The US rejects cheaper low-carbon energy
If only the energy transition weren’t so expensive, they say, our planet would be saved. But why should people pay more to decarbonise when we can wait for technology to get cheaper? When people are struggling with inflation and cost of living? Why indeed.
This week, the Biden administration announced plans to impose 100% tariffs on Chinese electric vehicle imports. Last month, the American Alliance for Solar Manufacturing Trade Committee filed the latest legal petition to stop alleged “dumping” of solar panels, a practice where products are sold below the cost to produce them. These measures could make the energy transition longer and more expensive.
Tariffs and other protectionist measures come from the desire to protect local businesses and their workers. If you make imports more expensive, or simply ban them altogether, your local businesses have a better chance of competing and creating jobs. Sometimes this buys them time to become more efficient, so that the tariffs can be removed in future. Often, it encourages complacency, and perpetuates inefficient business operations.
Tariffs and trade barriers, though, can makes prices higher in importing countries. Similarly, state subsidies make prices lower, making a country’s products more competitive to export at the expense of taxpayers money. Actions that benefit small but well-organised groups of workers and industrial interests have a diffuse cost on the faceless majority. The World Trade Organisation was set up to help countries negotiate trade and set up rules to make sure they feel like they are being treated fairly by each other and reduce interference with market prices. But the WTO is not a particularly toothy organisation. These rules are broken all the time.
In the US, the cost to produce solar panels and electric cars is currently higher than elsewhere, China in particular. This is not for lack of trying. The US has a long history of subsidizing solar manufacturers, and was the birthplace of the modern automobile factory. But Chinese manufacturing drove the massive cost reduction of solar panels such that they are now one of the cheapest forms of electricity. China accelerated EV adoption by launching subsidies and incentives, as well as taxes on petrol cars. In Shanghai, where EV number plates are green, some of the rich choose to drive luxurious fossil fuel cars with their distinct blue number plates as a status symbol that they can afford the registration fees.
The US hasn’t just turned to tariffs to become more competitive. The historic Inflation Reduction Act promised billions of dollars to subsidise all sorts of climate-improving investments. This industrial support has been criticised by the EU as unfairly advantaging American businesses, even though for decades they have been pressuring the US to do more on carbon emissions reduction.
But it seems like the IRA is still not sufficient to compete against lower cost suppliers. The solar panel dumping cases target not just China but countries in Southeast Asia, who represent c. 80% of 2023 solar module imports. These countries may be benefiting from government subsidies themselves, the use of forced labour, or proxy support from China. However, they also may simply be cheaper places to produce solar panels. Regardless of why their panels are so cheap, their low price is a threat to American businesses, and tariffs might help them to stay afloat and protect jobs.
Protecting these jobs is costly, and while that might not be enough to convince the average voter that they should pay more for their electricity bill, national security and American patriotism might.
One concern is that foreign, hostile states might have access to critical infrastructure if they are the manufacturer of its parts, and be able to interfere with its operations to sow chaos. This is not just the stuff of spy thrillers concern. Electricity grid hacking has happened in the US before, and was a component of Russia’s attack on Ukraine. This argument is compelling for software and more advanced hardware that ‘talks’ to components, like inverters. But solar panels are cheap, commoditised and usually ‘dumb’. They seem like an ideal component to import from the lowest cost source to save money for domestically made, higher value equipment.
Another security concern is around supply chains. If there is another pandemic, or a war that cuts off the US from important trading partners, access to cheap solar components would be cut off, and the US would be unable to make up the shortfall in the short term.
Energy security is important. It makes sense for a nation as large and wealthy as the US to have the ability to produce critical products domestically, if required due to war, pandemics or otherwise. But policy should not be set as if that has already happened. Why not instead set up strategic stock-piles of solar panels, as we do for oil? Or make capacity payments to factories that can come online in an emergency, as we do for reliable but high-cost electricity suppliers in power markets?
The US is the largest cumulative emitter of CO2 since 1850 and is still world’s second largest annual emitter. Tariffs might be popular from a nationalism perspective, but they could ultimately slow the energy transition in the US and erode support for climate change investments as the bills stack up. The government may be willing to pay this price in the short term to score political points and to stay relevant as a climate industrial power. The rest of the world just can’t afford it.