How International Trade Regulations Are Changing the Trajectory of China’s Low Carbon Energy Transition

 

 

 

Thursday 16 June 2022 

By Aakriti Shoree

 

Climate change is one of – if not the – most pressing issue of our time. Transitioning to a Low Carbon Energy (‘LCE’) system is essential for mitigating the impact of climate change. Government investment into LCE technologies not only protects the environment and facilitates technological progress, but also helps ensure the transition is equitable by improving the affordability and accessibility of new technologies. Government subsidies are an effective mode of public investment that can change market behaviours by stimulating domestic production, and improving consumer uptake, of LCE technologies. In the post-pandemic era, such subsidies also offer a pathway for ‘building back better’ and green-industry led economic recovery. However, such interventions in the market must heed the WTO’s international trade regulations, which seek to promote fair competition in global trade.

A new article by CIBEL Member Weihuan Zhou and co-author Mandy Meng Fang is one of the first comprehensive analyses of China’s emerging practice of subsidising its way through the LCE transition. Their discussion of China’s new energy vehicle (‘NEV’) industry subsidies offers a fresh framework for understanding why governments prefer certain subsidisation strategies over others. NEVs are considered the ‘single most important technology’ for transport decarbonisation. Zhou and Fang’s framework divides the NEV value chain into three segments: upstream (research and development); midstream (manufacturing); and downstream (infrastructure to support supply and consumer uptake). Their analysis shows that China has strategically shifted away from its previous disproportionate subsidisation of manufacturing and towards greater subsidisation of the upstream and downstream industry segments. They theorise that this shift is being made for two key reasons: to prioritise China’s economic goals, and also to minimise potential WTO conflicts.

China’s Economic Goals

China is the world’s largest carbon emitter but is at the forefront of sustainable pandemic recovery. President Xi Jinping announced an ambitious 2060 carbon neutrality pledge at the 2020 United Nations General Assembly. This goal sits alongside the nation’s other economic aims, of advancing technological competitiveness, innovative capability, and independence in strategic industries. Those aims have been informed by the weakness of global supply chains during the pandemic period and escalating tensions with key trade partners like the US and EU.

A desire to advance competitiveness and innovation explains China’s increased subsidisation of the NEV industry’s upstream segment. Zhou and Fang note that China’s R&D capability in the LCE sector is underdeveloped. They outline the various R&D incentives that have been deployed to combat this. They include the NEV Innovation Program, which selected top-performing NEV and electric battery projects for fiscal awards based on innovation and industrialisation; strategies designed to promote R&D collaboration between firms and institutions; and tax benefits for forms conducting R&D or technology transfer activities. All of these strategies reduce the main barriers faced by firms in the upstream sector (such as high start-up capital requirements and lack of financing and investment due to uncertainty of return or long payback time).

China’s past midstream subsidies have created a strong manufacturing sector, but without subsidisation of the downstream segment, deployment of those manufactured goods has been low at a domestic level. The creation of NEV infrastructure, like charging stations, has therefore become a strategic priority; the State Council issued a Guiding Opinion setting targets for charging infrastructure development and local governments have introduced varying types of subsidies, including compensation for construction, installation and maintenance costs, as well as preferential utility rates. Consumer-oriented incentives like tax incentives, fee waivers and preferential parking fees have helped make China the world’s second largest NEV market, and in 2019 around RMB 3 billion was spent on government procurement of NEVs for public transport. All of this reflects China’s new economic strategy of ‘dual circulation’. It involves a renewed focus on domestic production, distribution, and consumption cycles as the major driver of economic growth (‘internal circulation’), and a downplaying of international trade and investment (‘external circulation’). Again, this is a policy response to the uncertainties of the time; China is seeking to shelter its economy from external shocks, and this has measurable impacts on the way it is handling its decarbonisation process.

Minimising International Trade Disputes

Industrial subsidies are a controversial area of trade regulation. Zhou and Fang explain that the fundamental challenge lies in striking a balance between allowing legitimate uses of subsidies (economic recovery, correcting market inefficiencies) and preventing them from being unused to gain unfair trading advantages. Three recent cases considering subsidies incentivising the use of domestic over imported renewable energy goods (Canada – Renewable Energy (2010); India – Solar Cells (2013); US – Renewable Energy (2016)) all found that the subsidies were inconsistent with the relevant WTO rules.

Midstream segments of LCE industries are more exposed to international trade than the less-tradable upstream and downstream segments. This is because of the lower entry barriers, and the fact that the global market for manufactured LCE goods is fast expanding. It is therefore no surprise that there have been a growing number of WTO disputes concerning midstream subsidies provided to renewable energy producers in recent years. China’s renewable energy subsidies were challenged by the United States in the China – Wind Power Equipment (2010) case, which concerned subsidies granted to wind power manufacturers contingent upon the purchase of domestic components. China settled that dispute. Considering the fact that China was already a world-leading producer of wind power equipment, the subsidies were dispensable and had begun to cause overcapacity and overproduction. That situation is similar to the one China now faces as a result of its disproportionate subsidisation of the NEV industry’s midstream manufacturing segment, and Zhou and Fang consider this to be another likely reason for China’s shift away from its subsidisation.

Whether the WTO’s regulations provide enough room for countries to facilitate post-pandemic green recovery is debatable. Those seeking to learn more will find the in-depth discussion of the implications of WTO jurisprudence in this area in Zhou and Fang’s new article instructive. Ultimately, their work makes it clear that a complex combination of domestic economic interests and international trade dynamics will inform the path we all take towards a Low Carbon Energy future.

This paper is available here

Associate Professor Zhou’s research may be found at SSRN, Twitter @WeihuanZhou, and LinkedIn.