When President Obama goes to India to help celebrate Republic Day, he will have two priorities: to further open India’s market to US exporters; and to energize India’s efforts to tackle climate change. Sorry for the pun, but renewable energy could be a key link between these two objectives, if a nasty trade dispute doesn’t get in the way. No one expects India to follow in China’s footsteps and commit to a specific target for greenhouse gas (GHG) emissions, as Xi Jinping did when President Obama went to Beijing last fall. But Prime Minister Modi wants to expand India’s solar energy capacity 30-fold over the next decade—a $100 billion investment that would help contain GHG emissions. And US investors would like a piece of the action.
Unfortunately, the United States and India are engaged in a trade dispute over India’s requirement that a certain percentage of solar energy projects use Indian components. World Trade Organization rules generally prohibit such “local content requirements,” though the dispute settlement panel has yet to rule in this particular case. The WTO also has rules governing other types of subsidies and US policymakers used those to impose duties on solar panel imports from China last year (because of allegedly unfair pricing and subsidies).
So do these disputes mean that President Obama is prioritizing trade over climate change? A bit of background may be helpful. WTO rules allow subsidies as long as they are not discriminatory and, in theory, that is the right approach. Both climate change policy and economic welfare would be in better shape if countries sourced renewable energy technologies from whomever produces them most efficiently. But what if governments also want to create jobs at home and are leery of subsidizing technologies that might benefit foreign producers?
Wearing his academic hat, my former colleague Arvind Subramanian argued that the United States, and the WTO, should give China’s subsidies a pass. By lowering the price of solar panels, Arvind and Aaditya Mattoo note here, direct production subsidies encourage adoption of the technology—in other countries as well as China. That has positive global spillovers by reducing GHG emissions, from which the United States benefits as well.
As Arvind and Aaditya argue, however, local content requirements “merely induce the substitution of more costly domestic inputs for cheaper foreign alternatives, and therefore do not further—they may even hinder attaining—environmental objectives.” To the extent that these content requirements deter foreign investment, they also increase the financial subsidy that the Indian government will have to bear to achieve its goals, leaving fewer public resources for health, education, and other important priorities.
So a deal to open India’s solar energy market would help India meet its ambitious renewable energy targets; help President Obama achieve the goals for his trip; and help the planet. Arvind is now the Chief Economic Adviser to the Indian government. I hope his new colleagues have read his CGD paper!