By Brad McDonald and Scott Vaughan
2022 was a milestone in global power energy markets. For the first time, total investment in renewable power generation and related products matched or slightly exceeded investment in fossil fuel production. By some estimates, global investment in clean energy could reach USD 1.7 trillion in 2023, led by solar, wind, and electric vehicles (EVs).
This jump in the total manufacturing of low-carbon technologies is mirrored to some extent in global trade. World Trade Organization (WTO) data show that trade in environmental goods and services has slightly outpaced overall trade flows, while a recent World Economic Forum (WEF) climate-trade report shows low-carbon technologies could reach 15% of all merchandise trade by 2030.
In some respects, this “good news” looks set to continue. The International Energy Agency (IEA) reckons that annual renewable energy installations will reach 440 gigawatts (GW) in 2023, a jump of 107 GW (nearly a third) from the pace of annual installations in 2022. (One gigawatt is one billion watts.) China is on track to install 160 GW this year. The EU’s green transition has accelerated because of the Ukraine war. The US Inflation Reduction Act’s combination of direct subsidies and tax breaks are expected to increase renewable energy to as much as 110 GW by 2030. Most of this impact will be felt in 2024 and later.
Now the bad news. The projected growth in low-carbon technologies remains concentrated in a handful of countries or regions – mainly those with the size and fiscal space to promote the green industrial policies that are re-shaping global trade in low-carbon technologies
According to a 2022 assessment by the UN Environment Programme (UNEP), most emerging market and developing economies (EMDEs) are being left out of expanding trade in low-carbon technologies. Overall investment in renewable energy in the majority of EMDEs remains low, prompting the IEA to conclude, in its 2023 World Energy Outlook, that while “clean energy investment needs to rise everywhere … the steepest increases are needed in [EMDEs] other than China.” A stubborn barrier remains the high cost of capital for green technologies in most developing countries, in part because solar panels or wind turbines are less familiar to business, consumers, and regulators compared to carbon-intensive energy sources like coal, increasing the risk of investing in renewable energy.
There are various efforts to increase trade and overseas investments in EMDEs in renewable energy. In 2021, the Group of 7 (G7) launched the Just Energy Transition Partnership (JETP), with the goal of directing new overseas financing to accelerate the sunsetting of coal projects and increase renewable energy financing. There are now multi-billion commitments in partnership with Indonesia, South Africa, and Viet Nam. However, recent indications suggest project financing remains just as challenging as under other green transition plans.
Following its 2021 pledge to discontinue all new overseas financing of coal, China is considering ways to scale up its financing of renewable energy through the Green Belt and Road Initiative. In 2022, China invested roughly USD 6 billion in overseas financing for renewable energy, plus another USD 300 million in energy efficiency. At the October 2023 Third Belt and Road Forum, China pledged to amplify its 2021 announcement to stop all new overseas financing of coal with new pledges to scale up direct transfers and financing to get renewable energy technologies to developing countries. The third Green BRI Summit, held in October 2023, made specific commitments, notably allocating as much as USD 100 billion to new low-carbon technologies including through a newly launched Green Investment and Finance Partnership, or GIFP.
Other efforts are underway. This spring, the EU’s Global Gateway together with the European Investment Bank (EIB), pledged EUR 18 billion for climate action, while the June 2023 One Planet summit announced new partnerships to help meet the Bridgetown Initiative related to scaling up climate as well as nature finance needs.
Such initiatives give hope that the 2023 Group of 20 (G20) pledge to “encourage efforts to triple renewable energy capacity globally” just might come true.
Technology transfer is hardly new to multilateral ambitions. Yet past actions have rarely met ambitions for various reasons, from higher capital costs and risks in many developing countries to gaps in infrastructure, systems, and policies to make new technologies work compete with incumbent systems like coal.
Both the UNFCCC and the Intergovernmental Panel on Climate Change (IPCC) communicate largely generic and normative definitions of technology transfer. For example, the IPCC defines technology transfer “as a broad set of processes covering the flows of know-how, experience and equipment for mitigating and adapting to climate change amongst different stakeholders such as governments, private sector entities, financial institutions, non-governmental organizations (NGOs) and research/education institutions.” Developing and communicating more specific pathways and standards for low-carbon technologies could help to facilitate technology transfer to developing countries.
What is actually covered under technology transfer to support developing country implementation of the Paris Agreement will evolve through practice. Four areas merit close attention.
1. Improve trade policies
First and foremost, green technology transfer should be based on sensible trade policy. A good place to start is rolling back tariffs on renewable energy technologies. The first salvo in the Trump tariff wars of 2018 was a 30% tariff imposed on solar panels from Asia. In May 2022, India imposed import duties of 40% on solar modules and 25% on solar cells.
According to the WTO, while some 60 countries have zero tariffs for renewable energy and other environmental goods and services, roughly 20 countries still maintain tariffs above 10%. Various non-tariff barriers, particularly in the services sector linked to renewable energy, compound and magnify these effects. Together these make it more expensive for countries using these trade measures to meet their Paris Agreement targets.
Other gaps in the green technology landscape compound trade distortions. Despite rapid growth in renewable energy capacities, gaps remain in international standards for solar technologies. For example, there are still no standards for solar panels to withstand exposure to sand – obviously important in countries as diverse as Morocco, Mongolia, Egypt, and Australia. Similarly, various components that make up solar panels still lack their own international tariff codes – known as the Harmonized System under the World Customs Organization (WCO) – cluttering actions to make solar panels tariff-free.
Longstanding efforts at the WTO that have tried to muster country support for open trade in environmental goods and services have been laudable. Yet governments need not wait for multilateral action. If there was ever a case to liberalize import restrictions unilaterally, making renewables and other goods cheaper to meet a country’s own Paris climate goals, this is it
2. Leverage export credits
Second, we need to ensure trade finance plays a bigger role in renewable energy trade. Although estimates vary, roughly 85 national export credit agencies (ECAs) together provide over USD 200 billion, most by offering export credit guarantees, insurance, hedging, and other instruments that together leverage as much as USD 1.5 trillion. In essence, the daily work of most agencies is the kind of financial leveraging and blended finance set out in the Bridgetown Initiative and discussions to reform the World Bank and other Multilateral Development Banks (MDBs).
Increasingly, many national agencies are adopting various climate commitments. The Organisation for Economic Co-operation and Development (OECD) Common Approaches are to these agencies what the IFC Sustainability Framework is to many public and private banks. A recent OECD survey shows that more than half of the respondents from OECD countries have adopted at least one climate standard such as a labeling system to identify green financing instruments like green bonds. Moreover, most European-based agencies are the furthest ahead in mainstreaming climate targets by adopting the EU Green Taxonomy and other mandatory standards.
At the same time, climate commitments often apply solely to direct project financing, rather than the greater proportion of leveraged financing in carbon intensive investments. It’s hard to know precisely, given the relatively opaque nature of ECAs in disclosing their entire financing activities compared, for example, to MDBs.
The Common Approaches, first adopted a decade ago and revised in 2021, are now lagging behind widening targets and practices, and need to be updated to algin with the Paris Agreement.
3. Leverage financing through swaps
A third way to ramp up the transfer of green technologies to least developed and other high-need countries could involve greater financing at concessional rates that are significantly better than market terms.
Among the recommendations from a September 2023 preview of the UNFCCC Global Stocktake that will conclude at the UN Climate Change Conference (UNFCCC COP 28) in December is exactly this idea: “Reductions in costs and increased access to finance for some key technologies should enable greater deployment in all geographic areas, particularly in developing countries. Continuing to drive down the average cost of capital for such technologies and reducing unit costs for other key technologies for just energy and other sectoral transitions will be deciding factors for whether the goals of the Paris Agreement are met.”
International organizations can help accelerate technology transfer on various fronts. Using its economic surveillance mandate, the International Monetary Fund (IMF), for example, can advise its members on the benefits of goods and services liberalization as a means to meet their Paris goals. The recently launched IMF Resilience and Sustainability Trust (RST) can encourage IMF members and help them identify strategies to leverage or de-risk investments in renewable energy, ‘crowding-in’ private investors.
There are other options which are variations of financial swaps.
At the heart of the Paris Agreement’s Article 6 are the emerging principles and rules for international carbon markets. The early deals under Article 6.2, which involve bilateral, government-to-government agreements to reduce greenhouse gas (GHG) emissions, all involve the swapping of technologies like solar panels and electric buses in exchange for carbon credits (knowns at Internationally Transferred Mitigation Options, or ITMOs) – the first swap option.
To date, Article 6.2 deals are modest in the extent of technology transfer and modest in the expected carbon credits. But as voluntary carbon markets struggle to fix past and current practices that have eroded trust in their integrity, emerging Article 6 rules may create the kind of conditions to scale-up technology transfer.
Any trade below market prices is likely to trigger trade issues, notably claims by third parties outside of a deal of trade-distorting subsidies or dumping, which could lead to WTO legal disputes or to the application by third parties of countervailing or antidumping duties. Given the WTO’s welcome interest in the trade-climate nexus, WTO members should work on a set of principles to ensure technology transfer meets trade rules. Again, the Paris Agreement’s Article 6 may well provide the most important framework. Article 6.8 of that agreement, which covers ‘non-market’ international mitigation cooperation, explicitly notes technology transfer, giving an early indication that such cooperation should not be bound by market determinants.
A second swap option is through debt-for-climate swaps. There are roughly 70 countries currently in or nearing debt distress, making their capacity to purchase clean technologies especially hamstrung. Various debt-for-climate swaps show that they can work. For example, deals between Spain and Uruguay in the mid-2000s saw a portion of debt swapped for wind turbines, with Spain as the creditor given first option in the use of carbon credits. While the swap was small – around USD 10 million – it was one piece of a wider shift that has seen Uruguay transition from being among the most dependent on imported oil and gas to among the greenest electricity providers in the world.
In 2022, a group of IMF economists released their analysis of debt-for-climate swaps, arguing that in the absence of a common framework that comprehensively deals with a looming sovereign debt crisis, swaps can play a useful role.
4. From products to low-carbon systems
A final aspect of technology transfer is widening action from specific, stand-alone goods like rooftop solar panels, heat pumps, or offshore wind turbines to their wider operating systems.
Critical to scaling up renewable energy capacity is electricity grids with net zero goals in mind. We are seeing an increase in ambitious, very long-distance electricity lines intended to connect areas with a comparative advantage in different kinds of renewable power – solar, wind, hydroelectric – with areas lacking these attributes. For example, the Viking Power project currently being built will connect Denmark renewable power exports with the UK through a 765 underwater transmission line. The XLinks project plans to supply over 7% of the UK’s electricity through a 3,800 kilometer (km) largely beneath-sea transmission line.
Given important differences in average sunshine between countries – for example, Germany, on average, has 900 hours per year compared to Mauritania’s roughly 3,000, increasing solar and wind capacity within countries may offer in the coming decade new export and revenue generating opportunities, provided systems and regional planning work in tandem not only with transfer of goods, but also the services vital to the design and operation of clean power systems.
While many past efforts in technology transfer have underperformed, there have been successes. The Montreal Protocol to protect the ozone layer is rightly seen as the world’s most successful multilateral environmental agreement (MEA), owing in large part to the role of technology transfer in getting substitutes to ozone-destroying chemicals and technologies to developing countries. This was backed by additional financing, clear rules around trade, private sector engagement, and aligned domestic regulatory action.
Rapid increases in renewable energy production capacity in most of the advanced economies and in China are increasing the odds for these countries to meet their Paris targets. But in other EMDEs – home to three-fifths of the global population – the needed investments are falling critically short. Turning this around requires urgent attention to the role of technology transfer and spurring clean energy investments in EMDEs other than China.
Brad McDonald is an Adjunct Lecturer with the University of Minnesota, Humphrey School of Public Affairs, and former Deputy Head of Trade, IMF. Scott Vaughan is an IISD Senior Fellow. We thank Meizhen Wang, Policy Advisor, IISD for her additions and comments.