Should the EU protect European companies by restricting imports of solar technology from China? Based on new research, Pia Andres Competition from China has forced many European companies out of business, but some of those that have survived have found that they have adapted through stronger innovation.
Renewable energy is key to enabling the transition to a low-carbon economy. The good news, then, is that the cost of solar power has fallen dramatically in recent decades, exceeding even the most optimistic forecasts and allowing solar power to compete effectively with fossil fuels.
Solar is now widely known as a leading company that has achieved successful green technology innovation through government support. Figure 1 shows the evolution of the global average levelized cost of electricity and the global cost of electricity generation from solar photovoltaic (PV) technology from 1965 to 2016, with costs decreasing rapidly over time and increasing from the early 2000s. This shows an increase. .
Figure 1: Levelized electricity cost and global electricity production trends from solar PV.
Note: The levelized cost of electricity is the average cost per unit of electricity generated over the entire life of an energy generating asset. source: Way et al. (2022), Dudley et al. (2018).
Policy-supported learning and technological advances have contributed significantly to the success of solar PV technology, as well as other factors such as low material costs, along with the associated economy and the expansion of China’s low-cost manufacturing scale. Scale and increasing global competition also played a key role.
And while you might expect cheaper, low-carbon energy to be universally welcomed given the urgency to avoid catastrophic climate change, China’s dramatic rise to dominance in the solar sector faced protective tariffs from the United States in 2012. The European Commission also followed suit. After imposing tariffs in 2013, it reached an agreement with China on minimum prices and limits on import volumes.
Chinese competition and European solar sector
In the US and EU, industry groups have lobbied for tariffs on the grounds that Chinese competitors received unfair government support. The justification for anti-dumping and reverse bailing measures is based on the argument that such unfair competition harms domestic industries.
In new research, I investigate one possible basis for this claim by studying the impact of Chinese competition on innovation in the European solar sector. Using a sample of 10,137 firms from 15 EU countries from 1999 to 2020, I show that competition from China has had a heterogeneous impact on the sample firms.
Countries with low historical solar PV patent holdings have seen an increase in patents, while countries with a top 10 historical patent holding have seen a decline in patent applications.Day Percentile of sampled companies. Companies at the top of the distribution, with patent holdings in the top 1 percentile, have also increased their patent filings in response to competition. My results suggest that the average of these effects is zero. That is, because firms with lower historical knowledge generally tend to innovate more, competition appears to be more incentivizing the most innovative firms.
On the other hand, I also found evidence consistent with the widespread consensus that Chinese import competition has driven many European companies out of the market. My analysis shows that a $100 million increase in exposure-weighted imports from China increases a company’s probability of exit over the next three years by about 10%, while a unit increase in the exposure-weighted share of Chinese imports in solar PV increases the probability of a company’s exit over the next three years. The market increased the same odds by 70%. Overall, many European solar companies do not appear to have survived the China shock. However, some companies have adapted through more powerful innovations.
Clean technology support
In the years since the study period, China has further consolidated its dominant position in the global market for solar PV and other low-carbon supply chains. By 2022, between 76% and 96% of installed manufacturing capacity across all solar PV components will be in China, with 64% of global manufacturing capacity for nacelles and 69% of blade capacity (both key components of wind turbines). was in China. It accounts for 80% of battery production capacity.
Both the United States and the European Union (EU) have continued to respond using protectionist measures, such as imposing protective tariffs as well as domestic content provisions. The Biden administration increased the import tariff on Chinese electric vehicles from 25% to 100% and the tariff on lithium-ion batteries and battery components from 7.5% to 25% in May 2024. Solar cell tariffs were increased from 25% to 50%. Last July, the European Commission announced provisional tariffs of 17.4% to 37.6% on imports of Chinese electric vehicles, and on October 4, EU member states voted in favor of imposing tariffs of up to 45% on Chinese electric vehicles.
Protectionism has the potential to slow climate change mitigation efforts by increasing the costs of using low-carbon technologies. On the other hand, concerns about supply chain resilience of key energy technologies, especially in the face of geopolitical tensions, must be taken seriously.
Likewise, government support for clean technologies may need to benefit domestic businesses and workers to be politically feasible. However, it is unclear whether protectionist measures are the most appropriate way to promote domestic manufacturing with clean technologies, or whether they are actually effective.
While the U.S. inflation reduction law includes generous subsidies for clean technologies, the EU’s Net Zero Industry Act relies primarily on regulatory reform. Perhaps it is time to consider a more direct approach to encouraging low-carbon manufacturing. That is, by supporting research and development and providing cheap financing and other upstream subsidies, rather than relying on costly protectionist measures.
For more details, please refer to the author’s attached paper. Environmental Resource Economics
Note: This article gives the views of the author and not the position of EUROPP (European Politics and Policy) or the London School of Economics. Main image source: Supawit.S /Shutterstock.com
