The climate cost of America’s infinite tariffs

There are few places where inflation is felt as profoundly these days as tariff rates.

A few months ago, President Donald Trump's election campaign promise of a 10% levy on all US imports seemed shocking. Now we're looking at a 46% rate on Vietnam, and 145% on China.

This week, Washington went one better: If you're manufacturing solar panels in Cambodia, you could face a 3,521% impost on any modules sent off to the US. Alongside lower levies imposed on Malaysia, Thailand and Vietnam, that means about 80% of US panel imports face taxes that make Trump's Liberation Day tariffs look modest.

Levies as high as these are essentially bans, and the effect could be profound. For the best part of a decade, the cost advantages of photovoltaic electricity have made it the clear front-runner every time a US power company has looked to build a new plant. Two-thirds of new generating capacity last year was solar, with most of the remainder made up of wind and batteries that are often co-located with it. Everything else took a scant 6%. 

Thanks to Trump's pro-fossil fuel industrial policy (as well as the short-sighted protectionism of Joe Biden) that clean energy epoch may be coming to a close.

To see why, consider what the latest round of tariffs do to the US solar supply chain. They apply not only to modules — the large panels that are installed on your roof — but to cells as well, the bath tile-sized components that can be seen behind a module's protective glass. That's a problem, because the US has next to no capacity for producing cells — just 2 gigawatts annually compared to the 50 gigawatts of solar that was installed last year.

If you have a contract to build a new solar plant and you don't already have the modules in your inventory, the options are to either pay tariffs worth several times the value of the equipment itself, and try to negotiate a higher rate with your customer; cross your fingers and hope that a domestic cell facility gets built soon; or cancel the deal altogether.

Years of bipartisan protectionism have already left the industry in a weakened state. Almost uniquely among major markets, the cost of building solar projects has more or less stood still in the US over the last five years.

Across China, Germany, India, Japan and the UK, plummeting expenses meant building new solar power last year averaged about 60% less than the cost of using baseload gas. In the US, it was 24% more expensive. 

The European Union installed about 39% more solar over the five years through 2024 than the US. Industry groups expect the EU to pull further ahead over the years to come, despite geography which is fundamentally less suited to solar.

The latest round of tariffs will make all of this worse. As a rough rule of thumb, about 30% of the cost of utility-scale solar in the US goes on buying panels (the rest is the cost of land acquisition, labor, and other components such as inverters and mounting systems). Make those panels multiple times more expensive, and the cost advantage that solar power has over the fossil alternative will disappear.

Morgan Stanley last week estimated that even the 10% initial tariffs on Southeast Asian countries would, when combined with Trump's promised elimination of Biden-era renewable subsidies, lift the cost of solar projects within spitting distance of what you'd pay for baseload gas. That's enough to make fossil fuel clearly the better option for customers who want on-demand electricity and don't care about the environmental cost. The latest round of triple-digit tariffs now promised for solar will tilt the playing field yet further in favor of gas.

Put together, that threatens to set the energy transition back a decade, to the years when renewables simply couldn't compete with fossil fuels on price. It's potentially worse than that. Back then, the tiny amounts of solar on the grid meant there was no need for storage batteries to provide backup after sunset, or offset the brutal midday market when the sheer volume of panels connected can drive electricity prices below zero.

These days, even solar-with-batteries can be competitive with gas if the manufacturer buys equipment at global market prices. If you're dependent on imported lithium-ion cells attracting China's 145% tariffs, or the 25% or 24% levies imposed on South Korea and Japan respectively, that proposition looks a lot dicier.

Amid what Trump declared on his first day in office to be a "national energy emergency," clean power faces special taxes amounting to hundreds or even thousands of percent. Fossil fuels are one of a handful of sectors that are still allowed to enter the US tariff-free. Renewables will win the future almost everywhere that there is a free market in electricity — but that's not the world being constructed in the US right now.

David Fickling is a Bloomberg Opinion columnist covering energy and commodities. 

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.