Welfare and Environmental Effects of Subsidies and Import Tariffs in North–South Trade in Renewable Energy Equipment

Abstract

The recent China–EU and China–USA trade disputes over solar panels have no end in sight. This thesis attempts to examine the welfare and environmental effects of upstream and downstream environmental subsidies as well as an upstream trade policy, using a model where a developed country (the North) imports renewable energy equipment from a newly industrialised country (the South). Chapter 1 develops a two-country, three-good model to investigate the welfare and environmental effects of unilateral Northern policies – consisting of a downstream feed-in tariff premium for residential renewable electricity generation and an upstream import tariff on renewable energy equipment. We consider two market structures in the equipment sector – a Southern monopoly and an asymmetric Cournot international duopoly producing a homogeneous product. We show, inter alia, that domestic feed-in tariff premium always increases the endogenous Northern import tariff, and vice versa. Pollution externality reinforces rather than necessitates the policy complementarity. Chapter 2 conducts numerical simulations to illustrate Chapter 1 and address issues not solvable analytically. We study both market structures and generate a Northern policy mix. Then we shift to bilateral policies by introducing a Southern cost-reducing R&D subsidy. We find that the counter-intuitive net installation-dampening effect of the Northern FIT premium in the monopoly case is driven by its strong indirect price-raising effect, since the premium induces a higher optimal domestic import tariff. We also compare the equilibrium levels of policies, welfare and pollution harm across cooperative and non-cooperative strategies, as well as the Northern policy mix and Northern single policy scenarios. Chapter 3 theoretically extends Chapter 1 by considering three main alternative renewable energy policy instruments. Specifically, we examine how a Southern R&D subsidy and a Northern output subsidy interact with the Northern FIT premium and import tariff. Then we explore the effect of trade protection in the presence of a binding emissions target or a binding renewable energy share target. Emissions are unaffected under a binding emissions target, but interestingly, they are decreasing in the degree of trade protection under a binding renewable energy share target. Show more