China Could Massively Juice Its Clean Energy Industry. The World Isn’t Ready.

Would it be easier to fight climate change if America was China’s ally, or even a neutral third party, rather than its growing rival?

For the past few years, this has been one of the great what-ifs of global climate policy. It’s also been somewhat moot because, well, America isn’t China’s ally. The United States would never have passed the Inflation Reduction Act if not for China’s perceived technological leadership (even if China also emits far more carbon pollution than America does).

But the question has persisted, and it has hinted at a larger one: How should a given country approach the energy transition? Should it try to assert itself by making some input to decarbonization, some necessary technology? Or should it simply allow China, the world’s factory, to sell it everything it needs to decarbonize?

For years, many countries — especially in Europe — have tried to walk a line between these two approaches, promising that decarbonization could lead to good jobs at home while avoiding outright protectionism. But recent events have rendered this dilemma less and less theoretical. As the Chinese economy slows, the world will have to decide how to handle its climate-friendly industries.

A brief backgrounder. China dominates the global clean-energy manufacturing industry. It makes 60% of the world’s electric car batteries and wind turbines. It manufactures 80% of its solar panels. By one measure, the Chinese automaker BYD became the world’s largest electric vehicle maker this year, outselling Tesla. Chinese companies are also able to make many of these products more cheaply and at a greater scale than those of other countries.

China also finds itself in an increasingly troublesome economic slowdown. Its working-age population has peaked, home prices have fallen, and consumer activity is moribund. Even as the rest of the world combats stubborn inflation, China has slipped into deflation.

Although China’s slowdown is being driven by a few factors, its core problem is structural. For the past few decades, China has grown its economy by juicing production on the supply side — the construction firms, steelmakers, real-estate developers, and (more recently) manufacturing sector. It invested heavily in infrastructure projects, laying more cement in three years than the United States made in the entire 20th century. This type of infrastructure spending is key to how local Chinese leaders generate economic growth on paper, meeting the national government’s GDP targets. It also helps them stay in power and sometimes enrich themselves.

This arrangement has suppressed worker wages and dampened consumer spending. China’s capital controls have also forced Chinese families to save in the places where the government wants them to. As Paul Krugman writes, that led first to a surge in global goods exports, then to a real-estate bubble, which popped a few years ago.

Faced with such a conundrum, most Western economists would recommend that the national government offer support directly to consumers and households — much like the American government did during the pandemic. That would help families repair their finances, which were damaged by the real-estate bubble, and give them the money and security to buy the products that Chinese factories manufacture. It would, in essence, continue the process of turning China into a consumer economy.

But China doesn’t seem to want to do that. Earlier this week, The Wall Street Journal reported that President Xi Jinping does not believe that China should provide direct fiscal support to consumers. Instead, he appears to believe that China should recover through austerity, fiscal discipline, and by increasing its support of its manufacturing and industrial sectors.

Xi and the men around him seem to hold a set of ideas that, in a Western context, we would see as an odd mix of the right and left. On the one hand, Xi is suspicious of “welfarism” and warns that China must avoid the mistakes of Latin America (as he understands them). On the other hand, Xi dislikes entrepreneurs — see here his treatment of Jack Ma — and is suspicious of what we would call the software industry.

China’s leaders also don’t want to give consumers more power in their economy for fear of disempowering the Communist Party, which is able to use its power over banks to shape the domestic economy. Private consumption makes up about 60% of the average country’s GDP. (In the U.S., it’s closer to 70%.) But in China, households consume less than 40% of GDP. But according to the Journal, Xi believes “China should address ‘insufficient effective supply capacity’ — in essence, build more factories and industry — so as not to become overly dependent on ‘overseas shopping’ for goods supplied by the West.”

One domestic industry that China’s leaders do like is the clean-energy industry, the hundreds of firms that make electric cars, batteries, renewables, and their constituent parts and ingredients. These companies not only generate a ton of exports — China became the world’s top car exporter this year, driven in part by the success of the electric-car maker BYD — but they are strategically useful, placing China at the center of the global energy transition while relieving it of its dependence on seaborne fossil-fuel imports.

And that is what concerns me. The Chinese government is planning a new burst of infrastructure and factory spending, according to the Journal, and it may also make it easier for certain government-favored firms and projects to borrow money. These measures don’t even need to directly target the clean-energy industry to help it: There are so many constraints on how and where investment happens in China that the money could flow into these green-energy firms anyway.

But that could set up an unstable dynamic in the world economy — and one that will matter profoundly for the politics of decarbonization.

Deluged with cash, those EV and clean-energy firms would expand production, flooding the market with even more vehicles, batteries, solar panels, and the rest. But Chinese consumers won’t have the money to buy that stuff, so it will get exported abroad, driving down global prices even further.

And that brings us back to the Chinese decarbonization paradox. Would a global glut of Chinese climate tech be good for the planet? In the short term, probably yes. (My colleague Jeremy Wallace recently argued that it could be a very good thing.) Chinese firms already make some of the world’s cheapest electric vehicles and batteries. Expanding production further would allow China to keep learning by doing, driving down their cost even further. If the yuan were to lose value against the dollar or Euro (something that, to be clear, the Chinese government hopes to avoid), then that technology would get even cheaper. And cheaper EVs are a good thing, because more drivers would be able to buy them, cutting global oil demand.

But such a glut would be politically complicated in the medium and long term. Across developed democracies, politicians have promised that the energy transition will create good jobs at home. President Joe Biden’s mantra — “When I hear climate, I think jobs” — is just the most recent of many similar promises issued in Asia and Europe.

And a sudden global export glut of Chinese clean tech could be catastrophic for those promises, especially in Europe and North America, where inflation is higher and interest rates are tighter. When Chinese firms flooded the world with cheap solar panels in the early 2010s, they inadvertently killed a crop of companies abroad working on advanced or experimental solar technology — including Solyndra, the American startup whose failure became synonymous with President Barack Obama’s aborted green industrial policy.

Now, to some degree, the United States may have insulated itself from a glut this time by passing the Inflation Reduction Act, whose subsidies will ensure that America maintains at least a minimal base of solar panel, battery, and electric vehicle production. The Biden administration has also shown itself to be more willing to raise tariffs to fight sudden shifts in the market. But if American companies want to export what they make in the U.S. — and they should, given that making globally competitive products is essential for maintaining an edge — then they will have to compete with bargain-basement prices.

Where a deluge of Chinese EVs would be really catastrophic is Europe, where BYD and other Chinese automakers have already made a beachhead. Volkswagen and other European manufacturers are switching to an all-electric fleet slower than their Chinese counterparts; their vehicles are also more expensive than Chinese imports.

To be sure, there’s no guarantee that China’s slowdown will automatically lead to a global green glut; Corey Cantor, an EV analyst at BloombergNEF, told me that he doesn’t think it’s the most likely scenario. But I’m worried anyway. The EU has been slow to react to the Inflation Reduction Act; its trade negotiators have clung to the ideal of free global trade even as the continent’s major trading partners have modified their approaches. (Even when it does engage in quasi-protectionism — such as with its carbon border adjustment mechanism — it has chosen methods with a veneer of fairness and impartiality.) In the European democracies, meanwhile, the far right is gaining steam. Will the EU bureaucracy adjust its stance in time?

For the past few decades, the decarbonization story has been a sideshow on the world stage. Diplomats gathered once a year to discuss climate change, then they got on with the major set pieces of geopolitics: trade, economics, war, peace. But Bidenomics and the Chinese slowdown show that that act has ended. Those of us who care about climate change — who have devoted our time, money, or careers to slowing it — can no longer pretend our issue exists solely in a domestic or environmental context. We insisted for years that climate change was the world’s most important story, and the world, in all its terrible power, has finally listened.