In May 2024, the Biden administration announced the results of a multi-year investigation into whether to extend the Trump administration's hefty tariffs on Chinese products, originally imposed in 2018 under Section 301 of the Trade Act of 1974. Biden decided to not only keep most of those tariffs in place, but to expand them to a suite of clean energy products, including electric vehicles (EVs), batteries, and solar cells (White House, 2024).Why would an administration that prides itself on being the most climate-friendly in history take steps that could increase the price paid by American consumers for clean energy products? Wouldn't $10,000 Chinese EVs be better for the climate than U.S. models priced at $30,000 or higher? There are three reasons for this course of action. First, tariffs to stabilize a domestic clean energy industry that does exist or can are preferable to carbon taxes or free trade that doesn't or can't. Second, trade between a monopolist and non-monopolist cannot be free and introduces other distortions that may be more significant over the medium to long term. And finally, the specific design of Biden's tariffs minimizes the cost of his strategy, though more can be done to ensure the long-term viability of domestic and global clean energy production. In the sections that follow, we argue why tariffs are a necessary backstop of clean industrial policy.
MISSING MARKETS, SECOND BEST SOLUTIONS?Climate change is a massive market failure, where firms producing carbon emissions generate negative externalities on society at large. Faced with this challenge, most economists agree that pricing emissions is the most efficient way to get fossil fuel-using firms to internalize this externality (see, for example, Metcalf, 2018). Many even agree that it is worthwhile to impose carbon tariffs at the border, both to avoid emissions at home simply migrating abroad (i.e., carbon leakage), and to manage the distributional consequences of home-disfavoring taxation. Taken together, this mix can be seen as creating a carbon market.The only problem: The U.S. political system has not produced such a market, at least nationally. Climate action was largely moribund during the Bush II and Trump administrations. The efforts of the
