The role and incentives of Chinese local governments in solar PV overinvestment

Through an analysis of the political structure, fiscal system, and financing mechanisms at the local level in China, this study seeks to investigate the incentives that prompted local Chinese governments to overinvest in the solar photovoltaics (PV) industry. I find that local governments have several incentives to promote economic development by supporting local industries; their support of China’s PV industry illustrates these incentives. Specifically, we find that there are three major incentives for local governments in China to overinvest in the solar PV industry. First, due to the nature of China’s tax policy, local governments have supported the PV sector to increase local revenue. Second, as these industries have become significant sources of local employment, it is hard to stop supporting them now that PV companies are having difficulties. Third, local officials seek promotions under the economic indicator system by gaining higher GDP. PV companies have been very helpful in contributing to local economic growth, thereby advancing the careers of government officials. Farsighted provinces like Jiangsu used the strength of their existing industrial base and favorable geographical location (proximity to ports) to attract visionary innovators and investors for building their PV manufacturing bases. Thanks to the distorted local political and economic incentives in China, this early wave of PV industry investments preceded a flood of imitating local governments that sought to expand their own PV manufacturing. This uncoordinated, irrational exuberance stemming from distorted, bottom-up local incentives has led to the massive PV manufacturing overcapacity in China.