Peng Wensheng is the Chief Economist and Head of the Research Department of CICC, the President of the CICC Research Institute, and the Vice Chairman of the China Chief Economist Forum
Dear Dean Wang, it is a great honor to participate in the forum organized by China Europe International Business School this afternoon. Just now, Dean Wang explained some of her analyses of new quality productivity from the perspective of science and technology innovation parks, and I will talk about some of my latest thoughts from the perspective of green transformation.
China's green industry should be said to have made great achievements, and the biggest feeling to the world is that it is large. We have gone from photovoltaics, to wind power, to electric vehicles, on a large scale, but recently there are some different views, such as the problem of overcapacity. Internationally, the European Union announced last year that it would launch so-called countervailing investigations into China's wind power and electric vehicles. Recently, U.S. Treasury Secretary Janet Yellen also raised the so-called overcapacity, government subsidies, and international trade, so how should we understand that green transformation, as a new quality of productivity, will it bring about changes to the economy and international trade?
First of all, we can take a look, I just mentioned that we lead the world in the development of green industries, our photovoltaic module production capacity accounts for almost 80% of the world, and our market share of new energy passenger cars or electric vehicles is close to 50%.
You can look at it from two perspectives, one perspective is that China has made a significant contribution to the global green transition, but the other perspective, some people will also ask what it means for the development of green industries in other countries, so it also brings such a pressure of trade protectionism.
How should we understand some of the economic characteristics of green industry as a new quality of productivity? We can understand green innovation or green industry from two perspectives, some of my own experiences.
As a new qualitative productive force, the first is embodied in a new factor of production. In the past, energy was an important factor of production of an economy, in the past it was fossil energy, and now we are shifting from fossil energy to green energy, which is the transformation of production factors, it is a new factor of production, so it is an important embodiment of the new quality productivity we are talking about.
The second embodiment is that green technology is a general technology, which can be used in many fields, because green is essentially a manufacturing industry, and it is closely linked to scientific and technological innovation, so it is a general technology. The progress of general technology improves total factor productivity, so it is not only a new factor of production, but also improves the efficiency of the use of factors of production, the so-called total factor productivity, which is the first aspect.
The second aspect is, what is the difference between fossil energy and green energy in the allocation of resources in the market? Fossil energy is a natural endowment, if you have oil, you will have oil, and if you don't, you will not have it. One of these characteristics is that in traditional fossil fuels, there is a characteristic called diseconomies of scale, and it is difficult to achieve economies of scale. In this part of the oil reserves, there are only so many mining areas, you can't say that I make it bigger, oil production increases, and what are the general characteristics? What will happen to ordinary oil mines and coal mines? It is first of all a place where it is easier to mine and has a low cost, and then it will be mined to dig deeper, farther and more costly, so it is a typical diseconomy of scale, that is to say, it will not be like the manufacturing industry, because the scale increases, and the unit cost decreases. This is an important feature of fossil fuels.
Green energy It is a manufacturing industry, an important feature of manufacturing is economies of scale, the higher the output, the lower the unit cost. Just like a traditional example, with an annual output of 100,000 vehicles and an annual output of 1 million vehicles, under the same technical conditions, who has a lower unit cost? The annual output is 1 million vehicles. Because many fixed costs, including fixed costs such as IT procurement, marketing, and manpower, are spread over each vehicle and it will go down as the size increases. I think we need to deeply understand and value the important impact of such an important difference on the global economy and the competitive landscape of the market.
The mining industry cannot be biased and discriminatory, but there is a saying that the land-related resource monopoly, it is a kind of land head snake, and it is the head snake internally, I say that the head snake does not have any derogatory meaning, that is, it is naturally a monopoly attribute, its competitiveness is not enough, what is it externally? Cartels, like OPEC, are more than 20 member states that try to influence prices through production control, and its competition is insufficient, which is very different from manufacturing and automobiles and photovoltaic modules and wind power equipment, which is the first thing we have to pay attention to.
Shifting from fossil energy to green industry has different implications for the global economy, market competition pattern, and international trade. What is its impact on the economy? An important feature of economics, our human society has greatly improved from an agricultural society to an industrial economy to the present, why has the standard of living improved significantly? The most important embodiment of this is the economy of scale. It is difficult to achieve economies of scale in the era of agricultural economy. Marx talked about differential rent, what is differential rent? The good land is cultivated first, and the marginal output of the land on the back edge is reduced.
Therefore, economies of scale are a fundamental carrier for the progress of human society and the improvement of living standards, and green energy has economies of scale, so we talk about new quality productivity, in fact, this transformation has important, very important implications for our economic growth and the improvement of human living standards, and at the same time it promotes market competition. That's the second difference I want to make.
Third, the green transition does not fall from the sky, it does not happen naturally, because there are two externalities. What are the two external externalities? The use of fossil energy, a term called negative externalities in economics, is that the interests of individuals and the interests of society are not aligned. I use fossil energy to engage in an economic activity, the benefits are my own, and the harm caused by the carbon dioxide emitted is borne by the whole society and the whole world, so individuals do not have enough motivation to reduce the use of fossil energy. What to do? Public policy interventions are needed, such as carbon taxes, carbon trading markets, and carbon pricing.
Green energy also has externalities, and its externalities are positive externalities. A person's invention and creation, the progress of green technology, his R&D investment is individual, but once successful, the whole society benefits, which may lead to the sum of individual innovation investment is lower than the ideal level of R&D investment required by the whole society, because to do R&D investment innovation it has to bear risks, what to do at this time?
We also need the intervention of public policy, government subsidies, subsidies for innovation, subsidies for the development of innovative technologies in the early stage of commercialization, and the intervention of public policies will inevitably bring about the adjustment of interests, which has important implications for the global governance system.
So the green transition is a systemic one, not only affecting productivity, but also affecting production relations, such a major change that human society is facing, this is one that I want to talk about today, a basic framework from the perspective of economic analysis, and I will explain these points of view below.
First of all, green energy as a new quality of productivity to contribute to the new factors of production, in fact, from fossil energy to green energy, our China's photovoltaic, onshore wind power, power generation cost and raw coal standard electricity price, in fact, we are now negative. Regardless of other issues, such as grid stability and energy storage, we are already lower than coal power generation in terms of power generation.
Second, I just talked about improving total factor productivity, because it is a manufacturing industry, it is closely linked to R&D and innovation, this picture is the A-share listed companies we look at, we put these listed companies in the manufacture of new energy equipment together, these listed companies in fossil energy mining together, we can see that whether it is the proportion of R&D investment in operating income or the average number of patent applications, the new energy industry is significantly higher than fossil energy, which is what I said earlier. to improve total factor productivity.
I mentioned two types of externalities earlier, and this is in 2021, we at CICC Research published "The Economics of Carbon Neutrality", in which we proposed such an analytical framework for green premium.
How we can promote the green transition is to reduce the green premium. The green premium is the difference between the cost of clean energy and the cost of fossil fuels. We need to reduce the green premium to a negative one, so that the cost of clean energy is lower than the cost of fossil energy, so that economic agents can make such a conversion. How can we reduce the cost of clean energy? How to raise the cost of fossil fuels? As I just said, in response to those two types of externalities, public policy, one is on the demand side, through carbon pricing, carbon tax to reduce the cost of fossil energy, and the other is on the supply side, in green energy, technological innovation, industrial development, through financial subsidies, the design of some systems to promote the investment of market players, this is aimed at these two types of externalities, two types of public policy intervention.
What does the history of the past 20 years and 30 years tell us?
There are two paths for public policy, one is on the demand side and the other is on the supply side, and the EU is mainly on the demand side, so the European carbon market is the fastest growing in the world, and now it is also very large, which can be said to be the most mature. On the supply side, China is promoting the supply side through innovation subsidies, some tax breaks for the production and promotion of new energy electric vehicles, and even through some administrative requirements, such as mandatory distribution and energy storage.
The United States is in the middle of these two, but in the last two or three years, it has been very obvious that the European Union and the United States are moving closer to China, both learning from us, and now they are also engaged in industrial policy, such as the "Inflation Reduction Act" and so on.
What are the results of the two paths? We have to look at this, we compare the ratio of carbon prices between China and Europe, China's carbon prices relative to the EU's carbon prices, and we can see that our carbon prices have been declining relative to the EU in the past ten years. That is, the role of carbon prices in China is very small compared to the EU, but if we look at the ratio of new energy installations, we continue to rise, 10 years ago we only had less than 60% of the EU's installed capacity, and now it has almost doubled. So the carbon price plays a small role in our China, but the use of new energy, the speed of expansion, the scale of expansion is very large. The difference between the two paths, so I just said that they should learn from us, in the past two years, the number of projects subsidized by the United States and Europe in solar panels, and the number of projects subsidized by lithium batteries have increased.
What role can government subsidies play? In October last year, we at CICC Research Institute released a report, what are the results of our analysis, what is our point of view? Government subsidies and public policy support may play a certain catalytic role in the early days, but the most fundamental reason for the development of China's new energy industry to achieve today's achievements is economies of scale, because it is a manufacturing industry, China has the world's largest and most complete manufacturing industry system, so under the same technical conditions, almost anything, as long as it is produced in China, is cheaper than others.
So sometimes how do we understand overcapacity, an important feature of overcapacity is the price drop, and the effect of economies of scale is the price drop. In this chart, we can see that in 1976, this is the latest data for 2019, and it is obvious that there is such a trend of plummeting, and this trend does not seem to be changing, and the same is true for lithium batteries, why?
Because green energy is a manufacturing industry, if we compare coal power and gas power, the equipment cost of power generation is about 40% of coal power, and gas power is less than 20%. If we look at wind power and photovoltaics, the cost of equipment accounts for more than 80% of the entire power generation cost, so it is manufacturing, and manufacturing has economies of scale.
Moreover, an important feature of the digital economy is economies of scale, because the marginal cost of digital is very low, its non-competitiveness, and its expansion. Therefore, in the era of digital economy, some large platform companies are in large economies, such as the United States, China, and now India, and the green industry is naturally linked to digital technology.
We compare new energy vehicles and crude oil vehicles. More than 70% of the costs associated with new energy vehicles and electric vehicles are related to digital technology, so electric vehicles are also called smart cars, while crude oil vehicles are only about a little more than 20%. So what I've just said is a major change in economies of scale, from the diseconomies of scale of fossil fuels to the economies of scale of new energy.
What is the impact of economies of scale in international trade? Three major determinants affect the global division of labour and trade. There are two factors that we are all familiar with, one is natural endowments, and how do we explain trade between developed and developing countries? The traditional explanation, comparative advantage, developing countries have cheap labor, developed countries have cheap capital, so developed countries do capital-intensive products, developing countries do labor-intensive products, and then trade is generated. Of course, there are also countries that have natural resources, oil, natural gas, and you export them if you have them. If you don't, we in China will import natural gas and oil. It's trade.
The one on the right is the transaction cost. Because trade has transportation costs, there are some so-called protectionist measures of tariffs and non-tariffs, and even now there are some geopolitical implications, including some recent international controversies against the new energy industry. In fact, there is another important force, which everyone seems to have forgotten, and that is economies of scale, how do we explain trade between developed countries? The United States, Europe, and Japan have about the same level of development, and the cost of labor is about the same, how do you explain the large-scale trade volume between them? We can only go back to Adam Smith's "The Wealth of Nations", the division of labor and trade, the same level of development, the same income, we can also focus on the subdivided industries through the division of labor, increase the scale of the subdivided industries, the amount of production, to improve efficiency, reduce costs, this is a factor of modern international trade that may not be paid enough attention to. Economies of scale. Whoever has scale and who has a large scale will have a comparative advantage and a competitive advantage. And economies of scale it's not just manufacturing, in fact, the same is true of related public services, an important feature of public services, more people use them, and the cost per person bears is low, so why is China's infrastructure developing so well? It is related to the characteristics of its public services, scientific and technological innovation actually has economies of scale, technological progress does not fall from the sky, technological progress is the result of human economic activities.
On the demand side, the larger the market size, the stronger the incentive to innovate, why? You innovate in China, because the market size is large, your return is high. At the same time, you have a large population, assuming that there is one genius per 1 million people, you have a large population, the number of your geniuses is large, your economy is large, and your ability to invest in research and development is strong, so it must also have economies of scale in scientific and technological innovation. So this can explain why China's new energy industry is developing so fast and the scale is so large, and economies of scale are the foundation.
But this is the logic of economics, and there are many other political considerations in the middle of reality, geopolitics. I once gave a lecture at a European forum about the views I talked about today, and after listening to my lecture, a German friend said that the logic of economics is like this, but we in Germany do not want to be an open-air museum, and we can't all be new industries in China, so this is the problem we are facing now.
The exploitation and trade of fossil energy is a cartel, green energy is manufacturing, and the manufacturing industry has formed a free trade-oriented international trade and investment governance mechanism, but it has formed a free trade-oriented does not mean that there is no controversy now, because today's major adjustment of the benefits of green energy is not in his favor, whether he can adhere to the free trade-oriented international trade and investment governance mechanism, this is the problem we are facing today.
Therefore, the number of trade restrictions faced by China's green product exports is constantly rising, so the current international trade governance system has not adapted to the requirements of green transformation, and the WTO subsidies and countervailing measures are designed for the fossil energy era, and it does not reflect green products.
WTO subsidies and countervailing measures are divided into three types of subsidies, one of which is very obvious and everyone agrees, prohibitive subsidies, you can't engage in export subsidies, you can't engage in import substitution subsidies. There is also a category called justiciable subsidies, which are specific subsidies that have an adverse impact on another party or another member state. At present, subsidy disputes for green products are mainly of this type, the so-called justiciable subsidies.
Why is it an actionable subsidy? Because there is another type of non-actionable subsidies that have changed, in the past, subsidies for research and development, environmental protection, poverty alleviation and other purposes, which were acceptable in the past, but this one expired in 2001, and what happened in 2001, China joined the WTO.
From the perspective of economic logic, R&D subsidies should be due because R&D is risky. The positive externalities I have just talked about, in which individual input adds up to a lower than the ideal level required by society as a whole. Environmental protection also has externalities, so this is the problem that the entire international trade system is facing now, how can we adapt to the new era of green energy under the international trade governance system, how to promote the development of green industries, and global green transformation. Therefore, the unilateral actions adopted by some countries, especially now, have magnified the shortcomings of the current international trade governance system.
Finally, I would like to summarize what I have shared with you today, as a new quality of productivity, I think there are three questions, and I don't have a good answer to more, I hope to put forward some questions for everyone to think.
The first is how to understand the legitimacy of public policy interventions, as it seems that the mention of subsidies in everyone's mind is wrong, is not it? There are two types of interventions.
One is for fossil energy, negative externalities, carbon tax, carbon trading, which is what the developed countries of the EU have been promoting, and even some of them want to promote a global unified carbon trading market. Isn't it reasonable to say that you are a developing country, China's carbon price cannot be much lower than that of the EU, you have to be much lower, I want to engage in border adjustment taxes, and I want to raise the cost of your fossil fuels? Developed countries have developed, the use of fossil energy in the past, the carbon dioxide emissions caused by it are already there, the damage has been created, you are now asking developing countries to limit the use of fossil energy, through carbon taxes and carbon prices, is it fair to developing countries? Is it fair to low-income people?
Another public policy intervention is to deal with this positive externality of the innovation industry, subsidies for green technology research and development, investment subsidies, etc., this is also controversial, for example, some countries may think, for example, that China's subsidies have brought them an unfair competition, so there is a saying? Calling the ass to decide the head is actually related to your interests.
Developed countries hope that the EU hopes to pass more carbon taxes and carbon trading, because they can bear such costs, and the ability of developing countries to bear is relatively weak, but in recent years, they have seen the development of our China and green industries, and they feel that they may be lagging behind, so they need subsidies for direct research and development. But what I want to share with you today is that the role of subsidies is small, and the bigger thing is that the development of China's green industry is because of China's large scale, large market, and large manufacturing system.
The second issue is how to recognize economies of scale and overcapacity, which has been discussed a lot recently. In fact, phased overcapacity is part of the development of an innovative industry, you can't balance demand and supply at every point in time, in fact, supply is greater than demand, which has a certain role in promoting innovation, why? Because the supply is greater than the demand, the so-called overcapacity, the price falls, the money is not easy to make, and the money is not good to make will prompt everyone to do further innovation.
If the demand is strong and the money is easy to make, how can there be a strong incentive to do further innovation? But we in China really need how to promote science and technology finance and green finance, combine the two, and give full play to the advantages of China's economies of scale not only in manufacturing, but also in research and development, and innovation, so that we can maintain our leading position in green industries and green technologies, and can continue our so-called first-mover advantage.
Third, how to understand economies of scale and international trade. Economies of scale are said that technological progress is endogenous, and it has an important meaning, that is, large countries and first-mover have advantages, because the large countries have large market scales and many resources, and the two countries are about the same size and population, so economies of scale have another important meaning, that is, whoever is the first to have an advantage, because you first do the scale, you first make money through economies of scale, you have more resources to do new research and development, new innovation, will this have a very big negative impact on other countries in the world? In terms of the advantages of great powers and first movers. Probably not, why? Because the manufacturing industry is a fully competitive industry, the competitiveness of the manufacturing industry means that such a large country or first-mover advantage, and the innovation and technological progress it ultimately brings will benefit the world. However, the economic principle can be said in this way, but there are many obstacles in reality, so we in China have to deal with the concerns of some countries in the world about the size of our China, and we still need to promote the reform and improvement of the international trade and investment governance system, and adapt to the development of green industries and green transformation.
That's all for my report, thank you.