German CO2 Panels China: Vitamin C

This week in governments ... governing.

Flagship Fallout

Subsidies are often born of good intentions, but they rarely pan out as planned, as German officials are discovering. After the 2011 Fukushima-Daiichi nuclear disaster, Germany released a plan to eliminate nuclear power in its borders and flagship completely relying on green energy in the future. Though popular and politically expedient, the plan lacked solid economic backing—and, now, so do the subsidies it promised.

See, Germany planned to fund its new green energy projects by selling allowances for companies to emit CO2—hoping to discourage pollution and promote green energy in one step. Had emission allowance prices remained at the 2008 (when the policy was made) price of €30 per ton, perhaps the plan would have worked. (Perhaps.) Unfortunately for German policy makers, the market spoke up. The allowances, or emissions certificates, are now selling around €4 per ton. Hence, the German government isn’t receiving enough revenue to continue supporting green energy, leading to a general cutback on subsidies for projects like electric car promotions and forestland protection and expansion.

Some claim the weakening eurozone economy caused the drastic allowance price decrease, and there’s likely some truth to that. But even the 2014 budget estimated the certificates to cost around €17 per ton—and it’s difficult to see how that budget overlooked the last five years of overall European economic weakness.

In our view, the plan ultimately failed because, at this point, “green” energy isn’t as reliable, efficient or cost-effective as more traditional sources of energy—like nuclear, coal or oil. (Nor is it necessarily cleaner.) Not to say it can’t or won’t be, but government intervention historically hasn’t helped new technologies advance sufficiently to become commonplace. More often than not, free market pressures are needed to make new technologies economical enough (and/or appealing enough) for broad adoption. And the market tends to act outside of the realm of politics and public sector support. So, though we likely haven’t heard the last of green subsidies in Germany (or elsewhere), perhaps the removal of subsidies will actually serve to encourage green energy companies to enter the free market.

Golden Sunset?

China’s energy industry may also see new developments. Seems its government may implement a new policy abolishing one-time solar subsidies and restructuring others to promote smaller over larger projects—ostensibly encouraging higher competition. At the very least, China hopes the move will decrease duplication. The potential policy seems in line with criticism of Chinese subsidies—seen as inefficient and overly generous—after companies receiving last year’s massive increase in solar subsidies met weak demand overseas.

Some worry this may mean an actual decrease in subsidies, which will hurt the Chinese solar energy industry. But such fears are likely unwarranted—the move seems primarily a subsidy shuffle from one area to another. What’s more, China simultaneously declared intent to increase the number of “photovoltaic devices” (read, solar panels) it creates—pushing to become the biggest global producer. It’s no secret Chinese solar panels are heavily subsidized, so we’re curious to see how these moves may balance each other out (especially in light of a recent default by a large Chinese solar firm).

One predictable outcome is more politicking over trade. The US frequently complains about Chinese solar subsidies artificially holding down prices—resulting in their dumping panels and other solar technology on the US. As the US also subsidizes its solar energy, China complains right back. It’s probably unlikely trade tiffs over solar panels lessen if China does remove and restructure its solar subsidies—and very unlikely if China actually ramps up solar panel production—but this certainly is a development worth watching.

Trade Supplements

Accusations of artificial prices aren’t unique to the solar industry—Chinese pharmaceuticals are in a similar situation. China’s well-known to be the largest producer of artificial vitamin C in the world. And last week, a Brooklyn jury found a group of Chinese vitamin C makers guilty of violating US antitrust laws, sentencing them to collectively pay a $162 million fine. Charged with “colluding to raise prices,” the group is the first Chinese “cartel” prosecuted in an antitrust court.

In the trial, US vitamin C buyers claimed the Chinese companies voluntarily “[abused] their dominance,” but the companies claim they merely charged prices according to vitamin C price and volume restrictions set by the Chinese government—i.e., not subsidies, but government manipulation by any other name is equally as market-distorting.

Regardless of who said what and why, the US court’s verdict provoked a warning from the Chinese government, stating “negative global repercussions” likely follow unless the judgment is reversed. And they probably will, though such repercussions are likely to be small. Still, this is all the petty tit-for-tat inherent in US-Chinese trade tiffs.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.