June 28, 2024 — Lethal heat waves this month hit the US and other regions throughout the Northern hemisphere, including India and the eastern Mediterranean. June will probably mark the 13th consecutive month of average global temperatures that exceed all observations in records going back to 1850. The primary explanation is, of course, that emissions and concentrations of Greenhouse Gases (GHGs) have in recent years increased even more rapidly than had been feared.
- A pleasant surprise
In one area, however, progress in the fight against global climate change has been greater than had been expected. Use of solar power and other sources of renewable energy in the US and the European Union has risen rapidly. The beginnings of an historic shift from internal combustion engines to electric–powered vehicles (EVs) have multiplied the importance of the switch to solar and wind sources of electric power.
The demand for renewable energy and EVs has been stimulated by big drops in the real prices of solar panels, wind turbines, batteries, and EVs. In the US, one factor underlying the shift has been subsidies to clean energy, particularly solar, wind, and EVs, in President Joe Biden’s Inflation Reduction Act, which was signed in 2022, with further details announced June 18, 2024. An even bigger factor, however, has been declines in the world prices of solar panels and EVs driven substantially by Chinese exports. Worryingly, recent expansions in the US and EU of tariffs on imports of environmentally beneficial equipment threaten to derail this progress.
While numbers for the cost of the energy transition are inherently slippery, the global capital investment needs in the power sector alone are estimated at $1.3 trillion per year on average between 2021 and 2050. Western countries have demanded that China bear its fair share of the costs. Yet, their trade policies are starkly at odds with the stated objectives.
- New import barriers
The perversely disproportionate targeting of imports of renewable energy equipment by the US and EU goes back more than ten years. But it has gotten worse under the Trump and Biden Administrations.
On May 14, the US White House announced its decision (under a “section 301” trade remedy) to raise tariffs sharply on many imports from China, including solar cells, lithium-ion batteries, and electric vehicles, the last to a prohibitive 100%. Such protection will make it difficult to achieve Biden Administration targets which call for EVs to constitute half of all new cars sold by 2030 and for clean energy to constitute 100 percent of power generation by 2035.
New US tariffs are also aimed at other trading partners. Some production of photo-voltaic cells has shifted from China to Southeast Asia, in response both to rising costs in China and to tariffs imposed by the US and EU. In response, the US International Trade Commission recently decided, in a June 7 vote, to pursue claims by some US solar manufacturers who seek anti-dumping and countervailing duty protection against producers in Southeast Asia. This move comes despite opposition from US firms that buy the equipment as inputs to their business of developing and operating solar energy domestically.
Meanwhile, on June 12, the European Commission announced provisional tariffs on Chinese-made EVs, to take effect in July, in response to unfair subsidies. The new EU tariffs, while not prohibitive, average 31 %, substantially higher than those on its imports of conventional autos from other trading partners.
- Macroeconomic goals
It is true that Chinese prices of solar panels and EVs are low not just because of low labor costs and economies of scale, but also because of government subsidies, e.g., in the form of cheaper credit. This leads most American and European politicians to support the blocking of these cheap exports. But why do they want to charge the cost of clean-energy subsidies to their own taxpayers (or their national debts), in place of charging the cost to Chinese taxpayers? Remember, they wanted China to pay its fair share of the cost of fighting climate change.
Logically, one could even imagine that Western governments might have refused to subsidize the energy transition unless the Chinese government did so as well! But nobody thinks this way.
It may well be that selling climate policy by its capacity for creating green jobs that are reserved for domestic workers is the most feasible strategy politically. But we should recognize that the argument is indeed political, not economic.
For one thing, green jobs created in the industry that manufactures solar panels are offset by green jobs lost in the sector that installs solar energy, which depends on low-cost equipment for its dynamism. Similarly, green jobs in EV production are lost when tariffs lead to higher prices for imports of batteries. Furthermore, export jobs of all sorts are lost when China or other trading partners retaliate against import restrictions.
Anyway, with US unemployment at 4 %, inflation is the primary concern these days, not employment. Removing the tariffs is the surest way that Western governments could have a downward impact on prices of energy and transportation, and thereby on inflation. Yet another respect in which international trade could lower the costs of the green transition, if we were to let it.
[An earlier version appeared at Project Syndicate and the Guardian. Comments can be posted at Econbrowser.]