Why Trade Wars Can Weaken Carbon Pricing’s Impact

Putting a price on carbon should make clean energy more competitive. If emitting greenhouse gases becomes more expensive, renewable electricity and lower-carbon technologies gain an economic advantage. For investors, that appears to create a straightforward relationship between climate policy and clean energy opportunities.

However, the companies delivering those technologies also depend on minerals, manufacturing equipment, international customers, and financing. Trade restrictions can disrupt all four. A stronger incentive to decarbonize can therefore arrive alongside higher costs and greater uncertainty for the businesses expected to make it happen.

A study by Jiayue Jiang, published online in Energy Policy in September 2026, examines this tension in China’s clean energy markets.¹ Its findings suggest that carbon pricing becomes a weaker signal for renewable energy valuations during trade conflict. The broader investing lesson is that policy support and supply chain resilience need to be assessed together.

How Carbon Pricing Reaches Clean Energy Investors

Carbon pricing works by attaching a cost to emissions, often through tradable allowances. When carbon-intensive production becomes more expensive, cleaner alternatives can become relatively more attractive. This can influence investment decisions even before new infrastructure is built.

Financial markets respond to expectations. If investors anticipate stronger demand or improving competitiveness for renewable energy, they may assign higher values to companies supplying solar panels, wind equipment, and batteries. Better valuations can help businesses raise capital, although share prices alone do not guarantee additional deployment.

Jiang analyzes 136 monthly observations from January 2013 through April 2024 using a model that allows relationships between variables to change over time. The analysis connects geopolitical risk, carbon pricing, energy metals, and Chinese clean energy stock valuations.

The carbon pricing measure combines allowance prices with a policy-informed simulated series. Clean energy and energy metals are represented primarily by equity indices. This makes the research particularly relevant to investor expectations, while also requiring care when interpreting its conclusions about the wider energy transition.

What The Study Found During The Trade War

Before the 2018–2019 US–China trade war, the model identifies a positive response of clean energy valuations to carbon pricing shocks. During the trade war, that response weakens substantially.

At the four-month horizon, the estimated cumulative response falls from 0.0401 in the 2015–2017 baseline period to 0.0141 during 2018–2019, a reduction of 64.8%. At six months, the estimated reduction reaches 74.9%, although the trade-war response itself is statistically indistinguishable from zero at that horizon.

These percentages describe changes in modeled responsiveness to carbon pricing. They do not mean clean energy stocks fell by those percentages, or that emissions reductions declined by the same amount.

The table reports cumulative responses to a one-standard-deviation carbon pricing shock, using the paper’s estimates. Subsequent periods show partial recovery, but the response remains below the prewar baseline. That pattern suggests trade conflict can leave a lasting imprint on how investors interpret climate incentives.

Critical Minerals Can Dilute Climate Policy Incentives

The paper identifies energy metals as an important transmission channel. Before the trade war, the estimated indirect effect through metals markets accounted for 39.9% of the total four-month response. During the conflict, that indirect estimate turned negative and became statistically insignificant.

This distinction matters. The direct carbon pricing effect remained positive, while the metals channel weakened. The results are consistent with a policy incentive being diluted by supply concerns, rather than disappearing entirely.

Clean energy equipment requires material inputs that cannot always be replaced quickly. Batteries need specific chemical compositions, electricity networks need conductive metals, and some wind turbines depend on permanent magnets. Restrictions affecting one essential component can delay an entire project.

The International Energy Agency’s Global Critical Minerals Outlook 2026 reinforces this concern. It reports that refining concentration continued to increase for most minerals in 2025 and that expanding export controls have turned supply vulnerabilities into immediate economic risks.

An important implication follows: abundant mineral resources do not necessarily equal secure industrial supply. A country may possess deposits while lacking the processing facilities, equipment, or expertise needed to convert them into usable materials.

Why Uncertainty Can Matter As Much As Tariffs

A tariff adds a visible cost. Uncertainty changes whether businesses are willing to commit capital at all.

Consider a hypothetical renewable energy developer. Higher carbon prices improve its expected competitiveness against fossil-fuel generation. However, an uncertain delivery date for equipment increases construction risk, while possible export restrictions complicate cost estimates. Lenders may demand more protection, and investors may require a higher expected return.

The project can become harder to finance even while its underlying climate-policy advantage improves. This is particularly relevant to infrastructure, where substantial spending occurs before years of expected income.

The geopolitical context extends beyond a single bilateral dispute. Reuters’ September 2026 reporting on the worldwide battle for resources describes overlapping competition for strategic materials. For investors, the practical issue is whether a company can keep operating when access rules change.

Clean Energy Companies Have Different Trade Exposures

The study also reports differing sector trajectories. Chinese solar companies recovered after an initial valuation decline, while wind businesses experienced more persistent weakness. Battery and storage companies showed stronger performance after 2020.

These observations challenge the idea that clean energy is one uniform investment theme. Technologies differ in their materials, export exposure, financing needs, and ability to substitute suppliers.

For investors comparing businesses, three questions provide a useful starting point:

• Where are essential materials processed, and can alternative suppliers be qualified?
• Can contracts pass higher costs to customers without undermining demand?
• Can the business finance delays or factory expansion without repeated capital raising?

Securities.io’s recent coverage of digital technology and supply chain resilience adds another dimension: improved visibility can help companies anticipate disruption. However, detecting a bottleneck does not automatically create an alternative factory or qualified supplier.

First Solar Offers A Different Supply Chain Approach

For investors interested in a company addressing part of this challenge, First Solar (FSLR ) provides a relevant example. Its solar modules use cadmium telluride semiconductor technology rather than conventional crystalline silicon.

The company’s cadmium telluride technology supports an integrated manufacturing process and reduces dependence on China’s crystalline silicon supply chains. This creates a useful connection to the study: technology choices can change a manufacturer’s exposure to geopolitical disruption.

First Solar’s second-quarter 2026 financial results reported a contracted sales backlog of 45.1 gigawatts. However, quarterly sales declined partly because of customer contract terminations. Even a differentiated supply chain does not eliminate customer risk.

First Solar was not evaluated in Jiang’s study. Its relevance is illustrative: investors can examine whether a different technology and manufacturing structure create a durable operating advantage. That assessment still requires attention to material availability, policy exposure, execution, and the valuation paid for the business.

Supply Security Has An Economic Price

The most useful extension of the research is that resilience should be treated as an investment expense with potential economic value. An alternative supplier or additional inventory may raise costs during stable periods but protect production during disruption.

This creates a difficult trade-off. Cheap, concentrated supply chains can accelerate deployment today. Diversified supply chains may cost more while reducing the risk of interruption tomorrow. Investors need to evaluate whether the additional spending protects future earnings enough to justify it.

The study’s China-focused findings do not establish a universal effect for every carbon market. Its partially simulated carbon price series and model assumptions also limit how confidently specific mechanisms can be isolated. Additional tests using physical deployment measures support the broader pattern, but the headline percentages concern financial market responses.

Carbon pricing remains an important incentive. The research shows why investors should look beyond that incentive to the industrial system delivering it. Clean energy opportunities become more credible when policy support, dependable supply, and sustainable financing reinforce one another.

References:

¹ Jiang, J. (2027). Carbon pricing and clean energy markets: Policy effectiveness in an era of trade wars. Energy Policy, 220, Article 115624. https://doi.org/10.1016/j.enpol.2026.115624