Want clean energy? Avoid trade disputes

Subsidies, tariffs and public-procurement policies are trade barriers in large-scale use of renewable sources

The world craves cheaper and cleaner energy, but are global trade and energy policies disrupting progress towards greater deployment of renewable energy?

Nearly two billion people in the world have no access to modern sources of energy. Providing them with power - particularly clean power - is an imperative for social and economic development. According to UN Secretary-General Ban Ki-moon, renewable energy is the "golden thread that connects economic growth, social equity, and a climate and environment that enables the world to thrive".

However, efforts to scale up renewable energy are being obstructed by a range of barriers to sourcing the best technologies from global markets. Subsidies, tariffs, standards, public-procurement policies and local content requirements are slowing down, or outright hampering possibilities for large-scale use of renewable sources. Rather than focusing on energy access, renewable energy policies have, instead, become tools to achieve other objectives: generating fiscal revenue, developing local industries, creating job and stimulating the economy, to name a few. As a result, renewables remain artificially more expensive than they need to be, delaying access to the poor and postponing the day when they can serve as viable substitutes for fossil fuels.
 

Take clean energy subsidies, for instance. One of us recently studied how subsidies vary in both form (including financial transfers, preferential taxes, regulations and infrastructure support) and purpose (from energy access at one end to promoting clean energy exports at the other). Some of these measures correct market failures, while others distort trade. This is why disputes are emerging across the world over clean energy subsidies, even though subsidies for fossil fuels - that reached $523 billion in 2011, up 30 per cent from 2010 - actually far exceed those for renewable energy, which are barely one-sixth that amount. The recent solar energy sector disputes are a clear example of how trade relationships can turn sour and make the investment climate for clean energy more uncertain.

Second, tariffs against clean energy technologies as well as non-tariff barriers, such as cumbersome standards, provide another obstacle. For renewable electricity products and wind energy equipment, applied rates range from seven per cent and eight per cent in India and Germany, to 14 per cent in Brazil. Applied tariffs on solar water heaters stand at 35 per cent in China, the second highest in the world. Many countries maintain prohibitive tariffs on ethanol, exceeding 100 per cent in some cases. Solar photovoltaic products face non-tariff barriers in the US market, which does not accept the International Electro-technical Commission standards (otherwise accepted in markets elsewhere), adding to costs.

A third obstacle involves local content requirements, a policy tool intended in part to promote domestic industry and nurture local jobs. However, by requiring that a minimum share of local content be used in the final product, these measures actually result in reduced competition, delayed technology deployment, and higher prices for renewables.

The logic behind these measures is flawed on two counts. For one, it assumes that the renewable energy pie will always remain small, when current trends indicate otherwise. In 2010, clean energy was only eight per cent of global power generation capacity, but 34 per cent of new capacity addition. As the pie expands, all countries could benefit, either from improved access to cheaper technologies or newer markets.

Another logical fallacy is the assumption that if one country has a large share of the market for clean energy products today, it would always remain in pole position. In reality, a global supply chain for renewable energy products is developing, with components produced in several countries assembled together or deployed in others. Moreover, technological innovation could easily make protectionist measures redundant.

Ideally, these obstacles would be addressed at the World Trade Organisation (WTO). However, governments have been unable, so far, to tackle these issues in a holistic and effective manner, and the ongoing negotiations under the Doha Development Agenda do not instill much confidence. Meanwhile, time is of the essence, and our atmosphere and the billions of people without electricity cannot afford to wait for WTO negotiations to conclude. An alternative process is, therefore, needed to kick-start a wide-ranging dialogue on clean energy and trade. To this end, we offer three suggestions.

First, this week's Clean Energy Ministerial (CEM), being hosted in New Delhi, offers a star opportunity to address some of the issues at stake. CEM members currently represent 80 per cent of global energy consumption, making their input vital in identifying concrete responses to trade barriers in clean energy technologies. India, for instance, could spearhead this process, having already demonstrated leadership in clean energy through its National Solar Mission. Its experience could help spark discussions among fellow CEM members on how countries can retain policy space for promoting energy access while also maintaining open and predictable markets.

Second, countries could use regional trade agreements (RTAs) more imaginatively as tools for promoting renewables. With their limited membership, RTAs might have the flexibility to lower barriers to trade in renewable energy products. Asia-Pacific Economic Cooperation economies have made progress on a valuable package of environmental goods negotiations in recent years, a positive example that could be mimicked for clean energy as well.

A final suggestion would be to create a sectoral trade agreement on energy, a Sustainable Energy Trade Agreement (SETA). Using the momentum gathered under the sustainable energy trade initiatives, a SETA would leverage a critical mass of countries to elucidate complex international rules on sustainable energy and improve market access. Greater clarity in policy and progress in negotiations would mitigate the current surge of renewable energy-related disputes at the WTO.

Today, we stand at a crossroads. The threat of climate change and the challenges of sustainable development are greater and more pressing than ever - yet the deployment of renewable energy technologies is hampered by higher prices and increasing political tensions. No country wins in this situation, nor does the global climate. We, therefore, urge policy makers to explore all avenues - multilateral, regional, and plurilateral - to create a favourable environment for clean energy deployment. Globally, this would be a win for energy access and for the clean energy industry.

Ghosh is CEO, Council on Energy, Environment and Water (ceew.in) and Melendez-Ortiz is CEO, International Centre for Trade and Sustainable Development (ictsd.org). They are hosting a policy dialogue on clean energy and trade on the occasion of the Clean Energy Ministerial