IA commentary draft 3:

By Wesley Hudson

Title of the article: China Boosts Renewable Power Subsidies 7.5% to $13 Billion

Source: Bloomberg Green

Date: 18/7/2020

Link: https://www.bloomberg.com/news/articles/2020-06-18/china-raises-renewable-power-subsidies-
7-5-to-13-billion

Terms to define:

a) Subsidies

b) Positive production externalities

This article goes into discussion about China’s current subsidisation of the Renewable energy market, such
as wind and solar by 92.38 billion yuan ($13 billion USD), This is a 7.5% increase from 2019. A subsidy
is defined as “government payment to producers attempting to lower the price of produce and increase
quantity produced (encourage production). In the international trade context, the subsidy is given to
domestic producers to increase their international competitiveness.” By doing this China is hoping to
encourage the creation of Positive production externalities “Occurs when the consumption or production
of a good cause a benefit to a third party. For example, when you consume education you get a private
benefit Eg: you are able to educate other people and therefore they benefit as a result of your education.”
But in this case China aims to promote the creation and sustainability of cheap renewable power which
will help them in their large manufacturing market. As this subsidy will “cover existing projects plus any
new developments that meet eligibility criteria”. With an example of this subsidy in practice being: The
Longyangxia Dam facility on the Tibetan Plateau.

With the graph below we can establish the current market with the subsidy of 92.38 billion Yuan. And
with how the price is dramatically change by the introduction of this subsidy.
Market with original subsidy
$ price
Subsidy of 92.38 Yuan

Market after Subsidy

P1

P2

D
Quantity
Q1 Q2

As can be established from the graph currently the market is sitting at P1 and Q1. This line although
having an existing subsidy is now being directly right shift on the X axis, also being dropped to P2 on the
Y axis to meet the new Quantity and Price at value 2. By doing this the cost of production of solar
 installations and other renewable energy plants decreases, as indicated by P1 to P2. Making a higher
quantity of Renewable energy plants being viable therefore increasing the quantity. This will also increase
the demand as shown on the orange point on the graph. This can be also seen in the article by the quote
“Applications for new solar power projects that will compete for national subsidies rose 36%
to 33.5 gigawatts in 2020, the National Renewable Energy Information Management Centre said
separately. Last year China decided to subsidize 22.8 gigawatts of the 24.6 that were submitted. By further
applying this subsidy it decreases demand on the power grid as there is more power to go around the
network, promoting more growth nationally. Though this will also increase demand due to more people
being on the network as seen on the orange ball. However, most of these plants are owned by the state
therefore the Subsidy is not a true Subsidy as the money goes back to the government. Also, the Chinese
government is putting restrictions on the eligibility of these installations to keep coal power generation still
competitive on price alone.

But by allowing the demand for power to increase due to it being a cheaper price it creates positive
production externalities represented by the graph below.
MPC
$ MC/MB
Positive production externality
MSC

Pp

Ps Welfare loss

MPB=MSB

0 Quantity
Qp Qs

By introducing the subsidy presented in the previous graph it will create a greater positive production
externality. Which is indicated by the black line between MPC and MSC. by introducing this subsidy, it
will help consumers in how much their electricity bills cost a month (MSC) and promote industry to join
the region due to cheap cost of electricity (MPC). Another example of how positive production externality
will be created is via creation of new jobs and education for locals. As the people working at these newly
subsidised solar and wind farms will require training to operate these installations. Therefore, they can take
these skills elsewhere creating furthermore positive production externalities. Lastly it helps the global
community by decreasing over all carbon pollution in China which is already heavily polluted.

By China continuing to provide subsidies to renewable energy it promotes positive production

externalities. Which will allow more businesses to make money and increase overall living standards of
China. But have another benefit of helping the global community by decreasing carbon emissions.