Testimony: The Challenge of China's Green Technology Policy

Breakthrough Institute Project Director (and my friend and colleague) Devon Swezey testified last week before the U.S.-China Economic and Security Review Commission on China's clean energy technology policy and the steps the United States must take to remain competitive in the growing clean energy race.

The key to competitiveness, said Swezey, is not a low price on carbon--as proposed in current congressional climate bills--but a robust and long-term investment strategy in critical areas such as research and innovation, advanced manufacturing, market creation, infrastructure, education, and new industry clusters.

Swezey's testimony builds on Breakthrough Institute's recent work on clean energy competitiveness policy, including the landmark 2009 report, Rising Tigers, Sleeping Giant, published with the Information Technology and Innovation Foundation (ITIF), and policy memo, "Strengthening Clean Energy Competitiveness," released in June with ITIF and the Brookings Institution's Metropolitan Policy Program.

Click here to download Swezey's hearing agenda and Swezey's prepared testimony.

His full oral testimony is below:

Commissioner Bartholomew, Commissioner Brookes, and members of the Commission, thank you for the opportunity to testify today.

My name is Devon Swezey, and I am Project Director at the Breakthrough Institute, a climate and energy policy think tank based in Oakland, CA. Since its founding in 2004, the Breakthrough Institute has advanced an innovation and investment-centered policy framework for addressing climate change, energy security, and U.S. economic competitiveness in clean energy.

It is my great pleasure to discuss with you China's comprehensive strategy for developing a domestic clean energy economy, and the various policies and investments that the United States must prioritize to mount an effective response to the competitiveness challenges it faces today.

As the United States searches for new sources of growth amidst a sluggish economic recovery, the rapidly growing clean energy industry represents an important job creation and export market opportunity. Global private investment in renewable energy and energy efficiency technologies is estimated to reach $450 billion annually by 2012 and $600 billion by 2020.

Unfortunately, the United States risks losing out on this opportunity, as it lags behind economic competitors in Asia and Europe in the production of virtually all clean energy technologies. The United States produces only 5 percent of the world's solar cells, relies on foreign-owned companies to manufacture the majority of its wind turbines, and is losing ground on hybrid and electric vehicle technology and manufacturing. Measured by market capitalization, only four of the world's top 30 solar, wind, and advanced battery companies are American.

At the same time, other nations are moving quickly to implement comprehensive clean energy investment strategies, which will allow them to gain first-mover advantages ahead of the United States and capture a majority of the economic benefits--in terms of jobs, tax revenues, and growth--associated with this burgeoning industry.

China in particular, has emerged as a clean energy powerhouse. It is now the world's largest manufacturer of solar cells and wind turbines and has also taken the lead in commercializing plug-in hybrid and electric vehicles, as well as manufacturing the advanced batteries that power them.

China is not out-competing the United States through some inherent comparative advantage, but through targeted and comprehensive public policy characterized by large and sustained public investment across the entire industry.

China's investment strategy includes major funding for clean energy research and development; subsidies and tax incentives for domestic manufacturers; ambitious clean energy deployment targets and incentives and procurement policies to develop its domestic market; and major investments in enabling infrastructure.

Local and provincial governments are also offering clean energy companies free land, tax breaks, and other subsidies to facilitate the development of clean energy clusters--dense regional networks of investors, manufacturers, suppliers, universities, and other actors that can confer lasting competitive advantage to the region as a whole. One prime example of this is the city of Baoding, which has transformed into the fastest growing hub of wind and solar energy equipment makers in China. The city is home to "Electricity Valley," an industry cluster modeled after Silicon Valley, composed of nearly 200 renewable energy companies.

To make matters worse, the Chinese government is set to massively out-invest the United States over the next five years, even assuming passage of the American Clean Energy and Security Act. We documented these clean energy investment estimates in our November report, "Rising Tigers, Sleeping Giant," written with the Information Technology and Innovation Foundation. Already, China's public investment strategy has helped the country attract the bulk of private investment in clean energy. Last year, China attracted $34.6 billion in investment, nearly twice the $18.6 billion invested in the United States.

As clean energy manufacturing and investment shifts overseas, research and innovation activities -- America's historic "comparative advantage" -- have started to follow. Perhaps the highest-profile example is Silicon Valley giant Applied Materials, the global leader in supplying the manufacturing equipment used to make solar cells, which recently decided to construct the world's largest, most advanced solar R&D facility in Xian, China.

Applied Materials is not alone. IBM has announced that it will invest $40 million to create the company's first "energy-and-utilities-solution lab" to develop innovative new technologies for smart grid and other applications. The new lab will also be located in China. These decisions follow those of leading U.S. companies such as GM, Dow Chemical, and Intel, which have all constructed high-tech research labs in China, and show that high-value R&D is starting to follow manufacturing abroad, threatening America's historic leadership in innovation.

We believe that the decisions the United States government makes in the next five to ten years will largely determine whether the country can emerge as a global leader in these new growth industries. Unfortunately, proposed legislation in Congress would not be enough to keep the U.S. competitive.

Some say that pricing carbon is the most important policy the U.S. can adopt to become a leader in the global clean energy industry. But it is important to understand what a price on carbon would and would not accomplish. For political reasons, the carbon price established by both the House and Senate climate bills would remain much too low to substantially increase demand for clean energy technologies. A low carbon price also would not be sufficient to support growth in domestic clean energy manufacturing.

To develop a globally competitive clean energy industry, the United States needs a comprehensive investment agenda that prioritizes large and sustained public investment in clean energy technology. Today, clean energy is still too expensive to be widely deployed at scale around the world, and most governments are unwilling or unable to impose high carbon prices or sustain large subsidies to make clean energy cost-competitive. Therefore, the overarching goal of a new clean economy strategy should be to make clean energy cheap in real, unsubsidized terms.

Accomplishing this goal will require robust and long-term investments in areas such as research and innovation, manufacturing, market creation, education, and the development of industry clusters. The primary role of carbon pricing should be to raise the revenue needed for these critical investments.

We don't have to look far for examples of past public investment strategies that created whole new industries and unleashed waves of economic prosperity. In the 1950s, the Defense Department's procurement of microchips facilitated market development and dramatically reduced chip costs. Today's vibrant IT sector exists largely thanks to early, sustained public investments in R&D, computer science, infrastructure, and procurement. Government investment was also crucial for the development of railroads, radios, computers, the Internet, and many other technologies.

We believe America can still lead the global clean energy industry. The U.S. remains one of the most innovative and entrepreneurial countries in the world. But without a comprehensive clean energy investment strategy, America will lose out on one of the greatest economic opportunities of the 21st century.

Thank you very much, and I'm happy to take your questions.