Executive summary

The commitment to limit the increase in global temperatures to 2°C and ideally 1.5°C was recently reaffirmed at the United Nations Framework Convention on Climate Change’s meeting in Sharm El Sheikh in November 2022. To achieve this, substantial reductions in emissions of greenhouse gases are needed by 2030, and net emissions should fall to zero by 2050. This will require a transformation of the energy sector, with massive implications for supply chains. In this report, using the example of the supply chain for solar panels, we show how global trade will be essential to sustain the transition, with important implications for trading relationships.

The scale of the challenge is illustrated by the International Energy Agency’s (IEA’s) Net Zero by 2050 scenario under which power generation from solar photovoltaics (PV) increases from approximately 1,000 terawatt-hours (TWh) in 2021 to almost 7,500 TWh in 2030. To reach this, the rate of installation of solar generation facilities needs to increase from the 2021 volume of 150 GW to nearly 900 GW annually. Using the IEA’s top-down projections, combined with data from the World Bank on solar potential, we have estimated in this report the required 2030 solar capacity for economies in the Sustainable Trade Index (STI), and for most this will be a large multiple of current capacity. The STI is produced by the Hinrich Foundation and the IMD World Competitiveness Center and ranks 30 key economies on their capacity to conduct global trade in a sustainable manner. The large growth in solar installations requires a correspondingly large growth in manufacturing. Most economies do not have domestic solar industries. Only China, Malaysia, and South Korea are currently active in all segments of the solar manufacturing value chain. Other countries have some involvement but are primarily focused on the downstream segments of cells and modules production. A key conclusion of this work, therefore, is that trade growth in solar technologies is indispensable to the global drive toward Net Zero climate goals, and in particular trade between STI economies.

In common with other renewable energy technologies, access to specific raw materials is essential to manufacture solar panels. Silver is a material component of the value of the inputs even though it represents only 0.03% of the weight of a solar panel. Three countries are responsible for producing over half of global production; in contrast, silicon, which contributes 4.4% of the overall weight of the finished product, is a very common mineral. However, only very pure silicon sources can be used, and the conversion into polysilicon is an energy intensive process. Polysilicon production is dominated by China, which has increased its market share from 56% to 83% between 2015 and 2022. The last ten years have seen all parts of the solar supply chain become dominated by China, if the location of manufacturing does not change then exponential growth in solar capacity means exponential growth in imports of solar panels from China. This analysis demonstrates that diversification of supplies will be important to protect the supply chain.

Production of solar PV is very energy intensive, and production continues to rely on electricity produced from fossil fuels with approximately 360 kilograms of carbon dioxide equivalent (kgCO2e) emitted for each kilowatt of capacity produced. Approximately 45% of global polysilicon production is located in China’s western region of Xinjiang, where coal is the dominant fuel in electricity production. Emissions reduction plans should take account not just the cost of installing solar panels, but also the location and associated greenhouse gas emissions of their production. The evidence suggests that it may take up to five years for the CO2 saved by installing a solar panel to offset the CO2 emitted in its production in some locations.

We find that there are potential benefits from applying Border Carbon Adjustments (BCA) even those explicitly covering the solar trade. BCAs are a novel trade policy that countries are showing increasing interest in enacting. BCAs are tariff mechanisms intended to level the playing field for economies that produce at higher costs due to CO2 emissions policies or carbon taxes. A border carbon adjustment levies an import tariff based on the amount of carbon embedded during the offshore production process. It is likely that the European Union will be the first jurisdiction globally to implement a border carbon adjustment, aiming to do so by 2026.

If BCAs are implemented, this would increase costs to install solar capacity and this may influence the pace of deployment. Recent experience of implementing import tariffs on solar by the US and India suggest that even a relatively modest carbon price of $100 per metric tonne of CO2e would raise the price of an imported solar panel sufficiently to impact trade and by extension the speed of solar capacity installation. It is possible, however, that solar panels would be exempted from BCAs as an environmental good. But given the complexity of modern supply chains it is possible that such goods are inadvertently covered. There has been a distinct lack of progress in defining ‘green’ goods in multilateral negotiations. Exemptions are likely to be difficult to implement when there are intermediate goods involved, such as aluminium which is specifically tariffed in the proposed EU scheme and is a significant input in solar panels.

While the evidence from the US and India suggests that a border carbon adjustment will impact trade in the short-term, it may achieve its intended objective of shifting trade to countries with lower energy intensity. The US for example is currently using trade policy in an attempt to re-shore solar manufacturing, with some success. A shift of solar manufacturing from China to the US would likely reduce embedded carbon in panels. The US relies far less on coal and more on fuels with lower emissions factors such as natural gas. The existence of substantial amounts of nuclear in the US’s generation mix also substantially reduces its emissions footprint. Other countries that have expanded solar manufacturing recently include Malaysia, Vietnam, and Thailand. All three have a lower reliance on coal than China. Vietnam’s hydropower stands out for its low emissions. If solar production were to shift to these countries, this is also likely to reduce carbon emissions.

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