Biden's solar tariffs undermine his own climate agenda

WASHINGTON, DC: In an age of rapid technological disruption and economic transformation, policymaking has become more complex than ever. As incomes have risen, so has demand for more and better goods. New technologies have helped to meet this demand, enabling the development of a wide range of new products, but also made production increasingly complicated. Amid such unprecedented abundance, government policies must be carefully designed to boost output in the right areas. US President Joe Biden’s solar-panel policies show what happens when such efforts fail.

The Biden administration has three major stated objectives: controlling inflation, combating climate change, and creating “good jobs.” Its current approach to solar energy – which includes high tariffs on imported panels and subsidies for solar plants under the Inflation Reduction Act (IRA) – undermines all of them.

Solar energy accounted for just 3.4% of US electricity in 2022. But the Biden administration has set the target of achieving 100% carbon-free electricity generation by 2035, implying that the annual rate of solar-panel installation must be doubled. The problem is that the Biden administration wants those panels largely to be produced within the United States, partly to advance its objective of creating high-quality jobs.

In 2008, the average cost of producing a solar panel in China – already a solar-manufacturing powerhouse – was roughly $3 per watt, lower than in the US. In 2011, the US responded with a program aimed at reducing the costs of solar-energy systems by 75% by 2020. Though the program succeeded at reducing production costs, it failed to make US panels price-competitive with China. By the end of 2024, a US-made solar panel will still cost more than three times as much as one made in China.

So, the US resorted to more tariffs. In 2018, Donald Trump’s administration imposed a 30% tariff on solar-panel imports. In 2022, the Biden administration opted to hike tariffs even further, imposing 50-250% duties on imported solar inputs from China and Southeast Asia. But following widespread objections from installers, the administration issued a two-year waiver, delaying the additional tariffs until mid-2024.

By then, the cost of Chinese-made photovoltaic (PV) panels had dropped to $0.11 per watt, solidifying China’s status as the world’s cheapest producer and enabling the country to control 80% of the global solar-panel supply chain. In anticipation of these impending tariff hikes, US installers have been stockpiling solar panels, resulting in an 82% surge in imports in 2023. As the backlog grew large enough to meet demand for a year and a half, prices declined by 50%.

But with solar import prices projected to surge by up to 286% due to Biden’s tariffs, consumer prices for PV panels in the US – which, at $0.31 per watt, are already nearly three times higher than the global average – are likely to increase, potentially dampening demand. One study estimates that tariffs introduced by Trump’s predecessor, Barack Obama, reduced US demand for solar energy by 17% in 2012-18. With US residential solar installations expected to fall by 20% in 2024, it is increasingly evident that solar tariffs jeopardize America’s clean-energy transition.

Beyond undermining his own administration’s climate agenda, Biden’s solar-energy policies have failed to create good jobs. In 2022, the median annual salary for solar-panel installers in the US was $72,816, compared to $50,953 for solar-plant workers, making installation the “better” job. Notably, 171,558 Americans worked as installers in 2022, compared to the 33,400 employed in manufacturing facilities. Yet, as early as 2019, a study warned that for every manufacturing job created by solar tariffs, 31 installation jobs could be lost.

As installations decline, the number of installation jobs will likely shrink as well. In 2019 alone, an estimated 10.5 gigawatts of planned installations were cancelled due to rising solar-panel prices. While the IRA is subsidizing investment in new US solar-panel manufacturing facilities – several of which have already received tax credits to reduce investment costs – the prospect of higher tariffs could lead to more cancellations.

Given that China currently produces about 80% of the world’s silicon, along with other critical inputs for PV panels, it is unclear how much the US can realistically boost its solar-panel production capacity or reduce its dependence on China. Moreover, China’s own production capacity is expected to be more than double the level of global demand by 2027. As long as Biden’s tariffs remain in place, domestic prices will remain much higher than those in other markets, further reducing demand.

When Biden postponed his new solar tariffs in 2022, the stated reason was to give manufacturers time to ramp up domestic production. But while the administration has relied heavily on the IRA’s investment subsidies, it remains unclear whether these measures can bring about the desired manufacturing boost.

A more effective strategy would have been for the government and private firms to stockpile solar panels while prices were still low. The two-year lead time would have provided ample opportunity to build sufficient reserves, and investment subsidies could have been introduced if foreign supplies were disrupted. Such a policy would have been better aligned with the Biden administration’s economic, environmental, and geopolitical goals.

Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the Johns Hopkins University School of Advanced International Studies and Senior Fellow at the Center for International Development at Stanford University.

Copyright: Project Syndicate, 2024.

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