Blinded by the (Solar) Light

The Obama Administration’s preliminary decision to impose a 31 per cent tariff on solar panels imported from China is short sighted. The move could cause a trade war, hurt the US economy, jeopardize US security interests, and put the world further off course in terms of meeting its global climate change goals.

The decision opens the US up to a trade war in renewable energy, of all things. The US currently has a trade surplus with China in solar energy because of large US exports of poly-silicon to China. Not surprisingly, Li Junfeng, a senior Chinese government official, has already proposed imposing retaliatory tariffs on US polysilicon—and a trade war might not stop there.

The measure could also hurt one of the few bright spots in the US economy. Jobs in the solar sector grew by 7 per cent last year thanks to the combination of higher demand for solar PV (due to lower prices for the modules) and state and national incentives for renewable energy. Most of the new jobs are in the solar installation business. If the Obama Administration makes solar modules one-third more expensive by imposing these tariffs, US demand for solar PV will certainly fall, and new jobs in this sector will vanish. Chinese solar firms can shift their production to other countries to avoid the tariffs, and will still be more competitive than SolarWorld—the German company whose US subsidiary is behind the complaint.

The Obama Administration should be praising, not punishing Chinese support for renewable energy. By supporting renewable energy, China is appropriately correcting for market distortions, which the United States should be doing too. Global fossil fuel subsidies are estimated at $300bn per year. Fossil fuels also damage the environment when they are burned, which imposes costs on public health from air and water pollution. In a 2011 paper, the social cost of carbon dioxide emissions today was estimated by Yale economist William Nordhaus to be between $40 and $288 per ton carbon, depending strongly on one’s choice of discount rate. Fossil fuel imports also account for 59 per cent of the US trade deficit, and the US Navy spends countless dollars defending international shipping lanes for oil and other commodities. Recognizing these problems in the Chinese context, the Chinese government recently announced a modest carbon tax, created domestic feed-in tariffs for both wind and solar energy, and is effectively supporting their clean energy industries.

It is in the US’s interest to encourage China to reduce the growth of oil and gas imports, so that the global costs of these fuels will not continue to rise. Wind and solar-derived electricity can directly substitute for Chinese imports of natural gas for power generation. If China succeeds in developing an electric car industry, renewables could power their automotive fleet too.

It is also smart for the US to support China’s efforts to reduce emissions of greenhouse gases. Given China’s heavy reliance on coal, major investments in renewables and energy efficiency can enable China to reduce the carbon intensity of its economy. If the Chinese don’t make a big shift to renewables, there’s no chance of avoiding severe climate change because China is already the largest emitter of greenhouse gases in the world.

Finally, the merits of the actual case are dubious. Prices of Chinese-made PV modules in China are lower than they are outside of China, so it’s hard to see how they are “dumping” on the U.S. market. The true problem is overcapacity, which market forces will correct in time. The Chinese government has undoubtedly provided support to its solar industry, but so has the US government with its loan guarantees, investment tax credits, and production tax credits. At the local level, SolarWorld Industries America (the lead filer of the complaint) itself received millions in tax breaks and subsidies in Oregon when it decided to locate its manufacturing facility there. Indeed, the Commerce Department only found evidence of small Chinese subsidies in its March 2012 ruling. SolarWorld only had six co-filers, but more than 100 U.S. firms lined up against it.

Chinese government support for solar energy has already benefited the world in terms of improved welfare, climate mitigation, and reduced global energy prices. The rest of us are essentially free-riding on this support. Rather than punish China for its laudable efforts, the Obama Administration should applaud it and do its part to correct market distortions too.