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Dear China, About those Solar Tariffs…

Trump placed tariffs on solar shipments of export cargo and import cargo in international trade.

Dear China, About those Solar Tariffs…

Last week the Trump administration took a decision to raise tariffs on solar cells and modules imported into the United States. The decision was based on a complaint brought under Section 201 of the Trade Act of 1974.

Make no mistake, this was not a finding that China had conducted unfair trade practices; rather, it was pure protectionism intended for a very narrow domestic constituency.

A lot has already been said on this decision: (1) the additional tariff imposed was less damaging than it could have been (starting at 30 percent, rather than 50 percent, declining by five percent per year the over next four years); (2) by itself the tariff will spur little-to-no new solar manufacturing in the United States and the real growth in the US solar industry is not in manufacturing anyway; (3) utility scale solar will be hardest hit as will the states with new and fast growing solar markets, but impacts will possibly be muted in 2018 thanks to early procurement; (4) the tariffs actually harm the solar industry, one of the fastest growing segments of the energy sector and an important creator of jobs, which is why many members of Congress opposed the imposition of a higher tariffs; and (5) other countries are really unhappy about this because the United States did not seek a remedy through the World Trade Organization, because it goes against basic free trade principles, and because it hits their products (China, Mexico, and Korea have already voiced their disapproval), but it is not expected to have a critical impact on the global solar industry.

One major unanswered question is whether this step strengthens the forecast for a trade war on the horizon—particularly with China—but also what negative impact this could have on the NAFTA negotiations. The prevailing expectation is that China will most surely retaliate, as they did in 2011 when the United States imposed tariffs on Chinese panels and the Chinese responded with a measure against US polysilicon import to China. Still it is plausible that by settling on a less aggressive tariff on cells and modules (plus trying to provide relief to US manufactures who import cells but conduct the last stage of panel manufacturing) the administration was able to thread the needle and show its toughness on trade without harming any of its core constituencies, without causing more widespread damage to the US economy (as would be the case for a tariff or quota on imported steel for example), or angering China with something much stronger. Indeed, many folks are watching to see if this is a potential opening to a negotiated outcome with China on the basket of solar-related trade issues that have accumulated.

Three more things need to be said. First, as the Chinese foreign minister noted in his response to the trade decision, the tariff action “was also strongly opposed by many local governments and downstream enterprises in the US.” The solar industry was, indeed, divided on this issue when it first arose and worked hard to lobby for a solution that minimized, as much as possible, the damage this could cause to the US industry.

But the US parochial economic lens is not the only relevant one to consider. Economic competition and gains are certainly an important part of what drives the promotion of solar development and deployment policies, but another major driver is the global climate challenge. In this light, what China has done over the last decade in driving the cost down for solar has been a significant boost in the global fight to reduce emissions. In many circles, there is a deep amount of gratitude for Chinese contributions to the solar industry and a desire to encourage their innovation and commitment to pursuing further cost reduction, new technology, and mass deployment. It is important to remember this global strategic goal, lest we let competition overshadow strategic objectives. This does not mean China gets a pass on anticompetitive trade practices in areas where it’s making a positive contribution to climate change of course (see the recent ruling on Chinese intellectual property rights (IPR) theft in the wind turbine industry for example). But it does mean that self-inflicted wounds of protectionist measures run contrary to more than just good global trade hygiene.

Second, it will be interesting to see whether this action elicits pro-solar states (i.e., states that were already experiencing or most likely to experience benefits from a growing solar industry) to respond to the tariff decision. The economic and political bar to creating greater support for solar through higher renewable portfolio standards, feed-in-tariffs, solar carve outs, or new grants and incentives is high in some places. Yet again, this is the perfect opportunity to show that states play an important role in determining the energy future of the United States, so a message sent to the world that states do not want to harm the growth prospect in solar could be quite powerful. Such a counter action does not necessarily need to be directed against the Trump administration either. One could imagine, whether through an upcoming infrastructure package or through other government mechanisms, that states and the federal government could use this as a launching pad to support solar manufacturing or other promising portions of the solar industry in the United States in ways that help boost our competitiveness for the future.

Third and finally, the ripple effects from this decision could have other impacts on the energy sector. Putting the more consequential Section 232 steel and aluminum import and national security decisions aside, lots of companies from all sorts of industries could see this as an opening to put forward their claim of damages and need for relief before the International Trade Commission. At present, all segments of the energy industry should be scouring their supply chains for such potential complaints and assessing the impact of a potential protectionist decision.

Sarah Ladislaw is director and senior fellow of the Energy and National Security Program at the Center for Strategic and International Studies in Washington, DC.

Chamges in energy policies will impact shipments of export cargo and import cargo in international trade.

Key Energy Choices for the New Administration

The United States is blessed with ample natural resources, a strong economy, a vibrant system of universities and civil society groups, and world-class private companies. Each has contributed to the United States’ position as one of the largest energy producers and consumers in the world, and a leading source of innovative energy technologies.

The United States faces a world in which the energy system is very much in a state of flux. Oil markets are slowly coming back into balance after two years of oversupply accompanied by a dramatic fall in prices. The future price trajectory is uncertain—even with OPEC’s recent decision to cut output. A bumpy ride at lower price levels seems likely and one cannot discount the possibility of major price spikes driven by supply disruption.

Economic headwinds and uncertainty in major economies like China are likely to weigh on expectations for energy demand growth in all parts of the world. Technological, policy, and market changes continue to reshape established and developing electric power sectors in terms of generation mix, efficiency, and complexity of the grid. Geopolitical turmoil in certain key energy-producing regions of the world will continue to keep oil and gas markets on edge. A wave of populism, antiglobalization, and political discontent continues to weaken institutions and create a crisis of governance in many countries around the world.

On the climate front, the United States has established itself as a leader of global climate action and emissions reduction—but a huge amount of additional progress is needed to meet the stated global targets. Meanwhile, the center of gravity of global energy demand growth has shifted to developing countries, making those regions the landscape of the bulk of new energy investment and leading all energy sector stakeholders to focus on connecting the world’s poorest to modern energy services.

Today, the United States is producing more energy than ever relative to its consumption and yet, it is just as tied to the fate of other countries as it was a decade ago, when our reliance on imported energy was at its highest.

The election of Donald Trump as president has been characterized as an abrupt right turn for U.S. energy and climate change policies. Trump’s campaign promises include rolling back environmental regulations, opening up more areas of oil and gas development, revitalizing the coal industry, pulling out of the Paris Climate Agreement, and making the U.S. energy independent. In reality the Trump administration can take action toward each of these objectives but their impact will be somewhat constrained by process and market forces.

For example, the process to roll back Obama-era leasing policies and environmental regulations is onerous and litigious, yielding very little long-term certainty for investors in the affected sectors. Climate change is the area most affected by these changes, despite the aforementioned uncertainty. Federal climate-related policies that would have expanded under a Clinton administration will almost certainly not advance (there is speculation over whether the state and local level complements to those policies may continue to hold). In the context of the global climate agenda that was seeking even greater emissions reductions than pledged in Paris, simply holding the line on U.S. emissions reduction achieved to date is suboptimal, taking actions that increases emissions could be disastrous.

Another example is the pledge to deliver energy independence, a goal the United States is closer to achieving today than any time in the last 40 years. Today, the United States is producing more energy than ever relative to its consumption and yet, it is just as tied to the fate of other countries as it was a decade ago, when our reliance on imported energy was at its highest. It is unclear whether or not any of Donald Trump’s vague statements about standing up to OPEC and advancing energy independence will materialize as anything other than pro-energy production policies which will be welcomed by the oil, gas, and coal industry, but investments may be limited by an oversupplied global market, at least in the next couple of years, and actual production impacts may be limited by the long time cycles involved in new investments coming to fruition. As for the U.S. posture toward OPEC and other major oil producers and consumers, this will likely be more affected by other foreign policy issues, like our stance on trade, changes to the Iran nuclear agreement, and other security issues.

As with other new administrations, Trump will inherit an energy system with its own dynamics and issues—only part of which is under federal control. These days the energy sector is undergoing some profound changes that will provide both obstacles and opportunities for the new administration to shape our collective energy future.

Take, for example, the U.S. electric power sector. Just eight short years ago, half of U.S. power generation was met by coal; that is down to 32 percent due to abundant natural gas resources, stricter environmental standards on coal-fired power plants, and an increase in solar and wind capacity. The trend away from coal is likely to continue absent very significant government support. The U.S. has abundant gas resources, and existing state and federal policies and tax incentives, along with the declining cost of renewables, will keep renewables competitive. States across the country are experimenting with new pricing and regulatory models to accommodate a host of distributed energy resources from rooftop solar, to energy storage and demand response technologies. All the while electricity demand in the United States is flat to declining because of lower economic growth and higher efficiency rates, meaning that large changes to the fuel mix push out other sources. These trends will continue to challenge the role of coal and nuclear power.

Eight nuclear reactors have announced plans to close and by some estimates, 15 to 20 more are likely to follow suit. Early next year the U.S. District Court will decide the fate of the first ever sector-wide standard for carbon dioxide regulation as part of the Clean Power Plan regulation. The Trump administration has pledged to roll back this regulation along with many other environmental regulations affecting the U.S. electric power sector. While the new administration has the authority to undertake certain deregulation, the process will be long and the government will be sued by states and environmental organizations. The outcome will be greater uncertainty rather than a clear signal toward more or less climate regulation over the lifetime of the long-term investments. Stakeholders across the sector recognize that these changes are stressing a system whose physical and regulatory structure was designed for a different time, and changes must take place to accommodate the new realities of a system in transition.

Building new pipelines like Keystone XL and Dakota Access will get the most political attention in a new administration but the challenge to modernize existing pipeline infrastructure and continuing to improve the environmental performance of the nation’s burgeoning oil and gas production will be critically important to address.

Change is taking place in the transportation sector as well. The U.S. vehicle fleet has caught up with its international competitors in terms of fleet efficiency for the first time in decades. Ride and vehicle sharing is a growing phenomenon in most urban centers and the technology that enables it is largely considered to be the precursor for an entirely new transportation experience brought about by the eventual advent of fully autonomous vehicles. Amidst all this change the nation’s transportation system is stuck in a time warp. Highways, bridges, and rail systems remain woefully under-maintained and pose safety hazards as well as a general drag on the economy. Many state and local communities are modernizing their transit infrastructure but much more can and should be done. Trump campaigned on a promise to invest in the nation’s infrastructure, much of which includes the transportation sector. Smart infrastructure policies and reinvestments could be a very welcome and needed advancement in this sector.

Meanwhile, the U.S. oil and gas production revolution continues. Despite two years of low oil and natural gas prices, U.S. production remains higher than it has been in decades. U.S. oil production is playing a central role in global oil market dynamics and U.S. natural gas exports are being used as a symbol of the potential for a larger role for gas in the coming decades. Concerns over the environmental impact of production, especially onshore, has spawned efforts by advocacy groups to stop producing all fossil fuels by directly targeting pipeline infrastructure development projects to ensure large onshore resources do not get developed. Ironically this is happening at the same time that much of the nation’s oil and gas infrastructure is reaching maturity and is in need of replacement. Several recent oil spills and gas leaks speak to the need to update and maintain this infrastructure. Building new pipelines like Keystone XL and Dakota Access will get the most political attention in a new administration but the challenge to modernize existing pipeline infrastructure and continuing to improve the environmental performance of the nation’s burgeoning oil and gas production will be critically important to address as well.

The new administration has a tremendous opportunity to harness these changes and make some much-needed reinvestments that will benefit the U.S. economy, and can even choose to do so in a way that is acceptable to both political parties. One of the few areas of agreement in this year’s deeply divided race for the presidency was on the need to rebuild the nation’s infrastructure and use the energy sector as a source for job creation and growth. While one party favored growth from so-called clean energy sources and the other focused more on oil, natural gas, and coal, the underlying recognition of potential opportunity was present in both political parties. Several bills drafted in the current Congress, as well as the U.S. Department of Energy through its Quadrennial Energy Review and the U.S. Department of Transportation with its Beyond Traffic report have laid out some good ideas about current infrastructure needs and challenges that must be addressed to face the energy infrastructure challenges of the future. The Trump administration would do well to rely on these documents and the insights they provide to inform their decision-making.

Another area of bipartisan agreement is on the innovation agenda. The United States is a world leader in energy, automotive, and agricultural technologies of all varieties and supporting the innovation ecosystems that allow that competitive advantage to thrive is another area where real contributions to our long-term energy outlook can be achieved.

One final key message from this year’s election experience is that there is a great deal of dissatisfaction in both parties about the status of economic and social mobility. This concern is likely to permeate energy debates at the national and local level on both the right and the left of the political spectrum because energy is often tied to economic opportunity and job creation. For the last several elections both political parties have suggested that economic growth at both a national and local level could be achieved either through low-carbon energy deployment or fossil-based energy production and low energy prices. What no politician is willing to admit is that our understanding of how energy fits into economic and social mobility is underdeveloped and self-serving. This is an area where a bipartisan effort to truly understand energy’s role in social and economic mobility and improve our policies and investments would make a lot of sense.

Energy plays an important strategic role in the strength of the U.S. economy and our relationships with other countries. While the Trump administration’s campaign agenda will be constrained by both process and market factors, a dynamic energy industry affords a great many opportunities as well. They are opportunities worth taking.

Sarah Ladislaw is director and a senior fellow, at the Brookings Institution’s Energy and National Security Program. This article originally appeared here.