Navigating Global Trade Challenges in the Clean Energy Sector

Addressing Global Trade Challenges in Energy Transition

The Energy Transitions Commission (ETC) recently released an insightful briefing note titled Global trade in the energy transition: principles for clean energy supply chains and carbon pricing. This document highlights the pivotal role of technological advancements and effective carbon pricing in facilitating a smoother global energy transition. However, rising concerns regarding concentrated supply chains and the perception of carbon border adjustments as protectionist measures pose significant threats to progress.

The Importance of Policy Principles

In the briefing, the ETC proposes two essential areas of focus. The first is the development of domestic supply chains through six guiding policy principles. The second area addresses carbon pricing and carbon border adjustment mechanisms (CBAMs) with an aim to establish global agreements that can effectively drive decarbonization in challenging sectors.

Nearshoring Clean Technology Supply Chains

Over the past decade, the costs associated with various clean energy technologies have dramatically decreased. For instance, solar photovoltaic module prices have plunged by 94% since 2011, and lithium-ion battery prices have fallen over 92% since 2010, while their energy density has doubled. Additionally, in recent years, nearly two-thirds of electric vehicles sold in China have become more affordable than equivalent internal combustion engine vehicles.

This cost reduction trend has largely been spearheaded by China, which has emerged as a leader in multiple clean technology markets. This dominance reflects a combination of strategic foresight, low capital costs, technological innovations, and vibrant entrepreneurship, rather than simply lower labor costs.

Principles for Effective Nearshoring

In response to China's leading position, numerous countries are now prioritizing the diversification of their supply chains through nearshoring initiatives. While this approach promotes energy security and fosters local job creation, poor execution of nearshoring strategies may significantly increase the expenses associated with the energy transition. Thus, the ETC has outlined the following six principles to ensure optimal policy development:

1. Aim for diversified supply chains rather than complete self-reliance.
2. Differentiate between economic and national security concerns, understanding that each has diverse implications across sectors.
3. Customize policies based on specific technologies, concentrating nearshoring efforts on sectors capable of competitive domestic production.
4. Base tariff applications on factual data pertaining to current subsidies in alignment with World Trade Organization (WTO) guidelines.
5. Prioritize job creation and value addition over ownership, acknowledging that foreign investments can significantly drive technology transfers.
6. Collaborate with China to boost climate financing to lower-income regions, facilitating quicker deployment of clean technologies.

As stated by Adair Turner, Chair of the Energy Transitions Commission, "In an ideal world, absent geopolitical tensions or supply chain concerns, China’s remarkable technological advancements and cost reductions would be embraced as catalysts for a faster, more affordable global energy transition. Nevertheless, there are valid economic and security motivations for fostering domestic supply chains. Thoughtfully crafted policies can align these objectives with the goal of enhancing technological innovation and reducing costs."

Carbon Pricing: A Vital Policy Lever

While many sectors have already made strides toward adopting low-carbon technologies, industries classified as "hard to abate," such as steel, cement, chemicals, and shipping, currently face a challenge. The implementation of available decarbonization technologies in these areas typically incurs what is known as a "green cost premium". Therefore, establishing carbon pricing mechanisms becomes crucial for making decarbonization economically viable in these industries.

Currently, 53 countries have adopted some form of carbon pricing, which collectively accounts for over 20% of global emissions. However, only the European Union has set prices sufficient to actively influence decarbonization economics.

One significant concern is that imposing carbon prices by a single country or bloc, such as the EU, can inadvertently push production to countries without such regulations, leading to no tangible emissions reductions. However, establishing equivalent carbon prices globally for hard-to-abate sectors could alleviate this issue. Notably, the International Maritime Organization has recently taken a positive step toward this model for the shipping industry.

While we await a globally unified approach for other hard-to-abate sectors, the need for CBAMs is more pressing than ever. These mechanisms are crucial for supporting decarbonization efforts, serve as an essential tool for developed nations to manage their imported emissions, and should not be viewed as protectionist measures.

Supporting Climate Finance

The ETC fervently endorses the EU's introduction of a CBAM and its recent commitment to enhance its effectiveness. Progress toward a globally agreed-upon solution necessitates fostering international cooperation through:

• Promoting consensus via institutions like the WTO on standardized methods for measuring carbon intensity.
• Offering technical support to developing nations as they aim to implement carbon pricing.
• Using a portion of revenues from the EU's CBAM to promote climate finance flows to less affluent nations.

As noted by Faustine Delasalle, Vice-Chair of the ETC and CEO of Mission Possible Partnership, "The world is on the brink of a new industrial epoch, fueled by clean energy. Diverse clean industrial projects are thriving worldwide, paving the way for emergent trade dynamics. However, effective policies—including carbon pricing, financial incentives for supply-side initiatives, and strict demand-side regulations—are imperative to ensuring the viability of these projects and supporting decisive investment choices."

Frequently Asked Questions

What are the main themes of the ETC briefing note?

The briefing emphasizes the importance of developing domestic supply chains and implementing carbon pricing mechanisms while addressing global trade challenges.

Why are supply chains significant in the energy transition?

Supply chains are crucial as they determine the cost effectiveness and efficiency of transitioning to clean energy technologies.

What is CBAM?

CBAM stands for Carbon Border Adjustment Mechanism, intended to level the playing field between countries with differing carbon pricing policies.

How does China's dominance impact global clean technology markets?

China's leadership leads to significant innovations and cost reductions, influencing global supply chains and energy strategies.

What role do developing nations play in the energy transition?

Developing countries are vital for the global energy transition, as they often have untapped potential for deploying clean technologies and require support for financing and implementation.

About The Author

Dedicated Author and financial expert Logan Wright here, 29 years old. After earning an economics degree, I spent a number of years working in different financial industries. My great passion is enabling everyone, from any background or experience level, to understand and be literate in financial matters.

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