Ilaria Mazzocco on the Post-Pandemic Outlook for China’s New Energy Sectors

When the Chinese economy effectively shut down in February, observers noticed a striking trend: power consumption declined dramatically, and carbon emissions were dropping more than they had in years. One estimate indicated that China saw an 18% emissions reduction in the seven weeks following Lunar New Year. Beijing has been working to address emissions and air pollution for several years now, primarily by supporting low-carbon industries through subsidies and preferred market access. But as China’s economy recovers from the pandemic shock, it’s unclear whether Beijing will continue such support. A new analysis by MacroPolo Senior Research Associate Ilaria Mazzocco explores the prospects for the solar energy and electric vehicle industries, both of which are key to China’s shift away from reliance on fossil fuels. In a new interview, Ilaria discusses the post-pandemic outlook for China’s new energy economy.

Why is it important to monitor the role Beijing chooses to play in continuing to support new energy sectors?

Chinese policy in this area affects the pricing and availability of these technologies globally. For example, over the past decade, the cost of solar PV modules has fallen by about 80% and wind turbine prices decreased 30–40%. This is the direct result of advances in Chinese manufacturing, which benefit from sustained government support. As a result, renewable energy is competitive with fossil fuels in an increasing number of countries. Similar trends are visible in the battery and electric vehicle industries.

As Beijing begins to reduce subsidies in new energy industries, what challenges will these industries face in adjusting to the new market conditions?

The main challenge facing new energy industries, in China and elsewhere, is continued support for traditional, polluting industries, such as coal-powered plants and internal combustion engine vehicles. As a consequence, even more mature technologies will need policy support through power sector reform, carbon pricing, and restrictions on polluting vehicles, among other measures.

What role will clean energy transition play in China’s post-pandemic economic recovery?

In China, as in other countries, the decisions the government is making when allocating recovery spending is key to the future of green industries and will shape climate policy for years to come. Chinese leadership has been emphasizing investment in ‘new infrastructure,’ which includes digital infrastructure. This is a positive sign as it is likely to be less energy intensive than is traditional infrastructure, but it remains to be seen if and how the new energy industry will benefit.

In your assessment, will China continue to “bend the emissions curve?” Or will we see an eventual return to pre-pandemic emissions levels?

Much of China’s emissions and air pollution is caused by coal, and as demand for energy increases, so will coal usage. In China, as in other countries, infrastructural and power-sector reforms, rather than economic crises, are needed to achieve sustained emission reductions. In fact, rather than being a boon for the environment, an economic recession could well scare politicians globally from taking more muscular action on climate policy.

What can other countries—including the US—learn from China’s experience with new energy subsidies and incentives?

China’s approach isn’t new, but it has been large-scale and sustained. The government has made a long-term commitment to the new energy industries, and while there have been hiccups, that commitment has been pretty consistent. While some of these industries have grown very quickly, they were also largely benefitting from long-term investments in research and manufacturing. There has also been a lot of waste and overinvestment in some areas, so there are certainly some lessons to be learned in how to avoid some of the pitfalls of Chinese-style industrial policy.

What inspired you to study and write on China’s new energy economy?

First of all, these are industries that we should all care about because of the imperative to move towards a low-carbon economy. China plays an outsized role in the production and deployment of new energy technologies, so it’s the starting point for anyone who wants to understand this topic. Secondly, this is a very new area and one that is growing at break-neck speed, so it provides some very interesting perspectives on the governance challenges in supporting new energy technologies and the role of government in innovation.

Read more MacroPolo commentary on China’s energy outlook.