Why we must balance cooperation and competitiveness in cleantech

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Nils Aldag, Chief Executive Officer, Sunfire, Christopher Frey, Head of Regulatory Affairs, Sunfire GmbH

• The cleantech industry drives both decarbonization and economic growth, including job creation and innovation. Yet, sectors such as electrolyzer manufacturing must scale rapidly to meet global targets.
• Intense global competition in cleantech has led to market distortions and an unlevel playing field regarding state support.
• Embedding resilience in trade policies will support domestic industries amidst global supply chain vulnerabilities, ensuring public investments in cleantech also benefit the local economy and workforce.

Clean technology (cleantech) industries are the enablers of our future decarbonized energy system and have become a major economic factor.

Since the early adoption of wind turbines and photovoltaic modules in the 1980s, these industries have transformed into global heavyweights with diversified supply chains. Batteries, heat pumps and electrolyzers are now catching up. Their manufacturing is expanding rapidly in line with rising demand.

Cleantech adoption, however, will have to accelerate even further to limit warming in line with the Paris climate target. The 2023 UN Climate Change Conference (COP28) pledge to triple renewable energy by 2030 is paving the way. While all clean technologies (cleantech) will need to see impressive growth, this is especially true for new arrivals.

Electrolyzer manufacturers will have to hyper-scale to meet official targets for green hydrogen. If the European Union (EU) is serious about meeting its 2030 green hydrogen pledge of 10 million tons of annual production, it has six years to massively scale its electrolyzer industry. It took solar and wind more than 20 years to scale to similar dimensions.

Intensifying global competition

The rise of cleantech and its appeal as a “magic bullet” in reducing emissions while providing opportunities for growth and manufacturing jobs has led to intense competition for market share and global leadership.

Government support for clean energy investment has doubled worldwide over the past two years alone. All but five members of the Group of 20 countries have initiated green industrial stimulus programmes. The ambition to claim a top spot is reflected in official policy, including China’s five-year plans and Made in China 2025 strategy, the United States’ Inflation Reduction Act, and Europe’s Net Zero Industry Act.

To underline these ambitions, all three economic blocs are spending heavily – albeit at different speeds and scales – to incentivize the uptake of green energy, attract private investments and create green manufacturing jobs.

The global race to dominate cleantech has some side effects. The solar photovoltaic sector has already experienced massive overcapacity flowing out of China, which controls more than 80% of the global solar photovoltaic supply chain.

Challenges securing market leadership

As a result, the few remaining manufacturers in Europe and North America are at risk of going out of business. The mentality of “selling at a loss is better than not selling at all” might push costs for solar photovoltaic development further down but is unsustainable in the medium to long run.

For technologies just starting their scale-up journey, the distorted playing field represents an existential challenge. Massive investments into research and development and early demonstration have made Europe home to two-thirds of the leading electrolyzer manufacturers.

These companies are starting to compete with highly subsidized manufacturers, strategically depressing the price of their products and inhibiting the scaling opportunities for domestic players, some of which will not survive the next five years.

The result, in the long run, will be a smaller market overall dominated by non-European technology providers and a perfect repetition of Europe’s solar photovoltaic trauma: an entire industry built up and lost in the course of a little more than two decades.

Green protectionism across the globe

Given its strategic significance and the massive stimulus being spent on cleantech around the globe, it is hardly surprising that countries and regional blocs are looking at ways to channel funding to domestic players or – at the very least – incentivize localization of manufacturing.

While local content requirements have been a reality in the wind industry for decades (e.g. in Turkey, Brazil and Canada), the Inflation Reduction Act has undoubtedly opened a new chapter, raising serious concerns about compatibility with world trade rules. The EU has refrained from introducing local content requirements until today.

However, a new realism is developing on this side of the Atlantic as the EU seeks to avoid repeating the departure of another cleantech industry at all costs.

While understandable from an industrial policy perspective, these developments have already led to trade frictions and threaten to derail international trade relations further. For these reasons, a new consensus about resilience in cleantech trade is urgently needed.

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Resilience means maintaining the ability to manufacture cleantech domestically. —Christopher Frey, Head of Public and Regulatory Affairs, Sunfire”— Christopher Frey, Head of Public and Regulatory Affairs, Sunfire

Embedding resilience in trade policy

The liberal international economic order has taken a big hit over the last decade. The World Trade Organization’s (WTO) authority as the final arbitrator in trade disputes has suffered severely, allowing protectionism to rise unscrutinized. Despite its issues, the WTO remains the central multilateral negotiation forum for trade matters and its members need to find a way to fix the fractures.

The world trading system must better incorporate the principle of resilience to accommodate the new economic realities of global green competition. Economies are undergoing the most profound transformation in decades to get closer to net zero.

After billions of taxpayers’ money is spent on research, development and demonstration of innovative cleantech, green investments must yield a domestic dividend. That will hardly be possible without a level playing field regarding the role of the state and a basic shared understanding of fair competition.

There is also an important social dimension to consider: if public funding for renewable electricity generation or green hydrogen production does not benefit domestic manufacturers and their workforce, the acceptance of climate-related policies will be seriously threatened. Meeting a certain percentage of cleantech needs domestically is a legitimate concern amid global supply chain woes.

The vulnerabilities of the global trading system have already been painfully felt with the COVID-19 pandemic and exacerbated by ongoing geopolitical tensions. In this context, resilience means maintaining the ability to manufacture cleantech domestically. Countries should be allowed to protect the core of their cleantech industries until a critical market size has been reached. Once an industry is lost, it is unlikely to return, as supplier networks, know-how and workers will be gone with it.