On Jan. 22, president Trump announced a new import tariff on solar cells and modules. The controversial tariff is intended to encourage domestic manufacturing of solar products. We doubt the tariff will have the intended effect and instead will have plenty of unintended consequences—like costing the US taxpayer.
Ironically, the US solar industry is against the tariff. The current tariff case was started by two foreign-owned, failed companies. The rest of the US solar industry is largely against the tariff because it wants to provide the lowest cost systems to customers, using the lowest cost components, no matter where they are manufactured. This isn’t new; from the beginning, US solar companies have built the majority of their manufacturing facilities overseas.
Adding a tariff like this one won’t change the economics enough to cause investment in US manufacturing because that situation never existed. But it could decrease demand from consumers and that creates risks for the 260,000 people employed by these and other companies in the US who sell, install, and maintain solar power plants. There’s another risk that shouldn’t be ignored: US tax revenue.
The US solar industry enjoys an investment tax credit based on the cost of the solar-power system. The owner of the solar project can take a credit against their taxes for 30% of the vast majority of costs (some costs are excluded but we’ll ignore those at the moment). The new import tariff will be one of those costs. So if the tariff cost is passed onto the customer, the amount of tax credit will increase.
How much will that be?
Using volume and cost estimates from GTM research, the new tariff, and tax-credit plans currently in place, we find that the total amount of increased tax credit—and therefore the amount reduced from government coffers—could be $444 million over the next four years.
|Total US solar volume (GW)||10||11||12||13|
|Imported US solar volume (GW)||8||9||10||10|
|Non-exempt US solar volume (GW)||6||6||7||8|
|Cost / Watt||$0.37||$0.33||$0.30||$0.27|
|Tariff / Watt||$0.11||$0.08||$0.06||$0.04|
|Tax credit percentage||30%||26%||22%||10%|
|Credit / Watt from tariff||$0.03||$0.02||$0.01||$0.00|
|Total tax credit from tariff ($M)||$183||$136||$94||$30|
The tax-credit benefit doesn’t go to solar companies. It goes to a select number of large banks that can manage the credit’s complexity. In 2017, 75% of the total tax credit, or $3.5 billion, was taken by five banks: Bank of America, Wells Fargo, Citigroup, Warren Buffett’s Berkshire Hathaway, and Bank of New York Mellon, according to Bloomberg (pdf).
These banks invest in solar projects and take the tax losses as a part of their return on investment. Since there is a limited number of banks who are involved, they can command high returns—much higher than any other investor. So the $444 million will be a nice profit generator for these banks.
Another winner is a company called First Solar, which is exempt from the import tariff because they use a different technology than the Chinese companies. So while the customer pricing will go up from the tariff, First Solar’s costs won’t go up—even though their manufacturing is mostly overseas. And, indeed, shares in First Solar were up as much as much as 4% in aftermath of the decision.
It’s unclear to us why the government made a distinction based on technology since all technologies compete head-to-head in the marketplace.