The age of green protectionism

Summer inches closer in the northern hemisphere and the days are getting longer. And this week, the sun was shining brightly on US and European solar companies. These businesses have been struggling under what western capitals consider unfair trade practices from Beijing. On both sides of the Atlantic, governments announced measures that could be perceived as forms of green protectionism.

Protecting domestic solar businesses has side effects. Tariffs inevitably muddle trade, and domestic manufacturers might struggle to increase capacity. For the climate, these tariffs could slow down the energy transition.

But for now, please check out our analysis. And I hope to see many of you in London next week for our first Moral Money Summit of the year, featuring star speakers including Emmanuel Faber, Laurence Tubiana and Lord John Browne. Newsletter subscribers can enjoy discounted tickets to attend in person or a complimentary digital pass — click here to register. — Patrick Temple-West

US policy

Green investors digest the dollar impact of new China tariffs

It has been a wild week for solar panel manufacturers worldwide.

On Tuesday, the Biden administration announced new tariff levels for clean technology imported from China. Solar cell tariffs were increased to 50 per cent from 25 per cent. Two days later, the White House said it would impose tariffs on double-sided solar panel imports, which are used in large projects. The tariff rate was set at 14.25 per cent.

The announcements sent Wall Street scrambling to understand the implications. Investors were relieved to see that the solar tariffs would not start until 2026, giving companies time to adjust.

With this extra time, US solar companies were not expected to suffer, Morgan Stanley said in a report on Wednesday, adding “we believe that this could serve as a positive demand catalyst for its domestic manufacturing facility”.

Further, the first US solar tariffs on China were implemented more than 10 years ago and today very few panels are imported from China. Instead, most panels are manufactured in south-east Asia. The US Department of Commerce last year found that certain Chinese producers shipped solar products through Cambodia, Malaysia, Thailand and Vietnam to dodge tariffs.

“We would not expect to see a material impact from the increased tariff level on solar cells imported from China,” Morgan Stanley said.

First Solar, one of the biggest US solar manufacturers, enjoyed a bounce this week. Its shares are now up more than 12 per cent this year, slightly beating the S&P 500 index.

Still, these tariffs could hurt solar panel installers such as Sunrun, said Kenneth Gillingham, a professor at Yale University’s School of the Environment. “Many of these installing companies are already reeling from California’s [2023] electricity tariff reforms, so it’s a bit of a tough time for them,” he said. The California rules reduced subsidies that homeowners received to send excess solar electricity into the public power grid, a move that discouraged solar panels in the state.

The tariffs might help US solar companies domestically, but the market was global and US companies would still need to compete with Chinese competitors abroad, said Jonathan Phillips, director of the energy access project at Duke University.

“I would characterise this as a breathing room for the US solar manufacturing sector,” he said of the Biden announcement. “Biden and Trump are in a competition to show how tough they can be vis-à-vis China,” he said. “China policy is one of the few things the parties are relatively united on. So no matter what happens in November [US presidential election], it’s hard to imagine these tariffs being repealed for a while.”

This political posturing could have dangerous consequences for solar companies and their customers. Tariffs have a history of igniting inflation in the industries they were implemented to protect. For example, tariffs on washing machine imports imposed under former US president Donald Trump sent prices 12 per cent higher.

“This [solar] protection might reduce incentives for domestic producers to lower costs, possibly leading to higher prices for American consumers,” Lilly Yejin Lee, a researcher at Columbia University’s Center on Global Energy Policy, told me. “If consumer prices rise, it could slow down the deployment of solar installations, causing a general slowdown in the sector.”

The solar sector has already received significant government support with the US’s Inflation Reduction Act. The China solar tariffs are more bark than bite, but they illustrate how eager the Biden administration is to assist the industry.

Still, investors have been burnt many times in solar’s boom and bust cycles. As these tariffs go into effect, investors should proceed with caution. (Patrick Temple-West)

European policy

Europe moves to strengthen its domestic solar sector

As sparks flew over US solar tariffs this week, the European Commission made a move of its own that could make life harder for Chinese exporters.

Without fanfare, the commission released guidance on how member states permit renewable energy projects, giving governments more power to weigh factors such as sourcing and supply chain resilience in auctions and procurement — and therefore more leeway to support European clean tech production.

The new guidance on so-called “non-price criteria” is many months in the making — rather than a direct response to the latest US tariffs. It is, however, part of Brussels’ broader response to the US government’s financial support for green investment, as the EU aims to keep its manufacturing base competitive.

“Thanks to the introduction of non-price criteria in auctions, we are giving our industry a chance to prosper at home,” Green Deal commissioner Maroš Šefčovič said in a statement. A commission press release added that the use of non-price criteria would help ensure “a strong industrial base in Europe”.

The commission is not expected to finalise binding rules on non-price criteria until early next year, but the guidance signals where it might land.

The huge range of criteria being discussed — from the share of apprentices in a workforce to “the quality of bird collision avoidance measures” for wind energy development — offer a number of reasons for governments to select favoured suppliers, even when they are less price competitive.

The new guidance does not explicitly address how governments should factor in the country of origin for solar parts. But observers suggested that greater EU sourcing for renewable technology was a central objective.

Francisco Beirão, head of EU government affairs for BP-owned solar developer Lightsource, told me he believed the guidance was targeted at curbing renewables imported from China, while remaining open to other foreign suppliers. That’s in contrast with recent moves in the US, he said, which were more broadly aimed at reducing dependency on imports of clean tech.

“Europe often relies upon complex regulation for pursuing policy goals, and is less brazen and bold than the US in slapping tariffs on China,” Ben McWilliams, a fellow at the Brussels-based Bruegel think-tank, said. “If what you really care about is that this is made in Europe — which I would tend to disagree with — then, make it obvious,” he added.

Beirão pointed to the guidance’s warning against over-reliance on a single non-EU nation that accounts for more than 50 per cent of EU supply. That’s largely aimed at China, he argued, given its dominant position in many clean tech products and inputs.

“If you use international supply chains — not just European — you can still contribute for a more ‘resilient’ approach in the EU, and get points on these non-price criteria. While the Americans are all about ‘Make America Great Again,’” Beirão said.

Further directions on cyber security and international data transfer in the commission’s guidance might also be aimed at icing out Chinese tech, Beirão argued.

Developers such as Lightsource have been irked at the recent US tariffs on solar cells, which they fear will drive up the input costs of their renewable projects. The question is whether those costs will outweigh the substantial US tax incentives on offer.

For their part, European policymakers have been at pains to underscore their commitment to open trade — even as they aim to induce more European production of critical goods. While the guidance puts an emphasis on product quality, some argue that this could be a superficially neutral way to protect European companies.

It remains to be seen whether these recent moves can catalyse the industrial clean tech revival European policymakers long for. But their goals may be more modest than those of the US.

“In the US, it’s about ‘Made In US’ technology, while the European regulation is about [sourcing] anything non-Chinese,” Beirão said. (Lee Harris)

Smart read

Nathan Iyer, a researcher at US environmental consultancy RMI, has a thread on the social media platform X disputing facile thinking on both sides of “the great tariff debate.” “The idea that China is winning due to ‘cheap labor’ ignores that these are extremely high throughput, highly automated industries,” he points out.