The Folly of Bilateral Protectionism, China Solar Panels Edition

As you may recall, after a string of very public bankruptcies (*cough* Solyndra *cough*), US solar panel producers - and the Obama administration folks who happily subsidized them - were quick to blame China.  If only the Chinese cheaters were purged from the US market, they argued, America would become a global solar panel powerhouse, and the green jobs would flow like (highly subsidized) milk and honey.  To achieve this purge, the "domestic" industry (led by Germany's SolarWorld) petitioned the US government for steep anti-dumping and anti-subsidy (countervailing) duties on Chinese imports, and the administration - using US laws that tilt greatly in favor of domestic protectionism - was quite willing to oblige.

However, a new story from the Financial Times' Ed Crooks shows just how wrong-headed that move has turned out to be, and provides yet another lesson in basic trade economics.  Prices for panels have risen (slightly), but American producers and workers haven't benefited in the least.  Instead (and as I repeatedly predicted), jobs and output are down here, and other imports - not US panels - have replaced the Chinese ones that have been effectively banned from the US market.

Behold, the folly of bilateral protectionism - and the reality of trade diversion - in all of their glory:

In one respect, the duties do seem to have been effective. US imports of cells from China have dwindled, from an average of 11m per quarter in 2011 to just 900,000 in the first quarter of 2013. 

The pay-off in US manufacturing and jobs, however, has been elusive. The US has capacity to produce about 1,845 megawatts of solar panels per year, according to IHS, a research company. That is down from 2,027MW a year ago. 

The Solar Foundation, an industry-backed think-tank, found that solar companies lost about 8,200 manufacturing jobs last year, about 22 per cent of their total, and expected to regain only about 2,600 this year. 

SolarWorld itself has continued to cut jobs in Oregon.... 

Robert Petrina of Yingli Green Energy, the Chinese group that was the world’s largest solar panel manufacturer last year, said it was untrue that the duties have had no effect, citing higher cell prices in the US than in some other markets such as South Africa, as evidence of the distortions they were causing.... 

Yingli has been sourcing cells from Taiwan to avoid being caught by the duties on Chinese products. It had its second-best quarter on record in the US in the three months to March and is on track to double its sales to US utilities this year. 

Another source of supply to the US has been a surge in imports from Malaysia. The US imported almost as many Malaysian solar cells in the first three months of this year, as in the whole of 2011. 

Analysts said much of the increase was probably caused by First Solar, an Arizona company that was the world’s second-largest manufacturer of solar panels last year. It has 85 per cent of its production capacity in Malaysia, and is building several large solar plants in the US....

As I mentioned when the original decision to impose duties on Chinese solar panels, part of the reason for the trade diversion at issue here is because the Chinese producers achieved a small victory during the investigation, omitting solar panels made in third countries (like Taiwan) from Chinese parts.  This allowed a few Chinese companies to lawfully circumvent the AD/CVD order and still ship large quantities of their product to the United States.  That said, the surge of Malaysian and other imports make clear that even closing this "loophole" would do nothing to help US producers and workers for one simple reason: other countries' producers are still cheaper than their American counterparts.

Yet another reminder that protectionism doesn't work, and all those US subsidies were a horrible waste of taxpayer dollars, regardless of those dastardly Chinese cheaters.

Need Unnecessary

This just in from the GAO on US wind energy subsidies (emphasis mine):

GAO identified 82 federal wind-related initiatives, with a variety of key characteristics, implemented by nine agencies in fiscal year 2011. Five agencies--the Departments of Energy (DOE), the Interior, Agriculture (USDA), Commerce, and the Treasury--collectively implemented 73 of the initiatives. The 82 initiatives incurred about $2.9 billion in wind-related obligations and provided estimated wind-related tax subsidies totaling at least $1.1 billion in fiscal year 2011, although complete data on wind-related tax subsidies were not available. Initiatives supporting deployment of wind facilities, such as those financing their construction or use, constituted the majority of initiatives and accounted for nearly all obligations and estimated tax subsidies related to wind in fiscal year 2011. In particular, a tax expenditure and a grant initiative, both administered by Treasury, accounted for nearly all federal financial support for wind energy.

The 82 wind-related initiatives GAO identified were fragmented across agencies, most had overlapping characteristics, and several that financed deployment of wind facilities provided some duplicative financial support. The 82 initiatives were fragmented because they were implemented across nine agencies, and 68 overlapped with at least one other initiative because of shared characteristics. About half of all initiatives reported formal coordination. Such coordination can, in principle, reduce the risk of unnecessary duplication and improve the effectiveness of federal efforts. However, GAO identified 7 initiatives that have provided duplicative support--financial support from multiple initiatives to the same recipient for deployment of a single project. Specifically, wind project developers have in many cases combined the support of more than 1 Treasury initiative and, in some cases, have received additional support from smaller grant or loan guarantee programs at DOE or USDA. GAO also identified 3 other initiatives that did not fund any wind projects in fiscal year 2011 but that could, based on their eligibility criteria, be combined with 1 or more initiatives to provide duplicative support. Of the 10 initiatives, those at Treasury accounted for over 95 percent of the federal financial support for wind in fiscal year 2011.

Agencies implementing the 10 initiatives allocate support to projects on the basis of the initiatives' goals or eligibility criteria, but the extent to which applicant financial need is considered is unclear. DOE and USDA--which have some discretion over the projects they support through their initiatives--allocate support based on projects' ability to meet initiative goals such as reducing emissions or benefitting rural communities, as well as other criteria. Both agencies also consider applicant need for the support of some initiatives, according to officials. However, GAO found that neither agency documents assessments of applicant need; therefore the extent to which they use such assessments to determine how much support to provide is unclear. Unlike DOE and USDA, Treasury generally supports projects based on the tax code's eligibility criteria and does not have discretion to allocate support to projects based on need. While the support of these initiatives may be necessary in many cases for wind projects to be built, because agencies do not document assessments of need, it is unclear, in some cases, if the entire amount of federal support provided was necessary. Federal support in excess of what is needed to induce projects to be built could instead be used to induce other projects to be built or simply withheld, thereby reducing federal expenditures.

Full GAO Report is available here.

To recap: 82 wind subsidy programs; 9 different federal agencies; 2.9 billion taxpayer dollars in 2011 alone; "fragmented," "overlapping," and "duplicative" subsidies; and no formal indication that any of that taxpayer money was actually needed to get these projects off the ground or keep them afloat.

One last note: the US National Debt as of today is $16,753,612,387,626.67.

Permitting Oil and Gas Exports Is a No-Brainer

The following entry was cross-posted at the Cato Institute's blog, Cato at Liberty:

Following today’s deadline for interested party comments, the U.S. Department of Energy will begin to consider sixteen pending applications to export natural gas to countries like Japan with whom the United States does not have a free trade agreement.  The issue is a contentious one: energy producers, many other U.S. companies and a large, bipartisan swath of Congress have urged DOE to approve all export license applications, but opposition has materialized among certain domestic consuming industries and environmental groups.  As a result, the Obama administration has delayed consideration of all but one application, and is expected to eventually permit a portion of the remaining exports in an attempt to placate both sides of the debate.

As I explain in a new Cato Institute paper, however, such a Solomonic decision might achieve the administration’s political objectives but will do nothing to fix the fundamental problems raised by U.S. export regulations for natural gas or similar rules for crude oil.  These exports continue to be governed by licensing systems adopted when the United States was a net energy importer and dependent on fossil fuels for energy production – a picture far different from the production, price, and trade realities that exist today due to revolutionary fossil fuel extraction technologies like hydraulic fracturing (“fracking”) and horizontal drilling.  In fact, domestic production of crude oil and natural gas has skyrocketed in recent years, driving down prices, boosting downstream industries, creating ample export opportunities and potentially reversing the United States’ historic position as a net energy importer.  However, our gas and oil export licensing systems – respectively governed by the Natural Gas Act of 1937 and the Energy Policy and Conservation Act of 1975 – continue to treat fossil fuel exports as a rarity and subject them to a long, opaque approval process under which the federal government retains ample discretion to approve or deny most export license applications.

Perhaps unsurprisingly, these outdated systems, and the restrictions they impose on U.S. exports, create a host of problems:

• First, by depressing domestic prices and subjecting export approval to the whims of government bureaucrats, the U.S. licensing systems retard domestic energy production, discourage investment in the oil and gas sectors, and destabilize the domestic energy market. Artificially low prices prevent producers from achieving a sustainable rate of return on the massive up-front costs required to drill and extract oil and gas, and investors lack any assurances under the discretionary licensing systems that domestic prices will not collapse when output increases.  Such concerns have led the IEA to recently warn that U.S. export restrictions put the “American oil boom” at risk.  And contrary to certain politicians’ claims, independent reports show that the exportation of oil and gas would not cause a traumatic spike in prices, thus enabling consumers to continue to benefit from hypercompetitive U.S. fuel and feedstock supplies.

• Second, restricting U.S. gas and oil exports could hurt the U.S. economy. Recent studies indicate that these exports - even in unlimited quantities - would not only benefit U.S. energy producers, but also increase real household income.

• Third, both export licensing systems raise serious concerns under global trade rules.  The General Agreement on Tariffs and Trade (GATT) prohibits WTO Members from imposing export restrictions implemented via slow or discretionary licensing systems like those at issue here.  Moreover, several nations, including the United States, impose anti-subsidy measures (called “countervailing duties” or “CVDs”) on downstream exports (e.g., steel) due to export restrictions on their upstream inputs (e.g., iron). Thus, the crude oil and natural gas licensing systems could lead to anti-subsidy duties on energy-intensive U.S. exports that negate the very price advantages created by the licensing systems – a heightened risk, given that American exporters are increasingly targeted by foreign CVD actions.

• Fourth, current policy contradicts several other Obama administration priorities.  Most obviously, restricting oil and gas exports undermines the president’s National Export Initiative and stands in stark contrast to his full-throated advocacy of other energy exports, particularly renewables like biofuels and solar panels. Moreover, the use of export restrictions to benefit downstream industries contradicts longstanding U.S. policy of using countervailing duties to discourage foreign imports that unfairly benefit from export restrictions on upstream inputs.  Finally, the U.S. government has long opposed restrictive and opaque export licensing systems in WTO negotiations and dispute settlement.  The current U.S. export licensing regulations for oil and gas contradict these positions and undermine multilateral efforts to rein in such restrictions.

If President Obama really wants to develop America’s vast energy resources, grow the U.S. economy, restore some coherence to U.S. trade and energy policy, and avoid potentially embarrassing trade conflicts, he should order DOE to immediately approve all, not just some, of the pending license applications for natural gas and crude oil.  He then should pursue, with Congress, an overhaul of our archaic licensing systems so that they reflect the new American energy landscape and the United States’ position as a global export power.  Such reforms would bolster investment, production, and employment in the oil and gas sector, stabilize the U.S. energy market and benefit the overall economy, avoid the myriad policy and legal problems raised by the current system, and produce a rare moment of bipartisan comity in Washington.  It’s a no-brainer.

License to Drill: The Case for Modernizing America’s Crude Oil and Natural Gas Export Licensing Systems

That's the pun-tastic name of my new briefer for the Cato Institute.  Here's introduction:

Revolutionary extraction technologies have helped increase the supply of fossil fuels in the United States, driving down prices, spurring economic activity, and potentially reversing the longtime status of the United States as a net energy importer to a significant exporter. Impeding that transition are outdated federal regulations—in particular discretionary export licensing systems for natural gas and crude oil—that restrict exports, distort domestic energy prices, deter investment, and encourage graft. They also subvert some of the Obama administration stated policy objectives and could run afoul of U.S. international trade obligations.

Despite the potential economic windfall, opposition to exporting natural gas and crude oil has materialized among certain domestic consuming industries and environmental groups, causing the administration to delay any approvals on pending export-license applications. But there are compelling reasons to approve those applications and to overhaul our disjointed, anachronistic, export license systems to properly reflect the new energy landscape. This paper describes those reasons and provides a basic roadmap for reform.

The full paper is available on Cato's website here.  Probably my favorite part is the section on the inconsistency between the Obama administration's use - intentional or otherwise - of archaic licensing systems to restrict oil and gas exports and various other White House policies:

First, the restrictive export licensing systems undermine the National Export Initiative (NEI) and its goal of doubling U.S. exports between 2009 and 2014. Second, the administration’s reticence with respect to fossil fuel exports stands in stark contrast to its full-throated advocacy of other energy exports, particularly renewables like bio fuels and solar panels. Indeed, the September 2010 White House report setting forth the NEI’s priority recommendations calls for increased government support for renewable and nuclear energy exports—but never mentions oil or natural gas. A November 2012 follow-up report lauds the U.S. government’s efforts to achieve these objectives, yet continues to ignore American fossil fuels, despite the massive increases in production and export potential that occurred between 2010 and 2012. Furthermore, increased fossil-fuel exports could actually spur domestic production of renewable energy through higher oil and gas prices. According to the EIA, the role of renewables in electricity generation would be “greater in a higher-gas-price environment.”

Third, the use of export restrictions to benefit downstream industries contradicts longstanding U.S. policy with respect to export restraints and illegal subsidies. The Commerce Department repeatedly has imposed anti-subsidy duties on imports to countervail subsidies resulting from foreign export restrictions on upstream inputs. The administration’s embrace of similar restrictions would not only be hypocritical, but would also expose U.S. exports of energy-intensive products (e.g., fertilizer) to “copycat” duties in key foreign markets.

Fourth, the U.S. government has long opposed restrictive and opaque export licensing systems in WTO negotiations and dispute settlement. For example, in China—Raw Materials (DS394), the U.S. government challenged China’s “non-automatic” export licensing systems for various raw materials as impermissible restrictions on exportation in violation of GATT Article XI. In March 2009, the United States and several other countries submitted a proposal to the WTO Negotiating Group on Market Access calling for increased disciplines on Members’ use of export licensing. The current U.S. export licensing regulations for oil and gas contradict these positions and undermine laudable efforts to rein in such restrictions globally.

Be sure to read the whole thing. And I'd be remiss not to note some of the other recent work on this topic:

• Heritage's Nicolas Loris on the economic benefits of natural gas exports and empowering states to control their own energy policy.

• The Peterson Institute's comments urging DOE approval of pending natural gas export license applications.

Enjoy!

"Green Airline War" Ends (For Now) with a Whimper, Not a Bang

Even though the domestic and international backlash has been significant, today's news that the EU has suspended its airline carbon emissions tax remains pretty surprising:

The EU will suspend for one year a controversial policy of charging foreign airlines for their carbon emissions on flights to and from Europe, citing progress in negotiations towards a global regime to tackle pollution by the aviation industry.

Connie Hedegaard, the EU climate commissioner, announced the suspension on Monday of a policy that had united the US, China, Russia, Brazil, India and several other countries in their opposition to it.

The EU carbon emissions trading scheme had also drawn complaints from European airlines and Airbus, the Toulouse-based aircraft manufacturer, which feared being caught up in a global trade war....

The suspension will apply only to flights to and from the EU – not between the 27 countries that make up the bloc – and must still be approved by member states and the European parliament. 

The EU law was part of its broader policy to curb the greenhouse gas emissions linked to global warming. It requires airlines to buy permits from its carbon market to cover their emissions on all flights to or from the EU.

You may recall that when the EU's emissions scheme was first announced, I opined that the global "trade war" was possible in this sector because the majority of airline services were exempt from WTO rules.  Thus, the EU could apply the policy - and others could retaliate against European airlines - without much fear of WTO litigation (or WTO-sanctioned retaliation).  Some trade experts raised very theoretical WTO claims, but clearly no WTO Member governments were, as is typical, willing to file a WTO complaint on based on mere theories.

Instead, it appears that some ol' fashioned strong-arming by the US, China and others - forbidding their airlines from complying with the EU system or threatening retaliation - has done the trick:

Airbus, owned by EADS, called in March for a suspension of the EU scheme against airlines after claiming that it was being prevented from finalising contracts worth $14bn to supply jets to Chinese carriers....

The Association of European Airlines also welcomed Ms Hedegaard’s statement, adding that some of its member airlines had already experienced problems resulting from non-EU countries’ objections to the bloc’s carbon emissions trading scheme – such as European carriers struggling to secure traffic rights to fly into airports.

“We already had signs we were moving towards a trade war [because of the EU scheme],” said the AEA. “We welcome for that reason [the proposal] to put a moratorium on [the scheme] and wait for the outcome of the [ICAO] debate.”...

Foreign airlines, led by US carriers, complained the scheme amounted to a form of extraterritorial taxation for flights that originated outside the EU and were largely conducted in international airspace.

Airlines for America, the US airlines’ trade body that tried unsuccessfully to stop the EU scheme in the courts, said it was “cautiously optimistic” about the European Commission’s proposal....

The future of US legislation that could ban domestic airlines from complying with the EU carbon emissions scheme is unclear.

The EU, however, refuses to admit that global pressure caused the Commission to suspend the emissions scheme.  Instead, the Europeans point to global talks on airline emissions that are - allegedly - going just great:

European Commission officials insisted that they had not buckled to international pressure in proposing to defer enforcement of the scheme against flights into and out of Europe until the end of 2013. Instead, they attributed the move to positive results last week in talks at a UN aviation body about a potential international agreement after years of frustration. 

The body, called the International Civil Aviation Organisation, agreed to establish a high-level group to develop a global system to tackle airlines’ carbon emissions by the time of its next general assembly in September 2013....

“For the first time in years, a global deal on aviation should be in reach,” said Ms Hedegaard. She called the ICAO high-level group “very good news”.

However, Ms Hedegaard also warned that the EU policy would be reactivated “automatically” if the ICAO talks proved fruitless. “It is very important for our opponents to understand this,” she told journalists in Brussels.

Ms Hedegaard’s proposal marked a softening from previous declarations that she would not amend the EU law affecting airlines and their carbon emissions because of threats of a trade war.

I don't know about you, but Ms. Hedegaard's confident statements about an international agreement on airline emissions certainly raised my eyebrow, as any such agreement would require the support of the very nations who raised a giant stink about the EU program to begin with.  I could perhaps see the second-term Obama administration pushing for such a deal, but is it realistic to assume the same motivation - especially for a deal with the same level of ambition as the EU scheme - from China, Russia, Brazil, India and others?

Color me skeptical.

Instead, it seems to me that the ICAO deal has provided the European Commission with sufficient cover to shelve the poorly-thought-out emissions scheme and let it die on the vine over the next year as the ICAO talks continue behind closed doors.  The Europeans then can express support for anything that comes out of the ICAO next September (regardless of the final deal's scope and effect), and this two step will save face and the EU airlines and aircraft companies.

But, hey, maybe I'm wrong and a big, ambitious global emissions agreement it right around the corner.  I guess we'll find out in 10 months.

The Green Subsidies Mess Continues Apace

I'm sure I'll have plenty to say about last night's election results (other than an admission that my groundless prediction was obviously wrong), but tonight I'd like to focus on the latest reminders that the global mess surrounding green subsidies waits for no one man or election.

First, the US International Trade Commission unanimously found today that dumped/subsidized Chinese solar cells are injuring US solar manufacturers:

The United States International Trade Commission (USITC) today determined that a U.S. industry is materially injured by reason of imports of crystalline silicon photovoltaic cells and modules from China that the U.S. Department of Commerce (Commerce) has determined are subsidized and sold in the United States at less than fair value.

All six Commissioners voted in the affirmative.

As a result of the USITC's affirmative determinations, Commerce will issue antidumping and countervailing duty orders on imports of these products from China.

As you may recall, DOC last month released its final determination of pretty high antidumping and countervailing duties on Chinese imports, and DOC now will instruct Customs to start collecting those duties on a prospective basis.  And, of course, US solar panel prices will inevitably rise (if they haven't already).

While US consumers and the Chinese government will inevitably grouse about today's decision, I see several reasons why Beijing might not directly retaliate against the United States.  First, given the massive trade volumes at issue in this case and the ITC's unanimous vote in the preliminary phase, today's final vote shouldn't have come as a surprise  to anyone.  Second, Chinese exporters and US consumers actually scored a couple minor victories in this case: (a) DOC refused to expand the scope of the duties to include panels assembled in China but made from third-country inputs, and several Chinese producers have (apparently) already made contingency plans to export solar panels that are outside of the scope of the new US duty order; (b) the ITC today disagreed with DOC that "critical circumstances" exist in this case, and the duties will therefore not be assessed retroactively to 90 days before DOC issued its preliminary AD/CVD determination. If the ITC had agreed with Commerce, US importers could've been on the hook for millions of dollars in retroactively-applied duties. Third, this case is far from over: DOC's conduct in this investigation (and several others) is the subject of two new WTO disputes filed by China, and I wouldn't be surprised to see a US court appeal or two also emerge.

So maybe, just maybe, the US-China green subsidy fight won't be expanded dramatically in the wake of today's ITC vote.

On the other hand, it looks like the EU's own fight with China over green goods and subsidies is just cranking up.  In response to the EU's September initiation of separate anti-dumping and anti-subsidy investigations of Chinese solar panels, China initiated its own AD/CVD investigations of EU polysilicon.  If that sounds familiar, it should: in July China began similar cases against US (and Korean) polysilicon in apparent response to the US solar panels case.  However, unlike the US, the EU polysilicon case wasn't the end of China's response to Europe's solar investigation.  China also has filed a new WTO dispute targeting EU solar subsidies:

China has filed a WTO complaint over local content requirements under renewable energy feed-in-tariff programmes in certain EU member states, officials announced earlier this week. The surprise move comes just days after Beijing launched anti-dumping and countervailing duty investigations domestically over EU exports of solar polysilicon components to the Chinese market.

On the Chinese Ministry of Commerce website, ministry spokesperson Shen Danyang said that the People’s Republic had requested consultations with the EU and certain member states - including but not limited to Italy and Greece - under the WTO’s dispute settlement proceedings regarding allegedly unfair EU trade practices in the solar sector. According to Shen, electricity produced by EU-made solar components benefited from favourable feed-in tariffs in some countries, which in turn hurt the interests of Chinese producers locked out from such subsidies.

Interestingly, the Chinese WTO claim appears to be similar to one brought by - you guessed it! - the EU (and Japan) against Canada in relation to Ontario's "feed-in tariffs" for renewable energy.  The final Panel report in that case is due out soon, but rumors indicate that the Canadian government lost on most, but not all, aspects of the dispute.

So is a new Chinese dispute or polysilicon-like retaliation against the US in the works because of today's ITC announcement?  As mentioned above, I don't think so, but it's not out of the question.  Indeed, China already has a dispute teed-up in a final report by China's Ministry of Commerce (MOFCOM) which found that several US states provide prohibited subsidies to US manufacturers of solar panels and other green goods.  That report hasn't resulted in any formal action, but a WTO dispute would appear to be the logical next step if or when Beijing decides to respond to US green protectionism.  Maybe that won't happen tomorrow, but it'll keep hanging over Uncle Sam's head until those subsidies go away.

Regardless of what happens next, all of the stuff above makes clear that the global green subsidy mess - the duties, the litigation, the uncertainty and, of course, the economic problems - is showing no signs of abating any time soon.  While this might be good news for my paper on the subject, it's undoubtedly bad news for the many people urging the proliferation of environmental technologies, including US consumers and the struggling solar industry - in the United States, China and elsewhere.

Will Green Subsidies Be Part of a "Fiscal Cliff" Deal?

In order to avoid the political spotlight, Congress and the President have punted on all sorts of tax and spending issues until after the November elections.  The primary issue to be addressed during the short post-election legislative session is the "fiscal cliff" - an onslaught of automatic tax hikes and spending cuts that will occur on January 1, 2013 - but there are also a lot of other matters that were shelved due to political cowardice expediency.  Among them are several green subsidy programs, including a one-year extension of the wind energy production tax credit and its $12 billion price tag.  Given the many problems with US green energy subsidies, the best move would be to let this boondoggle and its brethren expire at the end of the year, but - fear not! - it ain't gonna be that easy.  In fact, BNA reports that the PTC and other green subsidies could very well end up in the fiscal cliff deal:

Legislation that would extend the wind energy production tax credit and other expiring energy incentives may be included as part of a congressional deal to avert looming tax increases and budget cuts expected by year's end, a Senate Finance Committee staffer said Oct. 17.

Ryan Abraham, a Democratic committee aide, said he is optimistic the tax credit measure (S. 3521) will be incorporated into efforts during the lame-duck congressional session to blunt the effects of the “fiscal cliff” when tax hikes and automatic spending cuts go into effect in January (see related story in this issue)....

More than $18 billion in energy-related tax incentives would be extended under S. 3521, the Family and Business Tax Cut Certainty Act of 2012, approved Aug. 2 by the Senate Finance Committee.

The majority of that spending—$12.1 billion—would fund a one-year extension of the wind energy industry's 2.2 cent per kilowatt-hour production tax credit as well as pay for a change that allows wind projects that are under construction by the end of 2013 to be eligible....

Other energy tax incentives that would be extended in the legislation include a production tax credit for other renewable energy projects, credits for energy-efficient homes and appliances, and tax incentives for cellulosic biofuel and other alternative fuels....

In addition to securing the bill in a deal to avert the fiscal cliff, Abraham said “we'll fight hard” to make sure “something that will be helpful to renewable energy,” such as tax extenders of longer duration, would be included in a longer-term budget deal that could address tax reform.

Granted, Mr. Abraham speaks only for Senate Democrats and was speaking to a room of anxious people dependent on these subsidies, so a bit of skepticism is in order here.  Then again, the Finance Committee approved the Christmas tree that contains all of these green presents with strong bipartisan support (a vote of 19-5), so it's not like there will be strong resistance in the Senate to this bill.  And do we really expect House Republicans - many of whom love green subsidies too - to stand firm when everyone starts FREAKING OUT about the oncoming fiscal cliff?  Oh, and let's not forget that we'll also have to deal with the pork-laden Farm Bill during the post-election legislative session, so it's really anyone's guess as to what gets thrown into a bipartisan deal to avert "fiscal disaster" on January 1.

In short: gird yourselves, folks.  This is going to get really, really ugly, no matter who wins in November.

I need a drink just thinking about it.

Yes, Subsidies Helped Kill Solyndra - American Subsidies

Although most people are busy talking about yesterday's announced bankruptcy of battery-maker - and Department of Energy subsidy recipient - A123 Systems, I'd like to kick it old school tonight and discuss the granddaddy of Obama administration green "investment" debacles, Solyndra.  As I've noted here and in my new Cato Institute paper (full version here), when Solyndra went belly-up, the company and the Obama administration were quick to blame Chinese subsidies for the company's demise.  Well, it turns out that they were half-right: subsidies did help kill Solyndra, but they came from Washington, not Beijing.

Surprised?  So am I, actually, so please allow me to explain.

First, a new article from Quartz' energy and science expert Christopher Mims explores the root causes of Solyndra's demise and concludes that a collapse in polysilicon prices, not Chinese dumping, is to blame:

Solyndra made tube-shaped solar collectors because they were good at optimizing what was, at the company’s inception in 2005, a scarce and extremely expensive good: the pure, crystalline polysilicon needed to make a solar panel. Solyndra’s “big idea” was to change the shape of the solar panel so that it could get the same performance using significantly less silicon.

At first, this seemed like the right bet: In 2008, the cost of polysilicon reached $400 a kilogram. Today that same kilo will cost you $30.

Companies that continued to make conventional, flat solar panels were able to reap the benefits of this collapse in price. And what brought about this price collapse was an explosion of US and global polysilicon manufacturing.

“Over the last several years, US industry leaders made massive investments in silicon production capacity that rapidly pushed down the price of silicon and therefore crystalline silicon solar panels,” says Walker Frost, a spokesperson for Suntech, one of the Chinese manufacturers currently being sued by Solyndra.

Globally, there are now more than 170 startups and established companies making polysilicon. The solar industry used to be dependent on the cast-offs from the microchip manufacturing industry, but the profits reaped by polysilicon manufacturers through 2008 were so large that capacity has since exploded. There’s now so many companies making polysilicon that industry analysts at GTM Research now predict that price pressure and consolidation will leave behind only a dozen survivors by the end of the decade.

Mims provides plenty of links to support his conclusions, but, hey, don't just take his word for it.  Instead, take a gander at the recent congressional testimony of Jonathan Silver, Executive Director of the US Department of Energy's Loan Programs Office, explaining why Solyndra failed:

In 2009, Solyndra appeared to be well-positioned to compete and succeed in the global marketplace. Solyndra manufactured cylindrical, thin-film, solar cells, which avoided both the high cost of polysilicon—a crucial component used in conventional solar panels — and certain costs associated with installing flat panels. But polysilicon prices subsequently dropped significantly, taking Solyndra, and many industry analysts, by surprise. Among the principal beneficiaries of this pricing environment were four of Solyndra’s Chinese competitors, which sell polysilicon panels and received $20 billion in credit from the China Development Bank in the 2010.

These developments made Solyndra’s business model more challenging. The company attempted to cut costs and enhanced its sales and marketing efforts, which resulted in increased sales and revenues. In fact, its revenues increased 40% between 2009 and 2010, from $100m to $140m. But Solyndra’s efforts to gain market-share left it short of capital and, by the summer of 2010, the company faced the prospect of bankruptcy if it could not secure an influx of new cash.

In short, polysilicon prices "surprisingly" collapsed, thus benefiting the Solyndra's Chinese competitors (yes, sure, they were subsidized competitors - you know, just like Solyndra).  However, were it not for this "surprising" collapse, these competitors would never have realized such benefits.  Thus, the key to Solyndra's bankruptcy wasn't China, but low polysilicon prices and the destruction of the company's business model.

What neither Mims nor Silver happen to mention, however, is why polysilicon prices collapsed.  Yes, Mims notes new US investment and huge increases in domestic polysilicon production capacity, but he doesn't explore the drivers of that investment/expansion.  A little digging, however, reveals that the huge increases in capacity - and resulting collapse in Solyndra-killing polysilicon prices - were caused, at least in part, by massive subsidization by the US government.  You see, it turns out that US polysilicon producers were some of the biggest recipients of Obama administration "green" subsidies, primarily through DOE programs begun or dramatically expanded as part of the 2009 Stimulus bill.

Indeed, a very quick search of "polysilicon" on DOE's website reveals the following examples - each bragging about how federal subsidies helped bring new polysilicon capacity online:

• $44.85 million to Pennsylvania's AE Polysilicon via the Advanced Energy Manufacturing Tax Credit (aka "Section 48C");
• $154 million to Washington's REC Silicon via the same Advanced Energy Manufacturing Tax Credit — "the highest amount awarded to a recipient under the Recovery Act" (woo hoo!);
• $275 million loan guarantee to California's Calisolar Inc. (which also apparently benefited from millions of dollars worth of R&D subsidies through UC Berkeley);

The 2010 IRS factseet on the $2.3 billion in Section 48C tax credits also shows a $128 million subsidy to Wacker Polysilicon and another $51.6 million to Calisolar.  (These are just the ones I could quickly pinpoint with "polysilicon" in their names; no doubt there are other producers who received 48C tax credits and/or one of the many other state and federal subsidies available to green energy producers.)  

This cursory review makes clear that the Obama administration, and especially the 2009 Stimulus Bill, gave hundreds of millions of dollars in direct subsidies to domestic polysilicon producers.  These subsidies inevitably - and totally unsurprisingly - helped cause polysilicon prices to drop (and led to a Chinese anti-subsidy investigation of US exports which targets the aforementioned tax subsidies and several other state-level programs).  Moreover, all the state and federal subsidies to downstream solar manufacturers like Solyndra and to US solar energy consumers further stoked US polysilicon investment and production and further reduced prices.  

And down goes Solyndra.

So to recap: the Obama administration gave a $500 million dollar loan guarantee to a company that was dependent on sky-high polysilicon prices, but simultaneously threw hundreds of millions of dollars at domestic polysilicon producers.  The latter subsidies - when combined with billions in indirect subsidies to solar producers and consumers - inevitably helped stoke overcapacity in the domestic and global polysilicon markets and a resulting collapse in polysilicon prices that - wait for it - eviscerated Solyndra's business plan and ultimately killed the company.  And when Solyndra declared bankruptcy, the Obama administration immediately blamed China.

You cannot make this stuff up.

There are certainly some important timeline questions here that I'm not willing or able to handle tonight (for example, did the administration subsidize Solyndra with any knowledge of the company's polysilicon-dependent business plan or that the 48C subsidies were helping bring tons of new polysilicon capacity online?), but answering those isn't necessary for tonight's purposes.  Instead, what's sufficient is to just point out (i) the problematic, incoherent and anything-but-surprising effects of the United States' out-of-control green subsidy policies; and (ii) the fact that blaming Chinese solar subsidies, instead of failed US policy, appears to be a really misguided (and/or misleading) approach.

So I'll ask, once again: isn't it time for a change?

America's Really, Really Messed-up Energy Policy

As readers of this blog know, I've long been a critic of US green energy policy and spent a lot of time in my new Cato Institute paper bolstering those positions.  And just last week I detailed why the Obama administration's policies related to natural gas - particularly exports of LNG - were economically and legally misguided (and blatantly hypocritical).  Now comes further evidence that our crude oil policies are equally problematic.

According to a recent Financial Times article, booming crude oil production in the United States - due mainly to revolutionary drilling techniques - has us poised to become a global crude oil exporter for the first time in decades.  This development sounds pretty great... until you read the rest of the article and discover several very serious - and utterly unnecessary - problems.

First, the main reason for the "export boom" is that the United States lacks adequate refinery capacity and transport infrastructure to process new crude oil in order to satisfy domestic demand for gasoline and diesel.  The FT hints at this when it notes that "Refineries in Canada are important fuel suppliers to US markets. Irving [Oil] says its St John refinery supplies 20 per cent of total petrol and diesel imports to the US northeast."  But a new editorial in today's Washington Examiner elaborates on this problem:

[M]ost of this new [oil] production is in areas that lack the needed refinery and transportation infrastructure that is currently located near our traditional public land sources. Without new pipelines and refineries better positioned to transport oil from private land to market, there will continue to be an oil bottleneck that drives up the price of gas at the pump, even as the price of oil falls.

The solution to this problem is to build new refineries and new pipelines, like the planned Keystone pipeline that would connect Canada's oil sand with existing oil refineries along the Gulf of Mexico. But of course, Obama and his environmental allies have blocked this and many other oil infrastructure projects.

There has not been a major new oil refinery built in the United States since the Marathon Garyville Refinery was built in Louisiana in 1977. True, our existing refinery capacity is higher today than it was 30 years ago, but all that refining is being done at 137 refineries today, versus 254 refineries 30 years ago.

Fewer refineries means more miles of pipe must be built and maintained, and it also means bigger problems whenever a key refinery goes down. That is exactly what happened this fall in California, when the Richmond Exxon refinery caught fire and the Kettleman-Los Medanos pipeline was contaminated. With two key delivery system points at reduced capacity, and without other refineries and pipelines to back them up, gas prices shot up almost a full dollar from $3.73 in the first week of July to $4.65 today.

In other words, Californians are now suffering at the pump because they have let their energy infrastructure become too fragile. Instead of developing the resources closest to them (including the more than 300 million barrels of oil sitting off of California's coast in the Pacific Ocean), California has chosen to become dependent on other states for its oil supply. And instead of building a diverse group of smaller refineries and shorter pipelines, California relies on a big dog that can suddenly take ill.

Without adequate pipelines in the United States, the oil transport and refinery bottleneck could be solved by shipping crude to other US states, but there's one big problem: a little-known bit of 1900s protectionism called the "Jones Act" makes it really expensive to do so.  The aforementioned FT article explains:

One advantage of exporting the crude to Canada is that the US’ Jones Act demands more expensive US-flagged ships for domestic routes. Poten & Partners, a ship broker, estimates it would cost less than $1.50 per barrel to ship crude in a foreign-flagged medium-sized Aframax tanker from Texas to the largest Canadian refinery at St John, New Brunswick. A shorter journey from Texas to refineries in Philadelphia recently cost $4.55 a barrel. 

“This is not about exports or imports,” said Lucian Pugliaresi, president of the Energy Policy Research Foundation in Washington. “It’s about transportation and processing efficiency.”

Because the Jones Act drastically inflates the cost of shipping crude from, for example, booming shale oil producers in Texas to Philly refineries, oil producers are looking to foreign markets to refine their crude and then ship it back to the United States.  Yet even this somewhat-messy relationship isn't the end of the story.  It turns out that the United States government severely restricts exports of crude oil via an arcane (dating back to the Energy Policy and Conservation Act of 1975 (P.L. 94-163, EPCA)) export licensing system intended to address "short supply" conditions that, given all that new oil production, likely no longer exist here in the United States.  As the FT notes, the only country to which American companies can export crude oil is Canada, and even that ain't easy:

US federal rules and the country’s dependency on imports have kept all but a trickle of crude from leaving the US. But a surge in supplies from states such as Texas and North Dakota have prompted companies to seek out refinery customers in Canada. As rising crude volumes reach the coasts, “pressure should build and will trigger policy debates about whether to expand the list of allowable countries beyond Canada”, said Ed Morse, head of commodities research at Citi.... 

Exporting US crude requires a licence from the Bureau of Industry and Security, a branch of the US Department of Commerce. The US has exported less than 100,000 barrels per day of crude in the past decade, a fraction of the 9m barrels imported daily. “It’s generally prohibited except for a whole host of exceptions,” said John Felmy, chief economist at the American Petroleum Institute. By contrast, the US is exporting record amounts of refined fuels such as petrol. 

Shell confirmed it recently applied for licences to export domestic crude. “Crude oil trades on a global scale and imports/exports will follow supply and demand,” it said. BP received a licence to export to Canada but has not yet used it, while Vitol has applied for a licence, people familiar with the matter said. Both BP and Vitol declined to comment.

The Department of Commerce refused to confirm or deny the existence of licences or licence applications, citing US law. But it said exports to Canada had a “presumption of approval”.

As I noted in my recent post on LNG exports, restrictive export licensing systems like the one applied to crude oil very likely violate WTO rules (namely, GATT Article XI which prohibits Members from imposing export restrictions), but it's possible that the United States' crude oil export regime would qualify for the GATT's "national security" exception (Article XXI).  However, this legal loophole doesn't change how totally and utterly nonsensical our crude oil policies are.  To recap: because the federal government and many states refuse to allow the domestic construction of new refineries or interstate pipelines, domestic producers are forced to ship crude oil by ship to other, out-of-state refineries; however, because the Jones Act makes interstate maritime transport of crude oil prohibitively expensive, oil producers are forced to look to export markets to ship crude oil to be refined and then imported back into the United States; however, because a decades-old US export licensing system severely restricts the exportation of crude oil, even this last-ditch effort to ship and refine crude oil faces serious legal and logistical problems.

And gas prices continue to climb.

Seriously, this is one messed-up policy, folks.  While oil and gas prices are admittedly a result of global supply and demand, it's impossible to argue that the aforementioned policies aren't making things worse in the short-term, and that things here would be better - for US consumers and producers/workers - if the federal government reformed arcane, conflicting regulations like the Jones Act and the crude oil licensing regime (not to mention the refinery and pipeline approval process).

Is that really too much to ask?

More TV and Comment on Today's China Solar Panels Announcement

Today, the Department of Commerce announced its final determinations in the antidumping and countervailing duty investigations of solar panels from China. (DOC's factsheet is here.)  Final AD duties went down a little from the prelimnary phase, and CVDs went up a good bit.  Meanwile, DOC declined to dramatically expand the scope of the AD/CVD orders to include panels made from third-country inputs.  None of these results is particularly surprising, although I'm quite sure that the significant increase in CVD rates (i.e., the magnitude of the Chinese solar subsidies found to exist) will not sit well with Beijing.  Meanwhile, I imagine that sinophobic politicians in both parties will be tickled pink with a new talking point.

I don't have time to parse the details of DOC's announcement tonight, but my general comments from Sunday still hold: this is one giant mess that will breed a lot of collateral damage and litigation. 

Oh, goody.

Also, the good folks at Fox Business had me back on today for an extended interview regarding the solar panels decision.  As you'll notice, the discussion echoes the findings and conclusions of my new Cato Institute paper on the global subsidy epidemic and the problems with US subsidy and anti-subsidy policies.  Enjoy:

Countervailing Calamity: US Green Subsidy Policy - The Ultimate Boondoggle

Given Mitt Romney's recent debate-zinger about President Obama's serious affinity for green energy and this Wednesday's big Department of Commerce announcement regarding final antidumping and anti-subsidy duties on Chinese solar panels, American green energy policy - and green subsidies in particular - have been (and likely will continue to be) in the news.  Thus, now's a perfect time to preview probably my favorite sections of my forthcoming Cato Institute paper, "Countervailing Calamity: How to Stop the Global Subsidies Race," on the United States' incoherent and painful green subsidy policies.

First, despite the fact that the Obama administration loves to complain about foreign (especially Chinese) subsidies hurting America's green companies and workers, the fact is that federal, state and local governments here annually throw tens of billions of taxpayer dollars at alternative energy companies and consumers:

Since the 1950s, the U.S. government has subsidized the search for, and production of, energy alternatives to fossil fuels, but such funds have expanded dramatically in recent years. The Congressional Budget Office (CBO) estimates that government subsidies to support the production of fuels and energy technologies totaled approximately $24 billion in 2011: $20.5 billion in various tax preferences (special deductions, special tax rates, tax credits, and grants in lieu of tax credits) and $3.5 billion in Department of Energy spending programs (direct investments, primarily for research and development, loans and loan guarantees). The CBO found that 78% of all tax subsidies and 54% of all DOE subsidies went to alternative energy projects (renewable energy and energy efficiency). Based on DOE’s figures, the Institute for Energy Research calculated that fossil fuels (oil, natural gas, and coal) received $0.64 in taxpayer dollars for every megawatt-hour of energy produced, while hydropower received $0.82, nuclear $3.14, wind $56.29, and solar an astonishing $775.64.

Three of the most prominent DOE programs are the Advanced Technology Vehicle Manufacturing (ATVM) program, which aims to improve the energy efficiency of automobiles; the Section 1705 loan-guarantee program, which supports loans for some renewable energy systems, electric power transmission, and biofuel projects; and the Section 1703 loan guarantee program, which aims to increase investment in “clean energy” facilities (primarily nuclear energy). The CBO estimates that the subsidy costs for the ATVM and Section 1705 loan programs between 2009 and 2012 were approximately $4 billion on about $25 billion in loans, although those costs could be higher depending on the economic success or failure of the subsidized firms. 

The federal government has also provided a vast array of tax subsidies and other grants to producers and consumers of biofuels such as ethanol, biodiesel, and cellulosic biofuel. According to the U.S. Department of Energy, 538 different federal and state subsidies—grants, tax incentives, loans and leases, rebates, exemptions, and other programs—are currently available to producers or consumers of alternative fuels in the United States. Forty-one of these are federal government programs. The CBO estimates that federal excise tax credits for alcohol fuels and for biodiesel alone cost $6.9 billion in 2011. Although some of these subsidies expired in December 2011, many other federal and state subsidy programs continue to funnel billions of taxpayer dollars to U.S. biofuels producers.

Despite some pushback from fiscal conservatives, targeted alternative-energy subsidies continue to have broad bipartisan support. For example, in August 2012 the Senate Finance Committee approved, by a strong bipartisan vote of 19–5, tax extenders legislation containing over $18 billion worth of rebates, credits, and other tax subsidies for alternative energy. A one-year extension of the 2.2-cents-per-kilowatt-hour production tax credit for wind energy alone will cost over $12 billion.

So much for those stalwart fiscal conservatives in the GOP, huh?  Sigh.

Second, all this subsidizing is - unsurprisingly - causing major problems here in the United States:

There is ample evidence that the problems caused by subsidies are both real and widespread in the United States. First, U.S. programs have caused significant economic damage. A recent review of the economic literature on federal loan guarantees found that “every loan guarantee program (a) transfers the risk from lenders to taxpayers, (b) is likely to inhibit innovation, and (c) increases the overall cost of borrowing.” The paper concluded that, at best, the “guarantees distort crucial market signals that determine where capital should be invested, resulting in lower interest rates that are unmerited and a reduction of capital for more worthy projects. … At their worst, these guarantees introduce political incentives into business decisions, creating the conditions for … cronyism." The study found that the three main DOE loan programs in particular “fall short of their stated goals of developing clean energy and creating jobs” and cause indirect damage to the nation’s economy through “distortion of market signals, cronyism, and mal-investment.” Thus, the very public bankruptcies of DOE loan recipients Solyndra, Beacon Power, Ener1, and Abound are more aptly described as a feature, not a bug, of American “green energy” policies. And more green energy failures appear to be on the horizon.

Similar economic harms are caused by other U.S. programs, such as agriculture subsidies, the auto bailouts, and biofuels subsidies. In each case, the costs—via economic distortions, cost overruns, unintended consequences, and cronyism—were found to outweigh any identified benefits. For example, the Cash for Clunkers program was found to cost taxpayers $24,000 per vehicle sold, and the auto bailouts, beyond the financial outlays, were found to constitute a direct and unnecessary payout to the United Autoworkers Union at the expense of taxpayers and investors. U.S. biofuels policies, particularly for corn ethanol, have actually been found to harm the environment, and federal farm subsidies are routinely found to benefit large agribusiness interests at the expense of taxpayers, consumers, and small farmers.

[Furthermore], U.S. subsidy policies have created stark political problems, as corruption—or at least the appearance of corruption—is routinely tied to these federal programs. The most famous recent example is the case of U.S. solar firm Solyndra, wherein major contributors to the Obama campaign lobbied for, and received, approximately $500 million in DOE loan guarantees for the soon-to-be-bankrupt company, despite strong evidence of the company’s unviability. Solyndra, unfortunately, is not alone: in the recent book, Throw Them All Out, author Peter Schweitzer chronicles myriad examples of cronyism and political corruption tied to ever-expanding U.S. subsidy programs. With respect to alternative energy, Schweitzer explains that “the game of funneling taxpayer money to friends has exploded to astonishing levels in recent years.” He notes that 71 percent of the Obama Energy Department’s grants and loans went to “individuals who were bundlers, members of Obama’s National Finance Committee, or large donors to the Democratic Party.” These donors together raised $457,834 for President Obama’s 2008 campaign, and were subsequently approved for over $11 billion in federal grants or loans. Most recently, Illinois-based energy producer—and Section 1705 loan guarantee recipient—Exelon has been found to have profited handsomely from its cozy relationship with the Obama administration. Such revelations and others led the book’s author to conclude that “the Department of Energy loan and grant program might be the greatest—and most expensive—example of crony capitalism in American history.”

Such a devastating conclusion.  (By the way, if you're interested in this stuff I highly recommend reading Schweitzer's book - an amazingly depressing read.)

Third, US green energy (and other) subsidies are a breeding ground for international trade disputes, as other countries use global anti-subsidy rules to defend their industries and workers from trade-distorting US subsidies:

The U.S. government’s subsidization of specific companies and enterprises subjects U.S. exports—and U.S. trade and subsidy policy more broadly—to scrutiny and potential retaliation by other WTO members in the form of CVDs or suspended concessions via a WTO dispute. Such responses undermine U.S. efforts to promote trade and to discourage other countries’ use of trade-distorting subsidies on the national, bilateral (Free Trade Agreement [FTA]), and multilateral (WTO/G20) levels. They also inject uncertainty into U.S. and global markets, while wasting finite government resources on long legal battles and tit-for-tat trade disputes.... 

[other subsections on disputes re: US automobile and cotton subsidies] 

Green energy and technology. Perhaps no issue is more indicative of the broader U.S. subsidy debate than federal government support for alternative-energy products. For example, in 2009–2010, subsidized U.S. biodiesel imports became subject to CVD orders in Australia, Peru, and the European Union, while U.S. ethanol subsidies have led to the initiation of trade remedies investigations against U.S. exports in both the EU and China. The Chinese government also has launched two investigations of green-energy subsidies. The first has resulted in a final report showing several instances of “prohibited subsidies” granted by U.S. states, and the Chinese government is now considering whether to bring formal charges to the WTO or take other necessary action. China also has initiated an AD/CVD investigation of U.S. imports of polysilicon—a key component in solar panel manufacturing—alleging that several state and federal subsidies to U.S. renewable-energy producers have injured their Chinese competitors. U.S. producers exported over $397 million worth of polysilicon to China in the first five months of 2012.

Other green subsidy programs also leave U.S. manufacturers vulnerable to future anti-subsidy measures. For example, as explained above, a large majority of all federal loan guarantees under the Section 1705 program have gone to U.S. solar manufacturers. Loan guarantees are expressly listed as a type of “financial contribution” under the SCM Agreement, and a “benefit” will exist to the extent that the amount that the loan recipient pays on the guaranteed loan is less than the “amount that the firm would pay on a comparable commercial loan absent the government guarantee.” Given the extremely risky nature of solar lending—a fact highlighted by the CRS and the high-profile failures of government-subsidized firms like Solyndra and Abound Solar —it is all but certain that the Section 1705 loan guarantees have conferred a benefit on U.S. solar producers, and the specificity of this subsidy program to these firms is clear. Thus, the Section 1705 program is very likely a countervailable subsidy. Ironically, the only thing likely preventing a CVD case against U.S. solar panel exports is the green subsidy programs’ failure—significant export volumes are needed to cause “injury” in another foreign market, and U.S. solar panel companies remain uncompetitive. U.S. biofuels and polysilicon producers, however, have met with more success, and thus more backlash.

Meanwhile, the U.S. government has launched high-profile CVD investigations of Chinese solar panels and wind turbines, as well as a Section 301 investigation, which allows the president, on his own or via a petition from a private U.S. party, to seek the removal of foreign measures that harm U.S. commerce. The Section 301 investigation of these products led to a WTO complaint against Chinese subsidies to wind-power equipment manufacturers. The solar case alone affects over $3 billion worth of 2011 merchandise trade, and DOC has already announced preliminary affirmative CVD and antidumping determinations. In response to these actions, the Chinese government—no saint when it comes to subsidies and protectionism—immediately deflected criticism by pointing out rampant U.S. subsidies on the same types of products and, as mentioned, by launching its own investigations of U.S. renewable-energy subsidies.

China is also challenging various methodological aspects of the US solar panels and wind turbines investigations (and many others) in not one, but two, new WTO disputes - adding yet another layer of uncertainty over the US and global markets for green goods.  And, of course, there are two US court cases challenging the constitutionality of the March 2012 law applying the US Countervailing Duty Law to imports from "non-market economies" like China, so the solar and wind cases are also tied up in that.

What a mess.

Since the solar panels determination is coming out Wednesday, let me try to summarize all of the above craziness for that specific product:

The United States - a rampant subsidizer of domestic solar panel manufacturers - will very likely impose final anti-subsidy (and antidumping) duties on Chinese solar panel manufacturers.  China is challenging those duties (and others) in two WTO disputes and in US courts.  The federal government and many US states also subsidize domestic consumers of solar panels (to encourage their use), yet the aforementioned duties will raise US prices of that product (thus discouraging their use).  Meanwhile, US subsidies of polysilicon - the primary component in solar panels - have led to Chinese AD/CVD investigations of US imports of that product.  If that investigation is successful, input prices for Chinese solar panels (which Beijing subsidizes) will go up, and - if form holds - the United States will challenge those duties at the WTO.  So, to recap: we subsidize the input, which they then tax; then they subsidize the downstream product, which we then tax (and subsidize!).  And, of course, everybody's suing everybody.

And this is from governments who claim to support the use of green energy?  Gimme a break.

And oh by the way, China's solar and wind industries are on the brink of collapse due to subsidy-driven overcapacity, weak global demand and, of course, the threat of anti-dumping and anti-subsidy duties in not only the United States, but also the EU and India.  This of course, is the result of China's export-focused, subsidy-laden industrial policy - a strategy that President Obama has repeatedly expressed a desire to emulate.

So do you think maybe - possibly - it's time to rethink US green energy policy?

Crazy thought, I know.

(More paper excerpts are available here.)

Behold, the Obama Administration's NatGas Politics (and Export Hypocrisy)

Today, Heritage's Ryan Olson picks up on a pretty important trade story that I missed last week: the Obama administration appears to be blocking U.S. exports of natural gas for political reasons:

Currently, liquefied natural gas (LNG) exports are restricted to countries with free trade agreements with the United States. Producers wishing to export to countries without U.S. free trade agreements must first get approval from the Department of Energy (DOE). With proven reserves of natural gas in the U.S. at an all-time high, companies have been flocking to export LNG to foreign markets. However, the DOE is stonewalling, approving only one of the 13 requests to export to non-free trade agreement countries and staking further exports on the release of a report that has been delayed until early next year. These types of bureaucratic hoops only hurt American companies and bring into question the President’s commitment to increasing exports.

The Reuters article that Olson cites helpfully explains that the big report was originally going to be out in March, then got delayed until late summer, and now won't be out until after the November elections.  That, of course, is quite convenient for the Obama administration, as Olson explains:

The Administration appears to be listening to economic advice from interest groups (including environmental groups) who oppose natural gas exports. They argue that free trade in the LNG field will disadvantage U.S. consumers, claiming that as the spread between the international price and the domestic price closes, U.S. prices will rise.

I'd add that many of these environmental groups also argue that the process by which much of natural gas is extracted these days - hydraulic fracturing or "fracking" - is evil dangerous, and thus their opposition to LNG exportation also frequently cites fracking's dangers as grounds to deny export license applications (see, e.g., this Sierra Club brief in opposition to an application from Sabine Pass LNG).  Olson goes on to explain how the administration's stonewalling on these LNG export license applications could seriously harm the US natgas industry (and tons of good-paying American jobs), but, considering environmentalists views on fracking and fossil fuels more generally, that might just be what they had in mind, eh?

But I digress.  For the moment, I'll try to ignore the obvious economic harms imposed by the administration's political stonewalling and instead look at two pretty ridiculous trade angles in this story.  First, as Olson notes, it's rather amazing that a President whose top trade priority is the National Export Initiative is, you know, actively blocking billions of dollars in potential U.S. energy exports:

The President has said he wants to “double our exports over the next five years” through his National Export Initiative. Apparently, those exports don’t include natural gas, a booming and vibrant sector of the national economy....

Recent studies have shown that exporting natural gas could make U.S. producers up to $3 billion per year, creating much-needed jobs for Americans. Reducing burdensome trade restrictions will also make U.S. firms more efficient, encouraging competition and reducing prices—ultimately helping consumers and spurring innovation. The President’s erratic policy of promoting trade in some areas while restricting it in others is hypocritical. Even worse, it sends mixed messages that increase uncertainty, hurt investment and job growth, and threaten American’s economic competitiveness.

Indeed it does, Mr. Olson.  Indeed it does.

Second, and speaking of mixed messages, it turns out that the Obama administration has been fighting against these exact kinds of export restrictions at the WTO.  Before I get to that glaring hypocrisy, however, a very quick summary of the US system and the applicable WTO rules is necessary.  The US export licensing system for natural gas (15 U.S.C. § 717b) provides DOE with unfettered discretion to deny an application to export natural gas to non-FTA partner countries if the agency determines that the exportation would not be in the "public interest."  GATT Article XI prohibits WTO Members from imposing quantitative restrictions on exports (and imports), including those made effective through export licenses.  Although WTO jurisprudence on licensing restrictions remains a little unsettled, one thing is pretty clear: discretionary licensing regimes are impermissible restrictions under GATT Article XI.  So, because the US licensing system provides DOE with discretion to reject any license application based on the vague “public interest” standard (as evidenced by the long delays in the aforementioned LNG applications), it could be WTO-inconsistent.

So why does this little academic lesson matter?  Well, over the last couple years USTR has filed two WTO disputes against China (of course) for its export restrictions on various raw materials (DS394) and so-called "rare earth" elements (DS431).  The US won (mostly) the raw materials case citing, among other things, GATT Article XI, and the new, high-profile rare earths dispute is just cranking up.  In each dispute, one of the primary export restrictions targeted by the United States has been - wait for it - export licensing systems for the covered products.

So, to recap, the Obama administration is attacking Chinese export licensing restrictions on key raw materials at the exact same time that it is restricting US exports of natural gas via a similarly dubious export licensing system.

You cannot make this stuff up.

On the bright side, at least China isn't, you know, really starving for energy or known to retaliate against US trade litigation with cases of its own or anything.

Oh, wait.

Umm, Yeah, About Those Amazing Chinese Solar Subsidies...

Over the last several years, China's subsidization of its domestic solar panel industry has attracted ire and envy in the United States.  Bankrupt US solar producers and the US politicians who subsidized them have been quick to deride pernicious Chinese subsidies - rather than their own corporate or policy mismanagement - as unfairly creating a global export juggernaut that has doomed their business.  I've already discussed the US Department of Energy's 2011 "blame China" parade following Solyndra's collapse, and it appears that Abound Solar and its political champions are following suit:

Abound Solar filed for bankruptcy earlier this month, succumbing to intense competition from China that has sharply driven down the cost of solar panels, said Thomas Tiller, who served as Abound's chairman.

Tiller said the Chinese government provided about $35 billion in subsidies to Chinese solar companies, resulting in sharp growth in production capacity that outpaced demand and pushed down the price for panels by more than 50 percent in just a year.

"Such a severe market change made it difficult for Abound and others to survive," he said in remarks prepared for a House of Representatives oversight committee hearing.

Prior to filing for bankruptcy, Abound received about $70 million of a $400 million loan guaranteed by the U.S. Energy Department.

The drop in the solar panel price was bigger than the Energy Department and other experts expected at the time the Abound loan was finalized, David Frantz, acting executive director of the department's loan program, said in prepared testimony.

Meanwhile, American industrial policy fetishists have been quick to note the dominance of the Chinese solar industry as proof that the US should have mirrored China and thrown even more taxpayer money at our solar panel producers.  For example, here's FP's Clyde Prestowitz throwing out a blatant I-told-you-so back in March of this year:

The solar panel industry was identified by the Chinese government long ago as a target of special attention. Indeed, I recall being in a White House meeting in 2009 to discuss the prospects for the U.S. solar panel industry. I told the administration's top economists then that unless they were prepared to match the enormous incentives China was planning to provide to its industry ,the U.S. industry would be blown out of the water. They weren't prepared to match and the industry is, in fact, now being blown out of the water. Anyone who had had the experience with Japan or who had an ounce of understanding of how strategic industry targeting and export-led growth works could have foreseen exactly what has come to pass as China has poured about $34 billion of subsidies into its industry which exports about 95 percent of its production. That would be the loss of several thousand U.S. jobs and the bankruptcy so far of 12 U.S. companies. This is not to mention the inevitable reductions in R&D spending and innovation in the face of the tsunami of imports from China.

Prestowitz, much like the US Steelworkwers union, appears to think that the billions in subsidies that the US government has thrown as American solar producers are woefully insufficient, and that just a few billion more would have all but guaranteed a globally-dominant US industry that's just brimming with profitability... you know, just like the, err, Chinese industry:

China’s top ten photovoltaic makers have accumulated a combined debt of 17.5 billion U.S. dollars so far, leading the whole industry to the brink of bankruptcy, data from U.S. investment agency Maxim Group showed.

LDK Solar, the world’s second-largest maker of solar wafers, and Suntech Power, the world’s largest solar panels producer, are the mostly likely to be headed for bankruptcy, Maxim noted....

Based on preliminary results of domestically traded photovoltaic companies for the first half, nearly 80 percent have slashed their earning forecasts while the top ten brands, listed overseas, posted a loss of 612 million U.S. dollars in the first three months this year.

Yingli Green Energy Holding Co., another leading solar power company in China, said over the weekend that the company cut its delivery growth forecast of photovoltaic modules from 15 percent to 13-14 percent for the second quarter, and gross margin from previous 4.5-4.9 percent to around 4.5 percent for the period.

“A gross margin of 4.5 percent indicates a loss, for sure, in the second quarter,” said Meng Xiangan, vice chairman of the Chinese Renewable Energy Institute. According to Meng, gross margins for China’s ten leading photovoltaic makers were all below 10 percent in the first quarter, led by Canadian Solar, who earned a gross margin of 7.7 percent but still reported a loss of around 20 million U.S. dollars. What’s worse, cash flows in Chinese solar makers are even tighter as many have rolled their debts over to 120 to 180 days, according to investment firm Helix Investment Management.

Gee, so what happened?  How could the subsidized Chinese juggernaut now be on the brink of disaster?  If only someone could have predicted this.  Oh, wait:

As tensions heighten over questionable subsidies and anti-dumping cases against China’s solar panel manufacturing sector, most non-Chinese citizens are quick to claim that China is robbing the industry from other countries. Indeed, China’s doubling of solar panel exports in 2009 and 2010 was followed by a string of bankruptcies of solar firms in other countries, including Germany and the US, in 2011. However, despite China’s huge gains in its global market share, its solar sector now likely faces a serious consequence of its explosive growth: overcapacity. Manufacturing capacity of solar panels is outpacing global demand, and as a result the prices of solar products have plunged; and now many Chinese solar manufacturers “face ‘suicidal’ prices on excess output” and are slashing prices in order to liquidate inventory.

So, it appears that all those Chinese (and American and European and...) subsidies have led to massive overproduction and a collapse in solar prices, and Chinese solar companies (and their global counterparts) simply can't stay afloat in the current market.  Of course, the current US antidumping and countervailing duty investigations of Chinese solar panel imports certainly aren't helping the Chinese industry's bottom line, but those cases very likely wouldn't have happened without all that sweet, sweet government cash to depress prices and make the industry vulnerable to anti-subsidy allegations.

Thus, the very subsidies that were designed to ensure Chinese solar industry dominance have helped cement its near-term demise (and brew up a couple trade disputes in the process).  Yes, the Chinese government might swoop in and "save" its ailing solar industry - it certainly has enough spare cash lying around to do so - but that salvation would come at a clearly huge expense.  The debt-ridden US government has no such "luxury," but considering the past few years of subsidized failures like Solyndra, Abound Solar and the rest, coupled with the experience of the super-subsidized Chinese solar failures, one must really wonder if maybe - just maybe - we're better off for it.

Protectionism's Cool... Until It Punches You In The Mouth

One of the reasons that protectionist laws and policies - thoroughly debunked in theory and practice - stick around is the fact that the costs of such actions are diffuse (e.g., tariffs force me to pay a few bucks more for a toaster) while their benefits are highly concentrated (e.g., the toaster manufacturer, protected from foreign competition, makes millions from those higher prices).  Thus, too few people spend the time to understand why free trade is the morally and economically optimal position, even though, on the whole, they'd benefit a lot from fully liberalized trade.  This is Public Choice Theory 101.

But, lemme tell ya, the ignorant sure smarten up quickly once protectionist policies begin to hurt them more directly.  The latest example of this truth comes from the Washington Examiner's Sean Higgins, who observes that US environmentalists - longtime opponents of free trade - have suddenly changed their tune because specific anti-trade policies against solar panels are hurting their "green" objectives:

They're not quoting free market economists Friedrich Hayek or Milton Friedman yet, but some environmentalist voices are asking whether protectionist trade policies aren't undermining renewable energy. And the broader Green movement may be listening.

What has them concerned is that the escalating trade war over the China's cheap solar panels. Domestic manufacturers have pushed hard for tariffs on them, and the White House has agreed.

That threatens to put the brakes on solar panel installation in the United States, which has taken off in the last few years, thanks in large part to those same cheap imports.

"Tariffs on Chinese solar are bad for us all," warned Sierra Club blogger Garvin Jabusch in a May posting. The policy, he said, is making solar panels "much less affordable for U.S. consumers."

In a post last month on the environmental news website Grist.org, Terry Tamminen, former secretary of the California Environmental Protection Agency, wrote: "If China is subsidizing solar panels, let's thank them and ask them to do more."

Last week, Bill Waren, trade policy analyst for Friends of the Earth, concluded a lengthy blog post with this warning: "Trade complaints will not solve our problems; in fact, in the long run, they may undercut clean energy and low carbon policies globally."

It's a thorny issue for the environmentalist movement. Generally they've favored any federal action that boosts the domestic renewables industry. They've also tried to build ties with Big Labor, forming the BlueGreen Alliance. And they've tended to scorn anything that smacks of free market economics.

Consider this the green trade war's silver lining, I guess.  Maybe next time these environmentalists - having now experienced firsthand the pain and immorality of protectionism - won't be so fast to bash the WTO (which has been trying to finish a big agreement on liberalization of trade in environmental goods) or to embrace protectionism.

Maybe.

New Preliminary Anti-dumping Duties on Wind Towers Provide the Same Old Lessons

On Friday, the Department of Commerce announced preliminary anti-dumping duties on wind towers from China and Vietnam ranging from 20.85% to 72.69% and 52.67% to 59.91%, respectively.  The announcement itself is pretty boring: as with DOC's May announcement re: prelim AD duties on Chinese solar panels, the "non-market economy" methodology in these cases pretty much ensures pretty high anti-dumping duties (hence, the myriad calls for reform).  Nevertheless, the New York Times' write-up of Friday's preliminary decision - again, like the solar panels case - provides a few good lessons about US trade remedies:

First, the NYT article reveals the glaring disconnect in protectionist rhetoric about trade in green goods.  After noting that the imported wind towers also are subject to preliminary anti-subsidy duties (announced in May), the article provides the wind industry's response:

How the tariffs will affect the market is unclear. Like solar, the wind industry has been under pressure to bring down the cost of producing power to better compete with conventional fuels, a task made more difficult by the low price of natural gas and the expiration of an important subsidy at the end of this year. Wind industry executives say that the looming end of the support, a production tax credit, has already led to a decrease in demand for equipment and layoffs.

“On one hand, you say this is good for American manufacturing to have tariffs if they’re truly dumping towers below their cost into the U.S.,” said Michael Garland, chief executive of Pattern Energy, a wind developer. “On the other hand, it’s not going to solve the bigger problem we have, which is a dysfunctional Congress that can’t get anything passed. Because there’s this cliff that everybody’s facing at the end of the year, you’re not going to have any manufacturing in the U.S. anyway."

Yes, you read that correctly: after praising duties on (allegedly) subsidized Chinese and Vietnamese wind towers, Mr. Garland immediately turns to... advocating more US subsidies.

You cannot make this stuff up.

Second, the NYT article demonstrates once again that, in today's globalized economy, bilateral protectionism typically won't resuscitate an ailing or uncompetitive industry because other low-cost imports will fill the void (aka "trade diversion"):

On the solar side, there are also questions about the impact of the duties. The major Chinese solar manufacturers have been able to keep prices low and skirt the tariffs by purchasing cells, the component of the panels to which the tariffs apply, elsewhere.

Imports of Chinese panels and cells decreased in May to $124 million from $226 million the year before, according to the Coalition for American Solar Manufacturing, an industry group that supports the trade cases. But shipments from other countries like Malaysia, Taiwan and the Philippines were up sharply. In the case of Malaysia, shipments were up by 950 percent over the previous May, to $135.5 million, exceeding China, according to the coalition.

Finally, the article shows that duties aren't the only economic harm that trade remedy cases - or the threat of such cases - can inflict on consumers:

Although the overall solar market continues to grow, executives and analysts warned that uncertainty about the outcome of the trade cases, which are only at the preliminary stage, could damp enthusiasm for future projects because costs are unclear.

“I’m paying X rate today. Am I going to have to pay a duty on that six months, a year down the road?” asked John Smirnow, a vice president of the Solar Energy Industries Association, a trade group that is advocating for negotiations between China and the United States to occur simultaneously to the legal cases.

Given that US solar producers have received a boatload of their own state and federal subsidies and are suffering from overcapacity, uncertainty surrounding potential duties on dumped or subsidized solar imports definitely isn't limited to American consumers - something that no one who supports US subsidies seems to acknowledge.

Maybe they will if a few foreign AD/CVD investigations start.