Inconvenient truths about the green transition

When western policymakers talk about reasons for supply chain decoupling from China in areas like semiconductors and clean energy technology, they often cite two inconvenient truths.

First, cheap Chinese inputs like the polysilicon needed for solar panels and critical minerals for batteries are often made or extracted by forced labour in Xinjiang. Second, a lot of what’s advertised as “clean” energy technology coming out of China is made in factories that use coal-powered electricity. If you tally in the true carbon and labour cost of that production, it doesn’t seem so “clean” any more.

America’s Inflation Reduction Act is meant to start tallying up the real cost of labour and emissions, with carrots and sticks designed to cut forced labour and dirty power out of supply chains. In theory, that also cuts China out of the clean energy transition in the US, at least unless it changes its position on coal and Xinjiang.

Or does it? As the IRA subsidies start rolling out, it’s clear that it’s difficult, if not impossible at the moment, to decouple totally from China in areas like solar power. Indeed, recent conversations I’ve had with both policymakers and business leaders have convinced me that we are about to have some very tough global conversations about the trade-offs that will need to be made if we want a truly green energy transition that creates decent jobs in the US and abroad.

Consider, for example, the last year of new solar and green battery factory announcements in the US. New rules mean that solar modules deemed to have been made with forced labour in those dirty Chinese factories can be impounded at the US border. At first glance, this looks like a huge win for the Biden administration. And in some ways it is: America is finally starting to pass policies to encourage sustainable, inclusive growth. 

But when you dig deeper, you realise that the IRA specifications for things like modules or solar battery cells don’t account for the fact that nearly all raw polysilicon, which is traded as a commodity on the global market and thus not identified by origin, is made in China, much of it in Xinjiang. That means that there’s hardly any solar panel in the US or pretty much anywhere else that’s “clean”, not to mention made completely with fair labour practices, given the dominance of China in the market.

“You have to ask the question, what clean energy technologies can we make at scale to achieve the green energy transition in the west that don’t currently depend on China?” says David Scaysbrook, a managing partner of Quinbrook Infrastructure Partners, an Australian firm that both builds and invests in renewable energy, including IRA-related projects. His answer? “Not much.”

Scaysbrook, like many executives in the sector, has been delving into the minutiae of supply chains. He is doing so in the expectation that continued US-Chinese trade tensions will make it increasingly risky for his firm to use Chinese-sourced inputs — from polysilicon to Chinese intellectual property or labour — as American politicians on both sides of the aisle push for further decoupling. In the latest sign of this pressure, the top Republican and Democrat on the US House of Representatives China committee accused BlackRock of profiting from investments that benefit the Chinese military. (BlackRock said that it complies with all applicable US laws.)

As part of an Australian government effort, Quinbrook has been looking at what it would take, for example, to mine and produce green polysilicon in Queensland, without using any Chinese input or expertise. It is possible, given that Australia has abundant raw materials like quartz and can use IP and talent from places like South Korea, Germany, Japan or the US, to build the factories and equipment needed for such an effort. 

The rub is that it would be at least two times more expensive to do so. What’s more, if a firm in Australia or even the US (which likewise has the raw materials to produce polysilicon) wanted to do so, it would take roughly six years to build a new facility. This would mean only two or three years of production subsidies under the IRA, which is set to expire in 2032. That’s a long time in the context of US politics, but not very long at all in the context of what’s needed for a truly clean and inclusive energy transition.

Clearly, as decoupling plays out, the rubber is hitting the road on the tough questions of who pays for resilience, sustainability, fair labour practices and all the things that western countries claim to care about. There are really only two ways forward at this point. One possibility is that the US, perhaps in the company of its allies, will come together and create a strategic procurement entity that would underwrite the true cost of the green transition for the long haul. These countries would use their purchasing power to set a floor under the market for the entire supply chain.

Alternatively, China could come to the table and have a real conversation about ending modern slavery and coal power. The west would of course have to acknowledge any of its own bad practices on this score as well, such as the use of convict labour in the US. I think Chinese companies would be up for it. I doubt the Chinese leadership would. Inconvenient truths, indeed.