By Morna Cannon
The inhabitants of Stuttgart and Bangalore may not know it, but they’re at war. Facing off in the fight are Luxor Solar GmbH – one of Germany’s largest solar photovoltaic (PV) manufacturers – and Kotak Urja Pvt. Ltd – one of India’s largest. The conflict, known in some circles as the “Green Trade War,” began in 2008 and has been raging for eight years. Though their battle hasn’t seen any fatalities, its significance should not be underestimated.
The Green Trade War describes a wave of disputes and retaliatory measures relating to renewable energy technologies. Since 2008, six significant cases have been brought before the World Trade Organisation (WTO) for dispute settlement. On top of this, an increasing number of countries have started to apply steep tariffs for renewable energy technologies in tit-for-tat measures. Combatants are the European Union (EU), United States (US) and Japan on one side, and emerging economies on the other.
When it comes to tallying the cost of the conflict, you can choose your metric. At the heart of the issue are trade restrictions costing hundreds of millions of dollars in exports per year. More than 3.7 million people work in the affected sectors, and consequently face varying degrees of job insecurity. Globally, the renewables in question save over 637 million tonnes of CO2 every year and by 2050 could generate up to 34% of the world’s electricity. Whether measured in dollars, jobs or carbon, the stakes of the Green Trade War are high.
The point of war
The leading cause of this new global conflict? Local content requirements (LCRs). These are the Jeremy Corbyns of the trade policy world: 50 shades of dull on the outside but packing serious revolutionary pizzaz underneath the surface. LCRs are conditions, linked to other policy mechanisms such as loans, obligating the recipient to source a certain value or weight of product from the local area. In short: protectionism. The Green Trade War arises from the application of this type of protectionist policy to the burgeoning renewables industry. As an example, wind farm developers in Brazil in the late 2000’s were obliged by the national development bank to spend 60% of their total construction budgets with Brazilian suppliers, rather than seeking components on the global market.
The competition for market share in environmental technology is particularly intense in the wind turbine and solar panel sectors. Both technologies are relatively mature compared to other renewables concepts – wind turbine technology varies little regardless of whether one is buying it to put on the Pampas in Uruguay or the plains of the Shandong Peninsula in China. Take such market-ready concepts, add the long-term certainty of a supportive regulatory environment due to climate concerns, and it becomes evident that the prize for the taking in these technologies is vast. Unsurprisingly, governments are keen to attract the associated manufacturing employment – a particularly appealing prospect for countries trying to carve out coherent macroeconomic strategies following the 2007–2008 financial crash and the commodities slump. In this context, the temptation to tinker with LCRs is understandably strong.
An enemy to all mankind?
Unfortunately, for the neoclassical economist and free trade devotee, LCRs are heavily frowned upon. A brief walk-through with a fictional country – let’s say, Chindia – helps illustrate this argument. Chindia implements an LCR, obligating producers to use domestic inputs (e.g. solar panels made in Chindia) instead of foreign inputs (solar panels made anywhere else) in the construction of a solar farm. Although this may benefit Chindia – capturing investment and employment – it results in an inefficient outcome globally: Chindia’s solar panels are, in theory at least, more expensive (otherwise the policy would be obsolete). It might also backfire completely for Chindia, if the price differential between their solar panels and the global price is too high. If Chindia has no affordable solar panels, then the LCR will actually deter investment in solar farms, thereby lowering demand for domestic inputs overall.
Legal and political considerations relating to free trade sit alongside strict economic theory arguments. LCRs are protectionist by design. As such, there is strong ground for challenging them under various WTO rules. In the current climate of demagogic promises to “Make America/Britain/France etc. Great Again” by throwing up various trade barriers, it is right that retreats to protectionism are seriously scrutinised. The negotiation of the General Agreement on Tariffs and Trade (GATT) in 1947 was based on the understanding (hard won through two world wars) that unfair economic competition led to serious global conflict. Franklin D. Roosevelt said in 1945 that “the purpose of the whole effort [GATT] is to eliminate economic warfare, to make practical international cooperation effective on as many fronts as possible, and so to lay the economic basis for the secure and peaceful world we all desire.”
Is there no place for them today?
More than seventy years on however, the world is a much-changed place. Crucially, it’s about 0.1°C hotter. And continuing a business-as-usual approach to economic policy will take the mercury 4°C higher by 2100. The associated effects of a “4°C world”: collapses in crop yield, water shortages, climate refugees (as well as the threat of xenophobic backlashes) are a nightmarish scenario which requires all of us, including economists, to urgently start thinking outside the box. That may include conceding that the BRICS’ use of pesky protectionist LCRs has actually been a novel and justifiable solution to a global problem.
The BRICS are facing the steepest challenges for carbon reduction, with Brazil, China and India having each committed in 2010 to reductions of greenhouse gases between 25 – 30% by 2020. In the medium-term, they’ve also each pledged – via Intended Nationally Determined Contribution plans (INDCs) submitted under the COP21 Paris Agreement – to provide between 20 – 45% renewable energy capacity by 2030. At the same time, however, each country faces significant development challenges; Brazil’s GDP/capita is only 27% of the EU average, and India’s is only 0.5%. Simply put, these countries face acute development needs. However, if these were to be met in the traditional carbon-intensive way, then the 4°C world nightmare would become a reality. If LCRs can be of use in squaring this circle, then it’s imperative that they be used in BRICS’ favour.
The Organisation for Economic Co-Operation and Development (OECD) recognises the utility of LCRs in some circumstances, noting their ability to foster nascent industries, increase manufacturing exports and improve public acceptance of renewable energy (something particularly relevant to countries without historical responsibility for climate change). Importantly, the practical evidence seems to support this, with BRICS countries having indeed used LCRs to impressive effect. A decade ago, Europe and North America were home to the leading manufacturers of wind turbines. In the last decade however, Brazil, China and India have each used LCRs to successfully build domestic manufacturing capacity in solar and wind power. China has seen overwhelming success with its 70% local content policy, implemented between 2007 and 2010. During this time, China’s installed wind capacity increased 7-fold. China went from claiming less than 5% of global market share in wind turbine manufacturing, to producing more than one-third of the world’s turbines. India, by contrast, has seen striking success in the field of solar photovoltaics, with a LCR policy first implemented in 2010. Over 100,000 jobs were created in the Indian solar sector, when installed solar capacity in India skyrocketed from 10MW in 2010, to over 6GW today.
It would be possible to make the case that this progress has come at a climate cost by keeping the price of renewables artificially high, something the US has recently argued. In 2016, embroiled in the US-India solar panel dispute, the US Trade Representative Michael Froman said “local content requirements actually undermine our efforts to promote clean energy by making it more difficult for clean energy sources to be cost-competitive.” But world prices of solar panels have fallen dramatically since India’s entry into the sector, with costs dropping by 60% between 2010 and 2014. The precipitous fall in prices was mirrored in the wind energy during China’s implementation of its LCR, with American turbines being a third more expensive than their Chinese counterparts, which themselves fell from $928 to $644 per installed kilowatt over the protection period. If China and India have held back the supply of cheap renewables technology through their LCR policies, then it’s not clear from the numbers. On the contrary, the ability to build green industries through LCRs may have been just the stimulus BRICS needed to switch to a modern sustainable development pathway. And that, ultimately, is the sticking plaster that is needed to address the true culprit in energy market inefficiency: carbon emission externality, or, as the Stern Review called it, “the greatest market failure the world has ever seen.”
There’s got to be a better way
Putting an end to the Green Trade War will require an increased focus on global co-ordination and pragmatism. The BRICS have used LCRs in a pragmatic and speedy way to respond to the urgent climate crisis without compromising their pressing development needs. While economic and political economy arguments against the use of LCRs are reasonable, it is imperative that BRICS’ efforts to shift towards clean growth are not discouraged. Piyush Goyal, India’s Energy Minister, complained in April 2016 that poorer nations were receiving “absolutely no support” from developed governments to pursue sustainable development. Of the US complaint to the WTO, he said, “I sincerely believe that what the West is doing in this respect is anti-development and anti the fight against climate change.” Clearly the fight between BRICS and developed economies for leadership on the nascent renewables industries is squandering political capital.
So how is an armistice reached? Some useful steps would be to recognise the leadership and ambition the BRICS have taken under challenging circumstances, and then, cognisant of the ultimately distorting effects of LCRs, negotiate for a gradual phase-out of such schemes. But in order not to jeopardise the good work that has been done in kick-starting clean growth in the developing world, climate finance will need to be taken very seriously indeed; it has been reported that the finance required by developing nations to meet their INDC commitments is five times greater than the $100 billion per annum available through the Green Climate Fund from 2020. Leadership by the developed nations on climate finance should ensure the BRICS’ first tentative steps towards sustainability are followed by a headlong run towards green growth. And with an ending like that, what would the Green Trade War be good for? Well, quite a bit actually.
Morna studied Land Economy at Cambridge University, graduating with first-class honours in 2007. She worked for seven years in marine energy and offshore wind in the UK. She is currently researching LCRs for her final thesis as part of a master’s degree in International Economic Policy at SciencesPo, Paris.