Cleantech race risks sidelining developing countries

Chief Europe Correspondent

The global cleantech race underway between the United States, Europe and China could leave developing countries behind.

The world’s major economies are competing to become industrial leaders in the burgeoning cleantech sector. But efforts to outmatch China’s dominance could drive the U.S. and the EU to embrace increasingly protectionist policies and embark on a subsidy race that could stifle cleantech development elsewhere, experts said.

Such a hostile global trade environment could starve developing countries of already insufficient climate financing from the developed world. What’s more, poorer, mineral-rich nations could end up supplying the resources for the energy transition in richer nations without benefitting economically from new supply chains created entirely in wealthy countries.

“The more the richest countries look inward, the less likely they’re going to make financing available for the developing markets,” said Todd Moss, the executive director of the Energy for Growth Hub, a Washington, D.C.-based non-profit group trying to boost energy access across the world. “I am worried.”

The United States’ decision to pour nearly $370 billion into clean energy through tax credits in the Inflation Reduction Act has caused panic in the European Union. The 27-member bloc fears the law will choke EU industrial competitiveness and draw European businesses across the Atlantic with its “made-in America” provisions.

Defending the law, the U.S. points to China, accusing it of having cornered the cleantech market through massive state subsidies in recent decades—a concern Europe shares.

The European Commission, the EU’s executive arm, presented its own Green Deal Industrial Plan last week to boost the EU’s industrial base and match the American cleantech push. EU leaders, who will discuss the plan at a summit this week, are butting heads over how to shape their response. Sticking points include how generous the bloc should be when handing out subsidies to EU-based companies to shore up its cleantech industry at home.

“There is mounting pressure, especially towards the EU, to ensure its policy response will not be protectionist, but also show how any revenue generated by these policies is going to go and help developing countries,” Elitsa Garnizova, director of the trade policy hub at the London School of Economics, told Cipher.

The global market for key mass-manufactured clean energy technologies will be worth around $650 billion a year by 2030—more than three times the sector’s value today—if countries fully implement their announced energy and climate pledges, according to a recent International Energy Agency report.

Investments to deploy clean energy technologies surpassed the $1 trillion mark last year for the first time, on par with fossil fuel investments, a BloombergNEF report found. But the share of energy transition financing going to emerging markets and developing economies stood at 8% in 2021, the lowest level in 10 years.

The reasons for this low share are diverse yet interlinked. Borrowing rates and capital costs are higher in developing countries, which, in turn, diminishes private sector appetite in the region.

“As the EU and the U.S. ramp up green subsidies, it will be crucial to engage with emerging and developing economies to not exclude the rest of the world from new fast-growing clean tech markets, which is a major incentive for these countries to deliver on net-zero targets,” a December briefing paper from the European environmental think-tank E3G reads.

Competing in the cleantech sector will also require setting up new supply chains for raw materials and assembly lines for key products, like electric vehicles. Both the EU and the U.S. are keen to create this infrastructure on their home turf.

African countries, several of which have an abundance of minerals needed for the transition, “are very concerned not to replicate the colonial patterns of exploitation where they were the source for raw materials, but without value addition,” said Moss, whose board features representatives from developing nations, including Nigerian-born Damilola Ogunbiyi, the United Nation’s representative on Sustainable Energy for All, and Donald Kaberuka, former president of the African Development Bank.

“There’s going to be a real tussle over where the different segments in the value chain will be located, where the jobs will be created,” Moss said.

The Commission’s Green Industrial Plan highlights the need for new initiatives “to allow resource-rich developing countries to move up the value chain.”

To be sure, the evolving cleantech competition could benefit developing countries as the cleantech race lowers the cost of new technologies and makes them more affordable to poorer regions, Garnizova said.

But bringing down costs is just one aspect—the other is ensuring enough investments flow to developing countries to help spur their own energy transition, she added.

How the U.S. and the EU handle international trade rules around clean energy and energy security today will have impacts far beyond either region, Peter Rashish, director of the geoeconomics program at Johns Hopkins University’s American Institute for Contemporary German Studies, said at a recent event in Brussels.

“If they are able to find a reasonably cooperative way to deal with this issue, that will…reinforce an orderly global economy,” he added. “But if they aren’t, that would just add to the kind of anarchy we are beginning to see.”