Hard Realities about the Green Transition: Uncomfortable Facts

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When discussing the reasons for supply chain decoupling from China in sectors like semiconductors and clean energy technology, western policymakers often highlight two inconvenient truths.

Firstly, the production of cheap Chinese inputs, such as the polysilicon needed for solar panels and critical minerals for batteries, often involves forced labor in Xinjiang. Secondly, much of the so-called “clean” energy technology originating from China is manufactured in factories powered by coal-generated electricity. Taking into account the true carbon emissions and labor costs associated with this production, it becomes apparent that it is not as “clean” as advertised.

The Inflation Reduction Act (IRA) in the United States aims to account for the actual cost of labor and emissions in supply chains, with incentives and penalties designed to eliminate forced labor and dirty power. In theory, this would exclude China from the clean energy transition in the US, unless it changes its stance on coal and Xinjiang.

However, as the IRA subsidies are implemented, it becomes clear that it is currently difficult, if not impossible, to completely decouple from China in areas like solar power. Recent discussions with policymakers and business leaders have convinced me that tough global conversations are imminent regarding the trade-offs necessary to achieve a truly green energy transition that generates decent jobs in the US and abroad.

For example, consider the recent announcements of new solar and green battery factories in the US. New regulations allow solar modules made with forced labor in Chinese factories to be seized at the US border. At first glance, this appears to be a significant victory for the Biden administration and its promotion of sustainable and inclusive growth.

However, a closer look reveals that the IRA specifications for modules or solar battery cells do not take into account the fact that nearly all raw polysilicon, a globally traded commodity, is produced in China, much of it in Xinjiang. This means that there are very few “clean” solar panels in the US or anywhere else, not to mention those made with fair labor practices, given China’s dominant market position.

David Scaysbrook, the managing partner of Quinbrook Infrastructure Partners, an Australian firm involved in renewable energy projects related to the IRA, poses an important question: “What clean energy technologies can we scale up to achieve a green energy transition in the western world that currently do not depend on China?” Unfortunately, there aren’t many viable alternatives.

Scaysbrook, like many executives in the industry, has been closely examining supply chains, expecting that ongoing US-China trade tensions will make it increasingly risky for his firm to rely on Chinese inputs, including polysilicon, intellectual property, and labor. As politicians from both sides of the aisle in the US push for further decoupling, pressure on companies like BlackRock, accused of benefiting the Chinese military through investments, intensifies. (BlackRock maintains compliance with all relevant US laws.)

As part of the Australian government’s efforts, Quinbrook has been exploring the possibility of mining and producing green polysilicon in Queensland without utilizing Chinese inputs or expertise. This is feasible, given Australia’s abundant raw materials like quartz and potential collaborations with countries like South Korea, Germany, Japan, or the US to establish the necessary factories and equipment.

However, the challenge lies in the significant cost difference, as it would be at least twice as expensive to produce green polysilicon in this manner. Additionally, if a company in Australia or even the US wanted to pursue this approach (considering the availability of raw materials for polysilicon production), it would take approximately six years to build a new facility. This means they would only benefit from two or three years of production subsidies under the IRA, which is set to expire in 2032. While this may seem like a long time in the realm of US politics, it is relatively short considering the timeline required for a genuinely clean and inclusive energy transition.

Clearly, as decoupling unfolds, the difficult questions of who bears the cost of resilience, sustainability, and fair labor practices are becoming increasingly important. There are essentially two paths forward at this stage. One possibility is that the US, potentially in collaboration with its allies, establishes a strategic procurement entity that guarantees the true cost of the green transition in the long run. These countries would use their purchasing power to establish a minimum standard for the entire supply chain.

Alternatively, China could engage in a genuine dialogue about ending modern slavery and coal power. Of course, the West would also need to acknowledge any of its own shortcomings in these areas, such as the use of convict labor in the US. While Chinese companies might be willing to participate, it is doubtful that the Chinese leadership would be receptive. These inconvenient truths highlight the challenges ahead.

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