On Rare Earths and Clean Energy in China

In June of this year, China announced restrictions on the exports of rare earths from the country. China introduced quotas and taxes of up to 25% on the exports of rare earths – a group of 17 chemically similar metallic elements which are used in a range of industries including in the production of electric car batteries, solar panels and wind turbines. While the country cited environmental concerns as the reasoning behind the restrictions, these export barriers also help keep the prices of rare earths in China low as there is a constant oversupply. On the other hand, foreign producers who require rare earths will face increasing costs as supply is constricted – after all, China has 97% of the world’s rare earths. The imposition of rare earth export restrictions is one way in which China is seeking to extend its domination in the international clean-energy market.

The oversupply caused by the export restrictions will only be exacerbated by news earlier this week (9/9/10) that the state is planning to consolidate the country’s currently fragmented rare earth industry – a structural change that will involve the industry being led by several big firms. The government plans to reduce the number of firms in the industry from 90 to 20 by 2015 through a series of mergers and acquisitions. Presumably, the move will allow the industry to benefit from greater economies of scale, resulting is lower costs which ultimately aid clean-energy industries. On the graph below, this consolidation represents a movement along the ATC curve to a greater level of output, resulting in lower average costs.

On top of creating an oversupply of rare earths, the Chinese government is also taking steps to increase the external economies of scale that the industry gains from. One example of this is the government’s announcement of a new, high-speed railway route linking Nanchang, the capital of inland Jiangxi province, with the industrial coastal regions. The new route will cut down travel distances for the transportation of resources by 200km and will cut costs by US$4.20 per tonne. Hence, this railway, due to be completed in 2013, will be a boon especially for the manufacturers of wind turbines and electric car batteries, as Jiangxi province’s potential for the exploitation of rare earths is 16 times the national average.

While this article has focussed on rare earths, rock-bottom interest rates, bargain deals for land and government intervention of US$1 billion every day to artificially keep the value of the yuan low have all contributed to the remarkable rise in competitiveness of Chinese producers of clean energy and ‘green’ goods. China’s efforts have certainly made clean energy more affordable – over the past two years, solar panel prices have halved and wind turbine prices have dropped by a quarter, largely due to the massive economies of scale (both internal and external) experienced by the sector. The graph below shows the rapid increase in scale of wind turbine manufacturers in China – indeed, China is set to make about half of the world’s wind turbines and half of the world’s solar panels this year.

While some may laud China for embracing cleaner fuels and weaning its manufacturers off dirty fuels, this protectionism clearly violates World Trade Organisation rules. While I am in favour of government subsidies in ‘green’ sectors of the economy, it is unfair for China to support firms which export clean energy – doing so cripples foreign producers who are unable to benefit from such large government subsidies, cheap labour etc.

In order to prevent the world from becoming over-dependent on China for alternate energy as oil and gas reserves are depleted, China should increase its relatively meagre subsidies for the domestic consumption of clean energy and withdraw the export restrictions on rare earths. Doing so would allow its clean energy industry to continue to flourish on the back of rising domestic demand, as well as permit other countries to develop their alternate energy sectors.