Over the years there has been considerable discussion on the issue of climate change and global trade of products and services in the renewable trade arena.
Energy remains an important component of global trade since its price is still a critical input for manufacturing across the globe. While the discussion on climate change focuses a lot on the use of energy by the poor in several countries, it will be important to look at energy trade from an industry perspective as well.
Energy from a business perspective can be seen from two standpoints. The first from the point of view of energy users by sectors such as steel, aluminium, chemicals and even food processing where the cost of energy is a significant portion of the total cost of production. The second would be the energy producers, ranging from fossil fuels to renewables.
Energy today constitutes about 30 per cent of the greenhouse gas emissions, especially in the developed world. According to World Bank estimates, the world invests about $1 trillion a year in energy every year, of which a majority is in "outdated and polluting systems". The use of coal, oil and gas for energy has been growing over the years, and in 2011, for which estimates are available, coal consumption increased by 5.4 per cent globally and constituted 30 per cent of global energy consumption.
Subsidies for fossil fuels have also been increasing over the years and the Global Subsidies Initiative believes that the figure would be as high as $600 billion a year, which is about three times the amount provided to clean energy technologies.
If we compare this with trade in renewable energy, the difference is stark. While the majority of non-renewable energy trade is in fossil fuels, in case of non-renewables the majority of trade is in goods and services. China and the US top the world in trade in renewable goods and products, and solar energy products constituted the largest component of US-China clean energy trade. Total trade by these two countries is estimated to be in the region of $7 billion.
The important point from an industry perspective is that, while production and trade in fossil fuels is mainly supported by government-owned and government-controlled companies, and subsidies or cartels are not targeted, there has been a trade war concerning trade in renewable goods and services. The US, the European Union and China have been trading charges at the World Trade Organisation and bilaterally on solar panels and related goods. Domestic subsidies for creating renewable energy companies have been questioned, though the International Energy Association believes that for renewables to become the second-biggest source of power generation by 2035, countries will have to subsidise to the tune of $4.8 trillion.
The question is what should developing countries do to move towards renewable energy to address the issue of climate change without the fear of a trade war. To begin with, the focus has to shift to the use of clean energy by industry and help the small and medium industry use renewables. The two critical inputs for this would be to promote research and development (R&D) to develop cheap sources of technology for renewable energy and also finding financing for such R&D.
For development of R&D, governments may want to consider setting up an open-source platform for trade in cheap by innovative technologies in renewable products. Countries need to promote the use of renewable energy especially by the small and medium sector.
Further, foreign investment needs to be promoted in this critical sector. Organisation for Economic Co-operation and Development countries, for instance, provide certain benefits to pension funds that look at renewable energy products for investment.
There is a need to look at the Rio+20 document that provides some promising opportunities in the renewable energy sector area. This includes exports of raw material and components for renewable energy supply products, exports of energy produced from renewable energy, exports of renewable natural resources to produce energy besides cross-border trade in renewable energy services, and selling carbon credits in international markets.
Energy remains an important input for industry and the cheaper it remains the more competitive companies would be in global markets.
The writer is Principal Adviser at APJ-SLG Law Offices
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
