Governments impose tariffs to protect domestic clean-energy industries and accelerate decarbonisation, but tariffs can increase the costs of deploying clean technologies. This column analyses the effect of tariffs imposed by the US on Chinese solar panel imports since 2012. In response, Chinese firms relocated production to countries not subject to the tariffs. The result was higher solar panel prices in the US and a decline in employment and wages in the US solar industry. The authors suggest that subsidies would be more effective in supporting domestic industries and climate action, correcting market failures rather than simply redistributing rents.

Governments worldwide face mounting pressure to simultaneously expand domestic clean energy industries and accelerate decarbonisation. Recent policies combine subsidies for clean technology with various protectionist measures, including domestic content requirements and tariffs on imports. Yet, evidence from the solar sector suggests tariffs undermine rather than support climate objectives.

Since 2012, the US has imposed substantial tariffs on solar panels imported from China. The EU erected related trade barriers on solar panels before lifting them in 2018. More recently, the US and EU have imposed tariffs on Chinese electric vehicles. These actions illustrate a policy tension: even as governments commit to rapid decarbonisation, protectionist measures raise the cost of deploying the clean technologies needed to achieve climate goals. Recent research helps illuminate this conflict and points toward better policy approaches.

The tariff policy landscape

The 2018–2019 US-China trade war marked the largest return to protectionism since the Smoot-Hawley Act (Fajgelbaum et al. 2019). A substantial literature examines the welfare effects of recent US tariff increases. Studies find that tariffs led to complete pass-through to import prices, with costs borne by US importers and consumers rather than foreign exporters (Amiti et al. 2019, Fajgelbaum et al. 2020). These tariffs reduced consumer welfare and decreased US export competitiveness through supply chain disruptions. The primary effect was substantial redistribution from consumers to protected producers and the government, with modest net welfare losses.

Work on supply chain effects reveals that tariffs on intermediate inputs create particularly large distortions. When governments protect upstream industries through tariffs, downstream sectors face higher input costs, reducing their competitiveness and employment (Trimarchi et al. 2021). Even accounting for gains in protected industries, the net employment effect within affected sectors is frequently negative, as job losses in downstream sectors outweigh gains in protected industries (Strain 2025).

Evidence from solar panel tariffs

Our analysis of US solar panel tariffs imposed since 2012 reveals patterns consistent with this broader literature (Gerarden et al. 2025a). We employ an event-study design using manufacturing data to examine how Chinese manufacturers responded to US tariff increases. Figure 1 illustrates the key result: Chinese firms strategically relocated production to Southeast Asian countries not subject to the tariffs. The event study shows sharp increases in this offshoring behaviour by Chinese firms exposed to the tariffs, relative to other Chinese firms that were not targeted by the tariffs. This offshoring enabled Chinese firms to continue serving the US market while circumventing trade barriers, paralleling findings from other sectors where firms restructure supply chains to avoid tariffs (Flaaen et al. 2020).

Figure 1 Chinese firms exposed to tariffs offshored production

Notes: The figure plots event-study estimates of the effect of US import tariffs on production offshoring by Chinese firms targeted by the tariffs, measured by quarterly output outside China in megawatts (MW) of solar panels. Vertical lines denote the timing of each round of US import tariffs. All event-study coefficients are relative to the first quarter of 2012. See Gerarden et al. (2025a) for more details.

Figure 2 illustrates how tariffs affected prices: event-study estimates show that following tariff implementation, US solar panel prices rose relative to markets without tariffs. This price differential reveals that US consumers faced higher costs despite Chinese manufacturers’ strategic avoidance of tariffs.

Figure 2 US solar panel prices increased relative to other markets

Notes: The figure plots event-study estimates of the effect of US import tariffs on prices (USD per watt, in logs) in the US market, relative to prices in other regional markets. Vertical lines denote the timing of each round of US import tariffs. All event-study coefficients are relative to the first quarter of 2012. See Gerarden et al. (2025a) for more details.

We combine these reduced-form findings with a structural model of the solar panel market to conduct welfare analysis. The model incorporates demand for solar installations, supply from domestic and foreign manufacturers, and the environmental benefits from displacing fossil fuel generation.

We estimate significant declines in US consumer surplus as buyers faced higher costs. Domestic manufacturers captured modest gains in profits and market share. The federal government collected tariff revenues. However, when accounting for all welfare components – including the environmental benefits from solar deployment – we find that domestic welfare declined.

The tariffs also reduced total US employment and wages in the solar industry. Installation and related sectors lost more jobs than manufacturing gained, consistent with research showing that tariffs on intermediate inputs harm downstream employment (Trimarchi et al. 2021, Strain 2025). This result contradicts a common justification for solar tariffs: protecting domestic jobs.

Tariffs and climate policy conflict

Solar panels generate electricity that displaces fossil fuel generation, providing climate benefits. Yet, carbon pricing remains limited and incomplete globally. This creates an asymmetry: tariffs raise the private cost of solar deployment while markets fail to reward the full social benefits. When environmental externalities are unpriced or underpriced, tariffs on clean technologies become especially problematic. They increase the cost of emissions reductions precisely when policy should aim to lower that cost.

An alternative approach: Production subsidies

Rather than restricting imports, governments could subsidise domestic solar manufacturing directly. Our modelling suggests that modest production subsidies could achieve increases in domestic manufacturing and employment, with fundamentally different welfare implications than tariffs (Gerarden et al. 2025a).

The contrast between these instruments is stark. Tariffs protect domestic industry by hindering competition and raising prices for downstream users. Higher solar panel prices make solar installations more expensive and slow down their deployment. In contrast, subsidies can support domestic industry while lowering prices for downstream users, expanding both manufacturing and deployment simultaneously.

This distinction becomes decisive when environmental externalities enter the analysis. Absent environmental externalities, the distortions caused by subsidies would outweigh their benefits. Our structural estimates show subsidies can improve welfare once climate benefits are properly valued. Tariffs create a direct conflict between industrial and environmental objectives. Subsidies, properly designed, can advance both goals simultaneously by expanding domestic production capacity while accelerating the clean energy transition.

Lessons for green industrial policy

The solar tariff experience offers three lessons for green industrial policy design.

First, instrument choice matters profoundly. The same level of domestic production support can yield vastly different welfare effects depending on whether it comes through tariffs, subsidies, tax credits, or procurement requirements. Policymakers should evaluate policies not only on their ability to achieve industrial targets but on their overall impact on welfare and climate goals.

Second, market failures should drive policy design. The economic rationale for green industrial policy rests on correcting specific market failures – environmental externalities, learning spillovers, technology spillovers, or coordination problems (Gerarden et al. 2025b). Effective policies target these failures directly. Subsidising production to capture learning benefits and support deployment can address actual market failures. Tariffs primarily redistribute rents without correcting fundamental distortions.

Third, trade-offs between industrial and environmental objectives are not inevitable. With appropriate instruments, these goals can be mutually reinforcing. Production subsidies combined with deployment incentives and carbon pricing could expand both domestic industry and clean energy adoption. Tariffs often pit these objectives against each other.

Policy implications

As governments expand green industrial policy commitments, the temptation to employ protectionist tools – tariffs, local content requirements, procurement restrictions – will intensify. The solar experience suggests caution. These instruments often fail to achieve stated objectives while imposing substantial costs on climate progress.

A more effective approach would prioritise correcting market failures. Carbon pricing would address the environmental externality directly. Production or deployment incentives could induce innovation and learning-by-doing, though evidence on the extent of knowledge spillovers in these processes is limited. These could also serve as imperfect substitutes to carbon pricing when it is infeasible. Beyond market failures, production subsidies could also be justified by strategic rationales and national security concerns, but careful design is needed to avoid conflict between industrial and environmental goals.

The stakes are considerable: global solar capacity must expand by an order of magnitude to meet climate targets. Growing evidence suggests that avoiding trade restrictions while deploying well-targeted subsidies offers a superior approach to tariffs. The solar sector demonstrates that tariffs create conflicts between industrial and climate objectives, while well-designed subsidies can advance both goals simultaneously.

Source : VOXeu