Bridges Trade BioRes Review • Volume 3 • Number 3 • December 2009
Trade flows, barriers and market drivers in renewable energy supply goods: The need to level the playing field
by Veena Jha
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A switch to renewable energy is expected to provide a major part of the solution to climate change. In this regard, understanding the conditions that facilitate their production, trade and uptake is important.
A number of renewable energy generation technologies are commercially available and many others under development. This article, based on a comprehensive trade analysis, focuses on trade flows and barriers to commercially available renewable energy generation technologies and their associated goods. It seeks to identify and examine the role of various market and trade drivers including tariffs in the uptake of these technologies.
Background
The trade analysis builds on a 2008 mapping exercise[i] that identified key climate mitigation technologies and associated goods relevant to the renewable energy supply (RES) sector. The technologies covered included: solar energy; wind energy; ocean energy; geothermal energy; hydro power; and biomass/biofuel technologies. These were classified under relevant customs codes within the international ‘Harmonised System (HS)’. For the purposes of the trade analysis, the authors added a few additional categories, namely: bio-ethanol, bio-diesel, solar air-heaters, solar water-heaters as well as parts and components deemed important to include in certain cases, notably hydraulic turbine parts (for hydroelectric generation) and wind-turbine parts.
Customs classification is a key challenge for the trade analysis of RES goods. Trade analysis on the basis of more general, so called HS ‘6-digit’ codes is relatively easy, as common codes and product descriptions are used by all WTO members. At a more detailed product level (8 or 10 digit) - which might capture the specific RES good in question - different countries use different codes and product descriptions. The trade figures produced in the current analysis, based on 6-digit HS codes, have to be interpreted with extreme care, as most 6-digit HS codes that cover ‘single end-use’ RES products also include unrelated products. Further, in the case of components, total trade under a particular 6-digit HS code is included although only a small part, if any, may be related to renewable energy technologies and products. For instance, ball bearings are included because ball bearings are used in the production of wind turbines, but the trade figures inevitably include total trade in ball bearings for any purpose.
Europe dominates renewables trade; China tops developing country trade
Only about six percent of global energy is supplied by renewables. European firms dominate the production of renewable energy and Europe is also a leading exporter of RES goods.
Based on the analysis of trade flows, it appears that intra-European trade in RES is among the highest in the world. Developing countries accounted for only 30 percent of global exports of RES products in 2007 and among these China accounted for 40 percent. In terms of imports, developing countries account for a slightly higher 38 percent, although the top importers by and large also are OECD countries. Other prominent developing countries - particularly in solar and wind energy technologies - include India, Mexico, Hong Kong, the Republic of Korea, Malaysia, South Africa, Singapore and Thailand. Brazil and a few other developing countries also figure among the top ten exporters of bio-ethanol.
Solar and wind figure quite prominently in terms of traded technologies. Wind-power generating sets (HS 850231) provide the main example of a ‘single end-use’ good (meaning it can only be used for one specific purpose) at the HS-6 digit level in the RES sector. Going beyond the 6-digit level, solar panels stand out as important single end-use items, categorised as ‘ex-outs’ (including photovoltaic cells whether or not assembled in modules or made up into panels, and light-emitting diodes) under the 6-digit HS item “Photosensitive semiconductor devices.” With a few exceptions, the same countries that are among the top exporters for ‘single end-use’ products are also top exporters of a much larger list of products. This does not come as a surprise as exports of RES products are closely correlated with the capacity to export industrial goods in general.
Traders and users of renewable energy technology
An interesting finding is that the top deployers of renewable energy may not always be the same as the top traders of the technologies and components. This implies that the products being exported and imported are multiple-use items and only a part of them are used in the RES sector. Products may also be exported in response to conducive conditions in external markets, but may be too expensive to deploy on a large scale locally. The export of solar panels from China to take advantage of the feed-in tariffs in Germany and Spain are a good example. In some cases, exports are driven by factors that are largely unrelated to the deployment of renewable energy capacity in the exporting country, such as preferential access to export markets. For example, some Central American and Caribbean countries are among the top 20 exporters of bio-ethanol because the US import regime allows them, within certain limits, to import “wet” bio-ethanol from Brazil and Europe and export dehydrated ethanol to the US market.
Similarly, there may or may not be a correlation between imports of RES products and local deployment of renewable energy. For example, nine of the ten countries that expanded their wind energy capacity the most in 2008 are also included in the list of top importers of wind turbines. In cases where this correlation is not found, it again suggests either that the imports are made up of multiple-use items or that major parts of the industry are not tradeable. In wind, however, Asian manufacturers have increased their share of the market and two Chinese manufacturers (Goldwind and Sinovel) and an Indian manufacturer (Suzlon) presently comprise 18 percent of the global supply.
In hydroelectricity, the top producers also feature among the top exporters of hydroelectric equipment (with the exception of Canada and Brazil). However, the equipment imports of top hydroelectric generating countries do not appear to be very high. While major countries that produce geothermal appear do appear on the list of key exporters, several countries that deploy geothermal energy, including Iceland and New Zealand, do not figure on the list of top exporters or importers. The correlation between the top traders in ocean energy equipment and deployers of ocean energy also seems to be very weak. Overall, this appears to indicate that for hydro, geothermal and ocean, traded components of technologies may not be the most important items with regard to the deployment of these technologies.
Tariffs on renewable energy technologies
Applied tariffs on most RES products in the top trading nations are in the single digits. India provides an exception in this regard. For solar technologies and components, the global average tariff is around 15 percent. Major importing countries such as China have applied tariffs of about eight percent and most developed countries have low or zero tariffs. One should keep in mind that most of the RES products considered are ‘multiple end-use’ products and many developing countries may be applying higher tariffs as part of their industrial development strategy or possibly to attract ‘tariff-jumping’ investment.
Most developing countries have higher applied tariffs on the whole than developed countries do, and with the exception of China, many developing countries also have some ‘tariff water’ between bound and applied tariffs. Ethanol is an exception to this trend. The US, a major importing country, has an ad-valorem tariff of 2.5 percent, and more significantly, a specific tariff of 14.27 cents per litre. On the other hand, tariff-free access is granted to ethanol imports to the US from Central American and Caribbean countries as part of the Caribbean Basin Initiative (CBI) and the Central American Free Trade Agreement (CAFTA) if they are produced from at least 50 percent local feedstock. Up to seven percent of the US market may be supplied duty-free and without local feedstock. This enables wet ethanol to be shipped from Brazil to dehydration plants in CBI countries for reprocessing and re-exportation to the US.
What drives the market and trade in renewable energy technology?
Subsidies: Public policies and subsidies are key drivers for renewable energy. The main measures used in developed countries to stimulate markets have been laws requiring utilities to purchase all electricity generated from renewables, laws requiring a certain percentage of renewables within all power generation, subsidies for investments and exemptions or reductions of taxes in component manufacturing, and preferential tariffs for electricity from renewables.
While supportive measures are required for the development of a renewable energy market, many of these measures are also likely to provide an unfair competitive advantage to developed country manufacturers of RES products. On the other hand, the main developing country exporters have traditionally relied on tariff protection - and in the case of China, localisation requirements - to stimulate their domestic RES industry. A lowering of tariff protection on RES goods without a reform of the subsidies affecting the trade in such goods is therefore likely to expose developing countries to subsidised competition. Tariff liberalisation should therefore be accompanied by subsidy reform. A number of policies also act as important non-tariff measures. Localisation measures are particularly notable in this regard. In China, localisation regulations require 70 percent of the equipment used for a renewable energy project to be sourced and built domestically.
IP: Intellectual property rights may also affect the diffusion of technologies. The number of patents registered in the renewable sector in different countries could also provide an indication of the dissemination of renewable energy technologies across borders. Patent holders usually register patents in a particular country if they want to commercially exploit the particular technology in that country. The difference between developed and developing countries in terms of the number of patents registered has been wide but is narrowing fast. Even more striking is the difference between groups of developing countries. A small group of emerging market economies account for nearly all the patents registered. China is particularly notable for the rapid growth in the number of resident-owned patents between 1998-2008. In China, 40 percent of the sampled technology patents are locally owned, while in India less than 14 percent are.
Fuel cell and solar energy patents account for 80 percent of the growth in global patents from 1998-2000, with wind energy a distant third. The export rate of climate technology inventions - measured by the share of technologies that are patented in at least two countries - is around 25 percent. Most transfer flows still occur between developed countries, although north-south flows are increasing. Flows between emerging markets are very small. Imports of technologies seem to crowd out local innovations. The higher the number of imported inventions, the lower the share of contemporaneous local inventions in the set of technologies used in the recipient country.
The relationship between trade flows in RES goods and the key market drivers
A regression analysis was conducted on the sensitivity of exports and imports of RES goods to four variables - namely tariffs on imports, the percentage of renewables in the electricity grid, the percentage of inventions as shown by the share of the country in global patents, and subsidies provided to renewables (using a dummy variable showing the presence or absence of subsidies). The regression results show that in general, the major exporting and importing countries of RES goods are also likely to patent inventions, use a high percentage of renewables showing high deployment of renewable energy, provide subsidies and have low tariffs. Tariffs were, however, found to be less significant as an explanatory variable for increased exports or imports as compared to a composite variable comprising the share of renewables in a country’s grid and subsidies. This appears to indicate that tariff reduction by itself may not generate trade in RES goods without supportive market drivers and policies, such as feed-in tariffs and other forms of subsidies. Markets in developed countries have grown exponentially during the last few years in response to the subsidies provided for renewable energy consumption, tax breaks, subsidies for components and the huge volume of venture capital investment.
While subsidies are important in generating a market for renewable energy, some may serve to distort trade and create an unlevel playing field. Such subsidies look set to increase further, as part of fiscal stimulus packages, given the economic crisis at the time of writing and the consequent drying up of venture capital. Discussions at the WTO should therefore address the two pillars of the RES sector, subsidies and tariffs.
However, as technology develops, other countries join in production, bringing down costs and increasing the divisibility of the supply chain. Thus there is a logical case to be made for liberalising trade in these components as they are likely to generate win-win solutions. Production particularly for the Chinese and Indian markets will also serve, through the economies of scale involved, to bring down the costs of RES technologies and goods.
Lessons for the future
In terms of trade negotiations at the WTO, one should bear in mind that only a handful of developing countries are important players in the markets or trade in renewables. This implies that negotiations on environmental goods could involve a ‘request and offer’ approach in order to achieve quick and effective results among the top 20 exporters and importers. This is the case in particular where the environmental end-use of products may not be as significant at the HS 6-digit level as for predominantly single end-use products. In the latter case, a larger group of countries could participate in reducing tariffs and non-tariff barriers.
Further barriers to the dissemination of RES technologies need to be identified and addressed. While patents may not pose an insurmountable barrier to the dissemination of renewable energy technologies, other forms of intellectual property (IP) protection, such as trade secrets, may be important. Patents have been seen to correlate positively with trade in renewable energy components.
Many other non-technological and economic factors many hinder developing countries from achieving their carbon abatement objectives, such as insufficient technical knowledge and absorption capacity to produce these innovative technologies locally, insufficient market size to justify local production units, and insufficient purchasing power and financial resources to acquire the innovative products. Each of these factors deserves considerable discussion. Solutions should be sought in policies that aim to overcome these insufficiencies. Creating the right enabling environment for the market drivers for renewable energy in developing countries should therefore be a key deliverable of the climate negotiations at the UNFCCC and a necessary complement to any trade liberalisation initiative on climate-friendly environmental goods and services at the WTO.
Veena Jha is Dr. Veena Jha is a Visiting Professorial Fellow at the Institute of Advanced studies, University of Warwick, UK, and a research fellow at the International Development Research Centre, Canada.
The full study this article is based on is available online at http://www.ictsd.org
[i] Accessible at: http://ictsd.net/downloads/2009/09/ictsd-ecn-renewable-energy-supply-mapping-report.pdf
[ii] Dechezleprêtre, A., Glachant, M., Hascic, I., Johnstone, N., and Ménière, E. (2008). “Invention and Transfer of Climate Change Mitigation Technologies on a Global Scale: A Study Drawing on Patent Data.” CERNA, Paris, France.
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what do you think are the main drivers are for wind power development and the main barriers ?