Capitalizing on Low-Carbon Technology Trade for Developing Countries

By Praveena Bandara

Since the beginning of this year, the US has withdrawn from the Paris Agreement, cut back on the Inflation Reduction Act (IRA) – which supported low-carbon technology (LCT) industries – and implemented staggering tariffs on its largest LCT trade partner, China.

A new journal article published in Science finds that China is currently the world’s leading LCT exporter, accounting for 19 percent of global LCT exports, while the US is the leading importer, accounting for 12.8 percent of global LCT imports in 2022.

As much as the latest round of tariff hikes could impact US consumers and producers through increased cost of consumer goods and imported inputs, it would also have an outsized impact on the deployment of LCT products, such as solar panels, that the US imports from China and Chinese-owned companies in Southeast Asia.

In this period of global economic transformation and transition, where waning investor confidence in US industries may create an opening for the Global South, emerging market and developing economies (EMDEs) are faced with both opportunities for building their own growth and resilience – as well as substantial challenges in taking advantage of such a moment.

A changing low-carbon technology trade landscape

LCTs generally refer to consumer products that emit fewer greenhouse gases (GHG) in their consumption than their polluting counterparts. These technologies, most popularly like solar panels or electric vehicles, can either generate energy or improve energy efficiency.

The world may be at a crossroads as electrification plays a key role in the economic growth of developing countries, while the acceleration of economic activity directly contributes to increased GHG emissions. However, developing countries do not have to choose between economic growth and lowering emissions. LCTs offer a path to sustainable development where EMDEs can achieve their growth objectives while avoiding the impacts of climate change that can, in turn, negatively impact economic and social outcomes.

Export patterns show that the production of alternative energy technologies, such as wind and solar, is gaining traction among many developing countries in recent years. However, these nascent producers are facing severe competition in the global market since China still dominates solar exports, accounting for a little over 50 percent of the market. The wind export market is still dominated by high-income countries, accounting for 56 percent (China, 24 percent) of world exports.

The energy storage sector, which is essential for addressing renewable energy intermittency and transportation electrification, also shows that East Asia (including China) commands over half (54.8 percent) of exports, indicating a strong production capacity. At the same time, Europe and North America lead in imports (43.4 percent and 21.5 percent, respectively). This pattern suggests East Asia’s substantial role in energy storage manufacturing, meeting Europe’s and North America’s growing demand as they transition to renewable energy sources.

Understanding the opportunities

There are three ways developing countries can engage in the LCT sector. First, in the short term, participating in newly emerging LCT supply chains will generate crucial export revenue, particularly for countries currently dependent on fossil fuel energy commodity production. This may involve producing parts of LCT products that may not be technology or capital-intensive in their production, but utilize existing comparative advantages of EMDEs, such as the lower cost of labor or repurposing existing product lines.

Second, importing LCT goods and deploying them in a timely manner will be a short- to medium-term goal for these countries. This is because most EMDEs are not capable of producing LCTs domestically within this timeframe. EMDEs will benefit from an accelerated renewable energy-driven electrification, as it would mean lower energy costs for domestic consumers and reduce demand for the foreign exchange required to import fossil fuels. Furthermore, the trade tension between the US and China may mean that China is looking for new markets to redirect its export production, and this could lead to lower prices and greater supply to developing countries that are incapable of producing these LCTs.

Finally, there is a growing trend toward deploying green industrial policies with the long-term goal of fostering green industrial development among EMDEs and advanced economies alike. Green industrial policies are any government-led interventions that aim to support LCT production industries through tools such as subsidies and state aid, export, import and foreign investment policies. The current trade climate may mean that EMDEs, especially those that are endowed with critical minerals, may have more leverage to negotiate significant domestic value-added clauses and technology transfers from foreign companies. For example, Indonesia announced a ban on nickel ore exports in 2020. This led to an increase in foreign direct investments in downstream domestic value-added industries such as smelting and refining, leading to more revenue and jobs in Indonesia.

Overcoming the barriers

However, whether EMDEs decide to import, export or execute industrial policies aimed at long-term growth, they will still face significant financial obstacles with competing interests vying for limited financial resources. Uncertainty and volatility in the global market generally make investors skittish about investing in EMDEs, despite any short-term developments in private investor sentiment spurred by current trade tensions. There is also a gross lack of resource mobilization that will allow developing countries to invest and take part in the global transition to a low-carbon and climate-resilient economy. Although multilateral development banks (MDBs) and the Group of 20 (G20) have pledged to have MDBs mobilize trillions of dollars for such countries, they lack the level of capital to make a stepwise increase. Second, external shocks, due to the COVID-19 pandemic, war and sanctions, and climate change itself have put many EMDEs in such debt distress that the ability to harness the resources for importing or investing in homegrown LCTs is out of reach. Thirdly, LCT production is capital-intensive and requires substantial upfront investment. This necessitates innovative financial instruments, such as those that allow the repayment of loans with savings from avoiding fossil fuel imports, an expense that a government would have to incur in the absence of low-carbon alternatives.

EMDEs are active participants in the climate transition along with advanced economies. What EMDEs require is the financial agility to forge their own climate-resilient path to development without locking themselves into carbon-intensive growth trajectories. Action at key policy moments this year, including the Fourth International Conference for Financing for Development, the 30^th UN Climate Change Conference (COP30), and the Group of 20 (G20) Summit hosted in South Africa, that facilitates this development path is mutually beneficial for developing and advanced economies alike.

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