In China, Clean Energy is NOW the Driver of Economic Growth

Adam Tooze at Chartbook: As data from the IEA confirm, the scale of China’s green energy push in the last couple of years dwarfs the much ballyhooed green energy programs in the West – NextGenEU, IRA etc.

Chinese manufacturers are expanding production of solar, wind, batteries and EV at a breakneck rate. Fierce competition is driving prices and costs down at a rate never previously imagined. Barring some unforeseen technological upset, China is set to be the leader in the first decades of the global clean energy transition.

But what is even more momentous is that China is the first large economy in which clean energy investment has become the principal driving force of overall investment and economic growth.

It is one thing for China to take on a large slice of solar panel markets. That is a global story, but a sectoral one. It is another for China’s solar energy push to take on such dimensions that it becomes one of the most important forces driving the Chinese economy, which as Chris Giles insisted in a recent piece in the FT should now be recognized by the most meaningful metrics – PPP and physical output – as by some margin the largest in the world.

In China’s energy-intensive economy, for the first time, clean energy has moved from being a niche or sectoral interest, to being the principal growth factor for the whole economy.

I highlighted this dramatic transition in Carbon Notes 6 at the end of last year, thanks to data form Carbon Brief. More detailed evidence is now to hand thanks to a powerful report from a team at CREA headed by Lauri Myllyvirta and Qi Qin, with research by Jingcheng Dai, Xinyi Shen and Chengcheng Qiu all of CREA.

The headlines are staggering.

  • Clean energy contributed a record 11.4tn yuan ($1.6tn) to China’s economy in 2023. Clean energy accounted for 9.0% of China’s GDP in 2023, up from 7.2% in 2022.
  • China’s $890bn investment in clean-energy sectors is almost as large as total global investments in fossil fuel supply in 2023
  • In China in 2023 green energy accounted for all of the growth in investment which was otherwise weighed down by the slump in real estate.
  • “Without the contribution of clean-energy sectors to China’s economic growth in 2023, the country would have seen its GDP rise by just 3.0%, instead of the 5.2% actually recorded.” Clean energy accounted for 40 percent of China’s overall economic growth, a larger share than any other sector.

As the CREA team explain:

The analysis includes solar, EVs, energy efficiency, rail, energy storage, electricity grids, wind, nuclear and hydropower within the broad category of “clean-energy sectors”. All of these are technologies and infrastructure needed to decarbonize China’s energy supply and consumption. The so-called “new three” of solar, storage and EVs are all prominent in the table – and all recorded strong growth.

The detailed breakdown shows the relative importance of each sector and the split between investment in new capacity and current production, both of which contribute to GDP.

I am not aware of any similar exercise weighing the importance of clean energy investment in the West, but back of the envelope calculation would suggest that a. the volume of green investment to date is still too modest and b. their economies less industrial so that clean energy investment will be balanced by greater investment in other sectors.

China’s lurch towards clean energy in the last few years fills the gap left by the contraction of its outsized real estate sector – perhaps better described as an urbanization-engine. Viewed from this point of view, it turns a pattern of unsustainable ultra-rapid growth in an environmentally friendly direction. That is good for the planet but makes it no more sustainable in macroeconomic terms. This may be true but it also poses the question of how relevant equilibrium considerations are in light of the climate emergency. If China is hurling resources into accelerating the energy transition should we not be applauding, profiting from and, indeed, emulating their example? Clearly this cannot mean duplicating what they are already doing. If they have stolen a huge and insurmountable lead in PV and batteries we have only ourselves to blame. They will also pay the cost in terms of overcapacity. Let us by their cheap kit and invest our scarce resources in the many other areas that demand attention. This will be the subject of another carbon note.

Harder questions are posed by the internal logic of China’s energy policy. This. is brought out by CREA’s comprehensive report on China’s climate transition for 2023.

China’s huge surge into solar is at the heart of the story. This is being driven by two main vectors. The “clean energy base” program which involve giant solar arrays, many of them in the desert. In their case the main issue is interconnection costs. China is also a pioneer in ultra high voltage transmission, but that is an expensive option.

Source: CREA

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