Without rules, green industrial policy will see trade wars

“It is less bad than we feared a couple of months ago,” International Monetary Fund (IMF) managing director, Kristalina Georgieva, said about the global economy at the closing session of the World Economic Forum’s annual meeting in Davos. “But less bad doesn’t quite yet mean good.” One of the not so good issues was the growing murmur of discontent in the European Union (EU) and the United States (US) over green subsidies.

This is not merely of bilateral concern. The push for these new subsidies, and a clutch of green industrial policies and incentives, will shape trade and investment patterns in clean tech industries, and impact prospects for emerging economies to tap into the technology-driven productivity boost offered by the energy transition.

Three concerns are paramount.

First, there is talk of a subsidies war. Former US treasury secretary Larry Summers thought a subsidy war over green technologies is a good thing. When correcting for market failures (such as not costing the impact of pollution from dirty fuels), subsidies play an important role in triggering markets for clean tech.

In August 2022, the US Congress passed the Inflation Reduction Act (IRA), which includes $369 billion of federal investment in climate to promote green industries such as renewables, nuclear and clean hydrogen. The EU’s Fit for 55 programme plans a Social Climate Fund worth €72 billion to support citizens and small businesses to move to clean energy. In December, the European Parliament provisionally agreed on the final text for the Carbon Border Adjustment Mechanism (CBAM), which will impose tariffs on imports from countries deemed as not acting aggressively on climate.

For proponents, these moves signal seriousness about climate action, putting taxpayer money to good use. But they also reek of protectionism. Will revenues from carbon tariffs subsidise EU industries or be returned to developing countries to assist their green transition? The French finance minister argued, “I’m not talking protectionism but about defending economic interests.” In defending economic interests, the US is ahead. “The US has some of the best solar and wind sites. With the IRA, the US wins,” said an American clean energy entrepreneur with Italian roots. A European oil and gas chief executive bemoaned that while Europe was applying the stick, the US was giving carrots.

India has instituted its own subsidies ($2.4 billion for green hydrogen; $3 billion for solar photovoltaic manufacturing). If richer countries use their taxpayer money to reduce costs, everyone benefits. But the quid pro quo must be open and transparent markets. Instead, there is a danger that the subsidies war will tip into a wider trade war, with disputes at the World Trade Organization and restrictions on imports. Trade disputes and uncertainties over industrial policy could stymie investments in cleantech sectors. Growing pressure on renewable energy supply chains, and disruptions in critical minerals embedded in them, would raise costs and increase inefficiencies without rules to ensure regular supply and better governance. What may begin as a mere bilateral trade disruption could disrupt climate policy and climate action worldwide majorly.

Two, a standards war could begin. Non-tariff barriers have long been a tool of industrial policy. One of the biggest threats is to the development of a global green hydrogen economy. Currently, there are no common standards for what constitutes green hydrogen, its transportation and storage. If market access is sealed off by rival standards, then it becomes a double whammy for emerging economies — having neither the financial resources to subsidise new technologies nor the ability to export renewable energy derivatives such as green hydrogen.

Consequently, a third concern arises: Rising distrust in climate negotiations. At Davos, a senior energy executive from Southeast Asia complained that IRA or CBAM are northern perspectives. Georgieva noted that the EU or US plans would not work for emerging economies, “unless technology transfer is part of [their] plans”. But this columnist’s analysis of three dozen climate and clean energy initiatives over the past decade found no evidence of large-scale clean tech transfer.

There are three ways to counteract these concerns: Dialogue, definitions, and co-development. In Davos, 50-plus trade ministers launched a Coalition of Trade Ministers on Climate to identify how trade can contribute to climate action while supporting diffusion and access to green technologies. As part of the dialogue, developing countries and emerging economies should ask how they can maintain and enhance their competitiveness in future value chains.

Another approach is to define standards for emerging cleantech that do not lock emerging economies out of new markets. India’s G20 presidency is an ideal forum to establish rules and standards for green hydrogen.

Finally, India must promote innovation at home and technology co-development with partners. This would involve pooling financial, human and technical resources, jointly owning intellectual property, commercialising technologies, and leveraging procurement policies, among others. Strategic industrial policy need not come at the cost of building resilient and reliable supply chains among like-minded countries.

For 30 years after the Cold War ended, we witnessed the globalisation of goods, services, and ideas. As the energy transition gains momentum, there is now a risk of increasing weaponisation of energy, resources and minerals, emerging islands of regulation, and mercantilist control over new technologies. Correction of one kind of market failure should not result in the distortion of competitive markets. The outcome would be suboptimal and iniquitous. India’s sustainable industrial future depends on applying rules for all, rather than a free for all dash to tech monopolies.

Arunabha Ghosh is CEO, Council on Energy, Environment and Water. He sits on the Steering Committee of the World Economic Forum’s Climate Trade Zero initiative

The views expressed are personal

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