demand. These countries are importing Chinese solar technologies to enhance their energy security, reduce emissions, and meet the growing demand for clean power, all while benefiting from China's competitive pricing and vast manufacturing capacity.
China’s Wind Technology Exports
In addition to solar technology, China is a major exporter of various other green technologies, particularly in the wind energy sector. China's wind energy technology components (WETCs) have seen significant export growth, although not as rapid as solar exports. The East Asia and Pacific region has been the largest export destination for Chinese wind turbine nacelles, accounting for 26% of the exports from 2011-2020.
Image Source: IHS Markit, Global Trade Atlas database; markets accounting for at least $10 million in exports; share is the percentage of Chinese exports during 2011–20.
Europe and Central Asia have also been significant importers, receiving 21% of China's wind turbine nacelle exports, followed by Latin America and the Caribbean at 17% and Sub-Saharan Africa at 14%. China's green technology exports extend beyond solar and wind, with the country investing in and exporting technologies related to green buildings, hydropower, and electric vehicles. BRI has played a crucial role in increasing the green technology spillover of China's Outward Foreign Direct Investment (OFDI) in countries along the routes. This includes investments in green economic development projects like the Garissa photovoltaic power plant in Kenya and the Sirindhorn Dam floating photovoltaic project in Thailand. China's quest for energy security and economic growth through green technologies has led to investments and exports in various sectors to both OECD countries and developing nations, with Germany being a notable market for Chinese solar PV components.
The US and EU's Push to Counter China’s Clean Tech Dominance
The United States and the European Union have both introduced legislation and plans to boost their domestic clean technology industries and accelerate the transition to a net-zero economy. The Inflation Reduction Act (IRA) of 2022 provides significant investments to accelerate clean energy and manufacturing in the U.S. It includes $10 billion in tax credits for clean energy manufacturing, $30 billion in production and investment tax credits for renewable energy projects, and $1.55 billion for infrastructure upgrades at national laboratories. The IRA also allocates $5 billion for a new loan program to retool and decarbonize existing energy infrastructure and $2 billion in direct loans for transmission projects. Additionally, it extends and modifies tax credits for electric vehicles, providing up to $7,500 for new EVs and $4,000 for used EVs, with specific manufacturing and sourcing requirements. The act aims to reduce greenhouse gas emissions by 40% by 2030, create millions of jobs, and lower energy costs for American families. It represents the largest investment in climate and energy in U.S. history, with a total of $369 billion directed towards energy security and climate change programs over the next decade.
Whereas, the EU's Green Deal Industrial Plan aims to bolster the bloc's competitiveness in clean technologies and accelerate the green transition. It is based on four pillars: a simplified regulatory framework through initiatives like the Net-Zero Industry Act and Critical Raw Materials Act; faster access to funding by loosening state aid rules and redirecting existing EU funds; enhancing skills through "Net-Zero Industry Academies"; and improving trade networks with clean tech partnerships. Key proposals include setting targets for EU manufacturing of net-zero technologies like solar, wind, batteries and hydrogen by 2030, streamlining permitting for green projects, ensuring access to critical raw materials, reforming electricity markets, and providing investment support. The plan aims to counter massive green subsidies in the U.S. Inflation Reduction Act and China's dominance while maintaining a level playing field within the EU's single market. However, concerns remain over financing such an industrial transition and potential subsidy races with trade partners
Conclusion
The lessons from the US and EU's plans are clear: investing in clean technology is not only an environmental imperative but also an economic opportunity. While China's solar panel exports will remain important in the short term, countries are increasingly focusing on developing their own manufacturing capacities to reduce reliance on imports. Europe is working to increase its solar panel production, while the United States has already significantly reduced its imports from China. India, too, is balancing imports with efforts to become self-sufficient in solar technology. Despite these changes, the overall trajectory remains clear: to put the world on track for limiting global warming to 1.5 degrees Celsius, global renewable capacity must triple by 2030. China's green technology exports will undoubtedly play a significant role in achieving this goal, but governments across the globe must also focus on policies that maximise deployment and overcome challenges related to installation, skills shortages, permitting, and grid integration.
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Cyberpolitik: Go “Fork” and Deliver: Funding Innovation in Open Source
— Rijesh Panicker
How societies drive innovation is critical for sustained economic growth. Over time, we have developed tools such as patents, procurement, research grants, and challenge prizes to help incentivise innovation. Each of these processes works well for different types of innovation and ideation. For open-ended research, grants or challenge prizes would be the way to go. For a closed, specific goal, the ability to get patents and government contracts provides the right set of incentives.
Open-source software is a key driver of innovation in society today. Nearly 90% of Fortune 500 companies actively use and are dependent on open-source software. The easy availability of open-source libraries and code drives the development of AI and machine learning models. Open-source software runs the vast majority of our infrastructure. Given its increasing importance to developing new technology, we must ask how to incentivise and sustain innovation in open-source ecosystems.
The traditional tools that incentivise innovation don’t work the same in open-source due to some peculiar characteristics that open-source ecosystems exhibit. Firstly, open-source code is open for others to reuse and build on. As a result, patents are not applicable (software patents are limited in any case). Secondly, most large projects develop over a long period, and the work is cumulative with contributions from a large base of developers. As a result, it is nearly impossible to distinguish and allocate rights to individual contributors. For the same reason, broad research grants raise questions on fair allocation. Finally, incentives for contributing to open source are usually a mix of altruism, intrinsic utility and career prospects, and it’s unclear if external motivators combine well with these.
A recent working paper by Annataria Conti, Vansh Gupta, Jorge Guzman and Maria Roche: Incentivizing Innovation in Open Source: Evidence from the GitHub Sponsors Program (NBER Working Paper 31668) studies the effect of monetary incentives on innovative output in open source projects.
The paper studies the effect of the Github Sponsors program, which funds developers who opt-in to it, on innovation as measured by the creation of new or forked repositories (knowledge bases usually consisting of code and data), on community contribution (as measured by the number of issues they identify in projects) and on productivity (code changes contributed to code repositories). The paper finds that while joining the Sponsors program led to an increase in all three parameters (innovation, contribution, productivity), receiving sponsorship led to a long-term decrease in innovation and community contribution, although productivity remained unimpaired. They conclude that financial incentives are likely to crowd out intrinsic incentives and have long-lasting negative effects on innovation.
How does the state fit in?
The state plays a large part in driving innovation in society. It issues patents, provides research grants, and funds basic research, especially those whose results might be open-ended. If the same set of tools is not applicable to open-source and may, in fact, have negative consequences, we should consider how the state intervenes in this area.
One way of thinking about this is to consider the framework of Samaj-Bazaar-Sarkar. Historically, Samaj has been the key driver of the open-source movement. Small groups, driven by a goal of creating free software (freedom to share code and reuse, not free as in beer), set about building software, processes, licenses and development tools that have changed the world. Today, however, firms matter as much if not more. The world is dependent on open-source projects, and firms are willing to fund and sustain the large codebases that matter. If you are reading this blog, rest assured that somewhere underneath it all is code maintained by a developer paid by Amazon or Google.
The need for communities (Samaj) to keep software free and open and the incentives for firms (Bazaar) to make a profit have created conflict that is still playing out. We have written about this on TechnoPolitik, most recently (#85 and #80). The tituler “Fork” in this post is the key tool that maintains the balance of power between these two sets of players. Any move by a firm to convert major open-source software from open to closed licenses is swiftly met by a forked version that follows the previous open license, usually with the backing of competitors who are incentivised to support the open version. The state has no role to play here.
Over time, we might see the open-source ecosystem work at two levels. At one level, well-funded foundations could take on a role similar to transmission utilities in the electricity grid. They will audit and maintain the nuts and bolts of our critical software infrastructure on which everything runs. The second will be a long tail of small projects built by individuals from which most innovation will come. Most projects will fade away over time or remain niche offerings, sustained by the conviction of a few, but some may grow to be the next big thing.
The state's role here is threefold. First, governments should have a view on what constitutes critical software infrastructure. Once we know this, addressing any risks due to these projects becomes more manageable. Identifying projects or people who may be under-resourced and at risk is also easier. Second, governments must find ways to encourage the creation of lots of small individual projects. Since direct financial incentives may not work or, worse, have a negative impact, governments could play a part by making it easy for people to access, learn about and contribute to the open-source ecosystem. Finally, the combination of samaj and bazaar will be great at capturing positive spillovers from open-source AI models but the state will play a prominent role in considering negative externalities in this area and mitigating risks.
What We're Reading (or Listening to)
[Blog Post] Why AI Governance Must Contend With Semiconductor Geopolitics, by Satya S Sahu
[Takshashila Discussion Document] Assessing Operations and ‘Jointness’ in the PLA Western Theater Command, by Anushka Saxena
[Opinion] Wealth Tax: The Rich Are Ready To Shell Out. Can the Government Enable Means?, by Arindam Goswami