Why the U.S. should give up on the clean energy race

Energy alarmism is on the rise again in the United States. This time, the looming phantom is not peak oil, but the danger of the United States falling behind in alternative energy development. Reprising a role it has played well in trade circles for years, China is a primary culprit. Beijing is accused of illegally subsidizing its clean-energy industry, most recently by the United Steelworkers in a suit filed with the U.S. Trade Representative a few weeks ago. Businesses, clean energy advocates and the U.S. government have make China a focus of attack.

Last Thursday, General Electric CEO Jeff Immelt sounded off on what he calls Washington’s “stupid” energy policy, warning that, absent more support for nuclear power, wind, and smart grid technology, the country will risk surrendering its lead in energy innovation to the Chinese. On Capitol Hill, Democratic congressman Ed Markey of Massachusetts has tirelessly urged the country to catch up in the “Global Clean Energy Race.”

That was the title of a hearing I attended last Wednesday before Markey’s Select Committee on Energy Independence and Global Warming, which heard testimony from four clean energy experts. It was only a committee hearing in the official sense; apart from a prepared statement by ranking Republican Jim Sensenbrenner, and two brief questions by Democratic Congressman Emanuel Cleaver, Markey had the floor to himself. The message: a lamentation that China, South Korea and Germany are “throwing the kitchen sink of policies at clean energy,” devoting large-scale investment in the sphere, while “[American] entrepreneurs and workers are increasingly being blown off the road.” Markey thundered:

“If we do not act decisively to provide the long-term and short-term incentives to make America the best place to invest clean energy dollars, someone else will. We will trade our addiction to Middle Eastern oil for an addiction to Asian or European clean energy technologies. … The stakes could not be higher.”

While Markey heated up the politics, accusing backers of California’s Proposition 23 and the Tea Party of conspiring to “kill” green energy initiatives, his witnesses soberly detailed cleantech investment trends. What they said wasn’t encouraging. Michael Liebreich, the head of Bloomberg New Energy Finance, said the U.S. leads the world in cleantech venture capital, but seriously lags China in total investment in the sector. (See slide 8 of his PowerPoint here.) In 2009, the U.S. financed $10.7 billion in clean energy assets, compared with China’s $29.2 billion; in the last five months, Liebreich added, the China Development Bank alone has provided $27 billion in clean energy investment. The United States, said venture capitalist Ravi Viswanathan, “has lost its leadership to China, Japan, and Germany in clean energy manufacturing and deployment.”

International competition is a tried-and-true oratorical theme. From a politician’s perspective, it can spur government and public support for favored projects. New York Times columnist Thomas Friedman, probably the most prominent non-governmental voice in the clean-energy race camp, argues that if the United States fails to seize the high ground in green energy, Americans will become “laggards in the next great global industry.” But this is a dubious policy thrust, not to mention the possible start of a trade war.

Investment in clean energy is best seen as a smart, long-term diversification strategy. The United States is already moving in that direction, albeit slowly, with the adoption of renewable portfolio standards — a requirement for the use of renewable energy in power-generation — in 31 states. Investors and utilities understand this, as I noted in a previous post, which is why the United States continues to attract so much cleantech venture capital.

As for encouraging growth in cleantech manufacturing, that is part of America’s self-interest — not “a social project, but … an industry,” says Bloomberg New Energy Finance analyst Ethan Zindler. Viewed from this perspective, one clear benefit from China’s considerable cleantech investment is lowered costs for these technologies, making them commercially stronger. Widely adopted clean energy technologies will produce growth not just in manufacturing, but in construction, installation and further innovation. No cleantech product is built in a single place. “It’s very hard to source a wind turbine that is ‘American-made’ through and through,” Zindler said. “There will be Chinese equipment in that General Electric turbine you buy. And there will probably be some American-made equipment in that Chinese turbine you might buy someday as well.”

Promoting American self-interest will require some form of government support, specifically a federal renewable electricity standard (a current bill in Congress would require utilities to derive 15 percent of their electricity from renewable sources or energy-efficiency projects). A similar Senate bill has four Republican co-sponsors, showing that this approach to clean energy can cut across party lines. Such a law could make clean energy sources competitive with coal and gas by creating demand for them at a time when market conditions alone are not entirely favorable, owing to a downturn in electricity demand and low natural gas prices. This ability to create demand makes an RES “the single most important factor for the development of [clean energy] market in the U.S.,” Mark Fulton, the global head of climate change investment research at Deutsche Bank, told Markey’s committee.

China, with its cheap government financing for cleantech projects and undervalued currency, is indeed a concern, as the Council on Foreign Relations’ Michael Levi writes. But the best step Washington can take is to promote clean energy manufacturing and innovation in the name of long-term energy diversification rather than a dubious “energy race.”