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January 21, 2011

China's 'Sputnik Moment'

By and

Does China's government-funded push into so-called green energy constitute a "Sputnik moment" for the United States? That's the term Pres. Barack Obama used in a December 6 speech in Winston-Salem, N.C., evoking events of more than 50 years ago when the Soviet Union launched the world's first satellite and seemed, for a brief moment, to be winning the space race, leaving the United States behind as a military-industrial also-ran. There are two main problems with President Obama's comparison of Sputnik to our contemporary energy competition with China: It completely misunderstands the Chinese energy industry, and it completely misunderstands the American energy industry.

Sputnik inspired a national campaign for the United States to first match, and then surpass, the Soviets' performance in space. Playing on similar fears, the theme of a mighty China surpassing the United States as the world's dominant power, or at least the world's dominant economic power, is irresistible to those who want more government involvement in the economy, especially government "investments" in things like renewable energy. But "catching up" to China would mean taking an enormous step backward: If the United States were to match China's performance in energy, then President Obama -- along with any sane environmentalist -- would be aghast. The United States already enjoys the far greener, far more energy-efficient economy -- one that is getting even more efficient even as China's coal-driven economy grows less so.

In 1999, Chinese energy consumption was half that of the United States. But China's booming economy had a big energy appetite, and by 2010 the country was consuming more energy than the United States, according to International Energy Agency (IEA) data. The trend is likely to hold indefinitely, and Chinese energy use will soon outstrip America's by a significant and growing margin. But what do they do with all that energy? Right now, the Chinese economy is only about 40 percent the size of the American economy -- which is to say, less than one-third as energy-efficient as ours. Some Sputnik moment.

Over the past decade, the U.S. has increased its energy efficiency by about 2.5 percent annually. Despite a far greater scope for improvement -- and despite a great deal of government spending -- China raised its efficiency by only 1.7 percent annually, according to the IEA. And even that relatively paltry figure is poised to decline. Chinese electricity use expanded at the same rate as nominal GDP in the first three quarters of this year, according to official data from Beijing, meaning that gains in electricity efficiency are at a standstill. The numbers for total energy use are not available, because Beijing has stopped publishing them, secrecy being another feature of Chinese energy policy that the U.S. should not want to emulate.

China has also stopped publishing data on its production of coal, and coal is the heart of the Chinese energy industry, Beijing's green rhetoric notwithstanding. According to the available official data, Chinese coal production more than tripled from 2000 to 2009. It accelerated in 2008 despite the financial crisis, and was briefly steady in early 2009 before accelerating again. Then the data stream stops.

Chinese coal imports have been soaring. A net coal exporter as recently as two years ago, China is now the world's biggest coal importer. Coal constitutes less than one-fourth of American energy consumption but more than two-thirds of China's. By some estimates, China now accounts for half of the world's coal consumption. China is praised for its green-energy investments, but in 2009 and through the first quarter of 2010 its coal production grew faster than overall electricity production. Even very recently, coal has been displacing other sources of energy, including renewables. Hydropower's share of electricity generation fell in 2009 and the first quarter of 2010. Nuclear power is expanding rapidly, but China's target for nuclear power is just 5 percent of electricity capacity. In wind power, the government acknowledges that it is encouraging overcapacity, partly to keep up employment in the sector. Some wind power is not connected to the grid; some capacity is simply inactive. Less than 5 percent of China's solar-panel production is used in the internal market.

China's continued reliance on coal has had a predictable effect on greenhouse-gas emissions. In 2006, Chinese and American emissions were roughly even. By 2009 China's emissions were 50 percent greater than those of the U.S., according to the Netherlands Environmental Assessment Agency. By all accounts, that gap is growing quickly. This is especially startling given that China's economy is so much smaller: more emissions with less to show for it.

Bad as this is, the next decade promises to be worse: Through 2020, China is projected to account for half of global greenhouse-gas emissions. What, then, is Chinese green-energy investment actually accomplishing? Strengthening the hand of government over the economy, for one thing. Given the nature of the government in Beijing, it is no surprise that government remains the dominant force in the Chinese economy. Price controls are strict, encouraging the overconsumption of energy, especially from coal. The state-owned oil giants are protected from competition at every turn. Solar-panel output is soaring mostly because of gigantic amounts of politically mandated lending by state banks, just as nuclear and wind power enjoyed previously.

So it is true that China is spending money on energy hand over fist. But China has little to show for it. Massive regulatory intervention and tens of billions of dollars in annual spending on green energy have produced results that are drastically inferior to those of the United States -- both economically and environmentally -- and have left China falling farther behind rather than marching ahead, contrary to the popular myth.

But we can indeed learn from the Chinese. Specifically, comparing the Chinese experience with our own, we can learn that markets work. Government interventions distort the market -- and, when it comes to cultivating new technologies, the results are poor. And not just in China: Spain is strangling its economy with expensive green-energy subsidies and ruinous mandates. The U.S. government is funneling billions of dollars into alternative energy, with nothing to show for it, at a time when it should be focused on reducing spending. Despite all the money lavished on green energy by China, the Europeans, and the United States, none of the favored alternative-energy sources is becoming any more economically viable, and none would survive without a government crutch. Nobody knows this better than the renewable-energy lobby itself, which is why it constantly clamors for subsidies, special tax credits, and guaranteed market shares. If the technologies were commercially viable, such handouts would be unnecessary. In truth, Americans pay twice for green energy: Not only must they fork over taxes to subsidize dubious projects, they also have to pay bigger bills for the pricier energy those projects produce.

One of the main reasons alternative energy sources are expensive and inefficient is that they are relatively labor-intensive. Despite the high-tech veneer, it requires more manpower to produce a given amount of energy from green sources than it does from conventional sources. In some places -- Beijing and Obama's White House among them -- this inefficiency is perversely regarded as a good thing. For politicians, the value of an energy source is not the power it produces but the jobs it creates. The American Wind Energy Association understands this, and boasts that wind produces more jobs per unit of energy than any other source. This is a bizarre view of energy and the economy. According to this logic, the United States could meet the Chinese agriculture challenge by replacing tractors and combines with hoe-wielding farmers. Food production would plummet and prices would soar, but we would have more agricultural workers. Of course, government "investments" in alternative energy also destroy jobs, by diverting resources from private-sector enterprises that create more-productive jobs. Strangely, green-energy advocates freely admit that their program is relatively inefficient -- in fact, they boast of its inefficiency when it comes to labor.

What is often lost in this debate is the fact that energy is not a final product. It is, rather, the lifeblood of the economy, a critical input for almost all goods and services. When the cost of energy increases, the cost of everything increases -- driving down demand among consumers unwilling or unable to pay higher prices, especially since they will be facing higher energy bills of their own. In response to weaker demand, producers make less, workers and investors earn less, and household incomes decline. Energy-intensive industries are hit hardest, but everybody ends up less prosperous.

Also underappreciated is how much more expensive alternative energy is than existing sources. Coal costs about $78 per megawatt-hour, while wind runs $150 or more and photovoltaic solar power is pushing $400. That's unlikely to change anytime soon, and those cost differences do not even take into account the unreliable nature of wind and solar or the billions of dollars needed to fund new transmission lines to carry electricity from remote wind farms or solar installations.

America's energy market will look much different at the end of this century than it did at the beginning. But the energy economy is too complex for the government to micromanage. Alternative energy sources may well win a significant share of our energy market, but that should happen without subsidies, mandates, or tax favoritism -- not just because those are expensive and wasteful, but because they stifle the innovation needed to make alternative energy truly competitive. By removing the incentive to lower costs, green-energy programs in fact promote mediocrity and complacency. The industry will tread water as long as it relies on government charity.

That being the case, it is no surprise that the United States has a far more energy-efficient economy, and a far cleaner one, than does China, despite Beijing's massive public spending on alternative energy. Sputnik was a shock to American complacency, as has been the relative rise of China as an economic power. But the system that produced Sputnik 1 was, in the end, massively inefficient, inhumane, and destructive. The one that produced Apollo 11 pointed the way forward, and it still does.

Mr. Scissors is a research fellow in economic policy at the Heritage Foundation's Asia Studies Center. Mr. Loris is a research associate at the Heritage Foundation's Roe Institute for Economic Policy Studies.

First appeared in National Review

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