Ray of Hope? China and the rise of Solar Energy

Abstract:

The rapid decline in the global cost of solar panels coincided with China’s growing market dominance in solar photovoltaics (PV) from the early 2000s. We evaluate the effectiveness of local, city-level policy efforts to encourage the growth of the solar industry in China. We develop novel measures covering all policies since their inception based on text analysis; construct original data on patenting, production and trade; and implement a synthetic-difference-in-differences approach. We show that city-level subsidies for solar production cause large increases in the production of solar panels and - with a lag - also raise innovation and the productivity of solar panel manufacturers relative to firms in matched control cities that did not implement such policies. Cities which combined production subsidies with R&D support showcased even larger positive effects on solar innovation and production. We also document positive impacts on solar firm numbers, revenues, and exports from these production and innovation subsidies. In contrast, demand/installation subsidies targeted at increasing city-level generation of solar electricity have no significant impact on city-level solar innovation and production as additional demand can be met with solar panels produced in other Chinese cities. These results are consistent with the predictions of a model in which electricity is supplied locally using components (e.g. solar panels) sourced from heterogeneous manufacturers across China, who endogenously choose whether to pay the fixed costs of innovating and/or exporting.  Taken together, these results suggest that industrial policy can foster innovation and growth in clean energy. The fact that we observe this in an industry that is displacing dirty energy generation worldwide magnifies the importance of our findings.