Yesterday, a dispute settlement panel at the World Trade Organization released an official report finding that local content requirements in India’s solar power scheme violate global trade rules. The ruling condemns a particular protectionist policy that dilutes the effectiveness of solar subsidies by diverting them to inefficient domestic manufacturers. The case is one more example of how global trade rules help to prevent green energy initiatives from becoming expensive crony boondoggles.
Although the report was just released, we’ve known what the outcome would be since last September. At the time, I wrote about how India’s local content requirement harms its own green energy initiative:
The ruling ought to be celebrated by advocates of solar power. The local content requirement acts as a drag on the program by making solar power plants more expensive to build. Allowing solar energy producers to purchase panels on the global market not only reduces prices for those producers, it also furthers the development of efficient supply chains for solar panel production.
Predictably, however, some green groups are not happy with the decision. According to the Sierra Club, “the WTO has officially asserted that antiquated trade rules trump climate imperatives.” They’re fully committed to the idea that—contrary to the lessons of history and economics—full-fledged green industrial policy will lead to a future of “100 percent clean energy.” They believe filling the economy with “green jobs” is politically and economically necessary to achieve their environmental goals.
But this policy approach is self-defeating, and I’ve pointed out its shortcomings on this blog before:
The inconvenient truth is that green industrial policy isn’t going to lead to a future of renewable energy, but it does benefit cronies and politicians. Bureaucrats who don’t make decisions based on market realities still respond to incentives, making them susceptible to capture by special interests at public expense (see Solyndra). Even if bureaucrats are enlightened saints, the centralization of decision-making benefits large firms at the expense of entrepreneurs and other innovative competitors. Over time, the relationship between commercial success and political acumen leads businesses to invest more in lobbying and leads to a culture of rent-seeking and privilege.
But the Sierra Club does rightly note that the U.S. government is being somewhat hypocritical in going after India’s solar subsidies at the WTO.
Bringing this case is a perverse move for the United States. Nearly half of U.S. states have renewable energy programs that, like India's solar program, include "buy-local" rules that create local, green jobs.
And the United States doesn’t just include protectionist local content requirements in its subsidies. Like India and Europe, the U.S. government also imposes import tariffs in the form of antidumping and anti-subsidy duties on solar panels and wind turbines. Simon Lester and I have argued that these sorts of tariffs should also be prohibited.
Taxing the same products you subsidize is inherently counterproductive. The same is true when you condition subsidies on the use of domestic products. Unless, of course, you are a domestic manufacturer that gets all the money and faces no competition.
The “Bootleggers and Baptists” dynamic of green energy cronyism is a powerful driver of public policy. International trade rules and dispute settlement can help to counteract that.