Scorched earth tactics

Solar subsidies don't merit costly trade war

A trade war is brewing over solar panels but the casus belli looks shaky. Western manufacturers probably exaggerate the impact of cheap Chinese kit on the industry's health. Panel profits need to rise, but punitive tariffs and possible Chinese retaliation may just make solar energy less competitive.

The EU may soon follow the United States in slapping punitive duties on Chinese panel imports in response to "dumping". China, meanwhile, threatens duties on polysilicon, the raw material for the panels and a market still dominated by Western manufacturers.

There's no question that panel-makers are suffering. Three years ago, panel makers' gross margins were 30 per cent, according to IHS, a consultancy. By the end of last year, unable to maintain pricing power because of rampant overcapacity, they were selling their products at a loss. And, there is little doubt that cheap credit and other inducements from Beijing have made it easier for Chinese manufacturers to withstand the pressure. They have seized the opportunity to grab market share.

However, the story is more complicated. To start, falling production costs account for most of the 80 per cent price decline since the beginning of 2010. Losses, and government support, are typical in industries in the midst of rapid technological innovation.

Also, Western panel-makers are hardly pure when it comes to relying on the government. Without generous subsidies to promote solar power, they would probably not exist at all. In the industry's 30-year history, gross margins on solar panels have only been above five per cent in the years 2004-2008, according Paula Mints, a solar market analyst.

An unprofitable industry is undesirable. But punitive duties only push up everyone's costs. That would not serve anyone, since panel-makers' pain has helped support a boom in solar demand. Subsidies have only accelerated the trend. Thanks to falling costs along the whole value chain, even subsidy-free solar is already competitive with fossil fuels in some niche markets, and broader cost-competitiveness seems within reach.

Policymakers should remember that, as long as the lights come on, most people don't really care where their power comes from. Coal, oil, gas, and rival green energy sources would be the real winners from a solar trade war.