Economic and environmental impacts of the WTO ruling on India’s solar program

Economic and environmental impacts of the WTO ruling on India’s solar program

The WTO ruled against India on its National Solar Mission, arguing that its domestic contents requirement discriminates against U.S. solar panels.

Since 2013, India and the United States have been engaged in a trade dispute concerning the former’s solar program. The program, known as the Jawaharlal Nehru National Solar Mission, was established in 2010 to simultaneously address India’s energy security challenges and to bring the nation onto a path towards sustainable development.

More specifically, its goals were to transform the country into a world leader in solar energy with an aggressive target of increasing its solar power capacity to 100GW by 2022 and to reduce the cost of solar power generation through policy implementation, research and development, and domestic production of products and materials.

On February 6, 2013, the U.S. filed a case with the World Trade Organization (WTO) arguing that the domestic contents rule in India’s National Solar Mission discriminates against imported solar panels from the U.S. Three years later on February 24, 2016, the WTO ruled in favor of the U.S., stating that the mission had indeed discriminated against imported solar panels. India has stated that it would submit an appeal against the ruling so while this fight is not yet over, the recent ruling itself has several implications.

Protectionist policies

Issues surrounding domestic content rules, as demonstrated in this case, are tricky. India is certainly not the only country to have such a requirement. Other countries like China and even many U.S. states also have “buy local” requirements. This was not the first case where “buy local” requirements were under dispute. For example, in 2014, there was a similar WTO ruling where Japan filed a case against Canada for Ontario’s 50% domestic content rule for renewable projects to qualify for the province’s feed-in tariff program and Ontario eliminated the domestic content provisions three weeks after the ruling.

From a political standpoint, the WTO ruling in the U.S.-India case sent a strong message to India and other countries that may have been considering the implementation of such domestic content rules. While these measures are protectionist, it makes sense for governments to implement such rules to stimulate the economy and create jobs, especially in times of slow economic growth and rising levels of unemployment.

Indeed, since the implementation of the National Solar Mission, major solar companies have announced their plans to establish factories in India to produce solar cells, modules, and panels, leading to job creation and allowing politicians to gain domestic support in the short-term.

The ruling in this case has closed the imbalance between domestic producers and consumers. Governments implement domestic content rules to support producers in their own countries. Placing restrictions on imported solar panels and modules, which may be cheaper for consumers, would prevent domestic producers from going out of business because consumers’ choices will be limited to those that are produced domestically.

However, in most cases, consumers do not discriminate between domestic or imported products as long as they are cheaper. In this sense, the domestic content rules had generated profit for producers at the expense of consumers. With this WTO ruling, cheaper foreign panels will enter the market, thereby driving down the cost for consumers.

Combating climate change

The success of this program has made the country’s solar industry to quickly become one of the fastest growing solar industries in the world and led India to make the National Solar Mission a core pillar for meeting its climate obligations to COP 21. In fact, during times of weak global economy with high unemployment rate, there is fear that governments may continue to utilize protectionist policies. Nevertheless, in the long-term, such protectionist trade policies are not effective in achieving green growth because they do not drive down cost or foster innovation in clean energy technologies.

From an economic perspective then, the ruling will serve as a catalyst for innovation in clean energy technologies. Such innovation is crucial for tackling climate change and achieving sustainable growth. Competition plays a major part in innovation. With domestic producers becoming forced to compete against foreign producers after this ruling, there may be more room for both foreign and domestic companies to innovate and produce better technologies.

Although many environmentalists have criticized the WTO ruling by arguing that it was a setback in tackling climate change, the impact on India’s ability to meet its climate targets may not be as serious as perceived.

While India will now have to allow for imported solar panels instead of relying solely on domestic ones to meet its targets, it does not necessarily mean that the nation would no longer be able to fulfill these climate obligations from solar power generation. India could still generate its electricity from solar power. The panels that are utilized in the plants would just not come from those supplied by domestic solar producers alone. If cheaper imported panels became available, consumers would still continue to use solar power for electricity generation.

About Author

Aiko Shimizu

Aiko Shimizu covers Japan’s renewable energy policy and clean tech investments at Bloomberg New Energy Finance. Her previous experiences include working at the United Nations, International Tribunal for the Law of the Sea, Pacific Forum CSIS, and the East-West Center in Washington. She received her undergraduate degree in Political Science and International Studies from the University of Chicago and graduate degrees from Columbia University’s School of International and Public Affairs (SIPA) and the University of Pennsylvania Law School.