🕵️♀️ Energy Transition & Deglobalisation
Exploring reshoring impacts on the speed and cost of renewable energy deployment.
On May 14th, President Biden announced a slew of new tariffs on Chinese exports in strategic sectors such as semiconductors, steel, and electric vehicles (EVs). This policy strategy, designed to boost American manufacturing—or reshoring, is the latest act in a trend of deglobalisation.
Countries reducing their dependence on global supply chains, as well as financial integration, comes amid tense geopolitical settings. In this edition of Seagnal, we will contextualise the new tariffs, and explore the impacts of reshoring on the energy transition, crucial to decarbonising our economy.
The tariffs
The new tariffs build on those imposed by the Trump administration in 2018, making them a rare bipartisan initiative. While the previous strategy involved imposing broad tariffs on most Chinese exports, the Biden administration is more focused on key sectors such as clean energy, semiconductors, and medical supplies:
Electric Vehicles (EV) tariffs increase from 25% to 100% in 2024.
Lithium-ion EV batteries tariffs increase from 7.5%% to 25% in 2024.
Battery parts tariffs increase from 7.5% to 25% in 2024.
Solar cells tariffs increase from 25% to 50% in 2024.
Lithium-ion non-EV batteries tariffs increase from 7.5% to 25% in 2026.
(Full list here)
These increases may seem extreme, but an economic analysis of their impacts reveals they are more of a political statement rather than a practical economic measure:
Yet they mark a clear intent to reshore key energy transition industries.
The trade-offs of reshoring
Favorising local manufacturing will increase jobs, supply chain resiliency, and reduce lifecycle emissions (up to 30% less GHG!). However, training employees, building factories, and creating new supply chains take time and money; reducing the speed and affordability of the energy transition.
For example, raising import taxes, the tool used to boost reshoring, will make energy transition products, such as EVs and solar panels, more expensive for the end customer in the short term. Americans won’t be able to access cheap Chinese EVs (which can go as low as $12’000 USD) unless paying a 100% tax. An
You could say tariffs are a little bit like an investment upfront, you pay more now to get the benefits in a few years when the factories are up and running. But remember every green electron we don’t produce means more carbon in the atmosphere, so this strategy also negatively impacts climate.
While tariffs are the stick used to boost domestic production, there is also a carrot in the form of subsidies. Clean tech industries worldwide are getting substantial government subsidies. We explored this in a previous Manufacturing Wars article, noting that the U.S. alone has provided nearly $400 billion in tax credits and subsidies for low-emission energy production.
Summarising broadly, everyone thinks it’s important to manufacture more domestically, or at least prevent unfair competition (meaning other countries’ subsidies) in key sectors. To incentivise reshoring, countries are raising tariffs and subsidies, which are further degrading trade relations and making critical products more expensive for end consumers. And reducing the speed and affordability of the transition is costing the environment.
The double whammy for the energy transition
But the trade-off doesn’t end here: reshoring is capital intensive, and tariffs are inflationary in the short term. In the current economic environment of high inflation and interest rates, this approach could exacerbate existing economic hurdles.
Higher interest rates, which countries are using as a measure to reduce inflation, are hurting the energy transition. Let’s compare, as an example, the cost of a residential solar system with a 0% vs a 5% 10-year loan, on a 20,000 USD$ system:
0% 10-year loan - Monthly repayment: 166,67, Total Cost: $20,000.
5% 10-year loan - Monthly repayment: 212.13, Total Cost: $25,456.
A 5% increase in loan rates for a 10-year loan, adds up to a 27% increase in total system costs! Compared to the impact of the new increased tariffs (from 25% to 50%) on solar cells, which will increase the cost of a system by ~ 2.5 - 5% (because solar modules only make up ~ 10-20 % of the cost of a residential solar installation).
So good or bad?
While the new tariffs are not economically significant, they reveal a common thread among countries toward deglobalisation. This shift, or at least pause, in globalisation is highlighting the need to balance economic, geopolitical and environmental trade-offs.
Enhancing domestic manufacturing and reducing global supply chain dependency, comes with short-term economic costs, trade relations degradation, and potential delays in the energy transition. Interest rates are making it harder for end consumers and businesses to invest in the energy transition.
I believe these trade-offs and hurdles are much harder to resolve in a zero-sum world. So the real question might be how can we leverage current and future technologies to sustainably continue to “grow the pie”? Instead of racing to the bottom on EV manufacturing shouldn’t we work hard to capture more value in creating electric driverless cars? Or EV charging networks that help stabilise the grids? The oportunities seem to be endless.
🔗 - Check these out
Cool internet pages, related or not to sustainability, I found this week:
A16z State of Crypto Index - Metrics on cryptocurrency adoption across sectors.
Sriram Krishna Memos - A collection of internal company memos.
From San Fransisco 🇺🇸,
Jean
PS: Got tips to improve the newsletter or topics you would like me to explore? Reply to this email with your suggestions!
Glad you’re writing this from SF !