By Luz María de la Mora, Director of International Trade and Commodities, UN Trade and Development (UNCTAD)
©UNDP/Stéphane Bellerose | Engineers at a grid-scale Battery Energy System Storage facility in Mauritius - part of a project financed by the Green Climate Fund to enable the country to increase its renewable-energy capacity.
As the world approaches the 2050 target for net-zero emissions, the journey toward this goal underscores the need for cohesive trade and investment strategies that address climate challenges.
Achieving ambitious goals, such as tripling renewable energy production by 2030, has proven challenging given the complex web of global policies – particularly the surge in new industrial policies that use trade policy instruments to protect domestic production.
This raises questions about how these policies affect developing nations and whether they support or hinder a global, equitable transition toward decarbonization.
Industrial policies, though not new, have evolved to address current geopolitical, economic, and environmental domestic priorities. The resurgence of domestic industrial policies in the world’s largest economies, such as the United States, the European Union and China, has impacted international trade flows.
A growing divide
The UN Secretary-General’s report to the General Assembly highlighted how industrial policies in developed nations perpetuate a growing divide in productive capacities between the Global North and South.
Without access to affordable technology and knowledge transfer, developing countries risk being marginalized in sectors vital to the low-carbontransition, such as renewable energy and digitalization.
New industrial policies often aim to protect and promote domestic industries using trade policy instruments that risk distorting global trade and competition.
For instance, the US Inflation Reduction Act and the CHIPS and Science Act, the European Union’s Green Deal Industrial Plan and China’s “Made in China 2025” initiative all seek to strengthen national capabilities in critical sectors by restricting market access, introducing local content or performance requirements and other measures.
However, this approach risks creating a playing field skewed in favor of developed countries, potentially leaving developing economies further behind.
As developed nations deploy subsidies and other incentives to drive advancements in clean energy and digitalization, the global gap between developed and developing nations’ economic trajectories may end up widening.
A 2024 International Monetary Fund working paper on the return of industrial policy in data found that when one major economy introduces subsidies for a product, other major economies follow suit within a year, with a 73.8% likelihood.
This trend, referred to as a “subsidy race,” leads to distortions in trade flows and exacerbates inequalities, pushing developing nations into a cycle of lagging progress in key sectors.
Data supports concerns about this widening gap. Unlike wealthier nations, developing countries often lack the resources or fiscal capacity to match this type of support to domestic players. This puts developing nations at a disadvantage in sectors most needed to address climate change, such as renewable energy and digitalization.
Indeed, UN Trade and Development's (UNCTAD) recent report on trade and energy finds that developing countries are going back to traditional trade patterns, acting as net exporters of raw materials for solar and wind energy value chains, while being unable to take part in the intermediate and final production stages of manufactured goods that could support a transition to zero emissions.
Barriers to investment and market access
At the heart of this issue there is a substantial investment gap. Developing countries face an annual shortfall of about $2.2 trillion in climate finance necessary to transition to renewable energy and meet 2030 climate targets.
This gap is worsened by slow progress on key elements of the Paris Agreement, particularly regarding climate finance, technology transfer and capacity building. Without sufficient financial and technical support, developing nations risk being left behind in the race toward decarbonization, jeopardizing the global goal.
To avoid a scenario where certain nations progress toward net-zero emissions while others fall behind, when devising new industrial policies, countries would need to consider their global impacts and consider developing countries’ concerns. Ensuring that developing countries have access to affordable technology, knowledge and financing is essential to close the investment gap and enable a truly inclusive sustainable transition.
Further complicating the situation are new and unilateral trade policies tied to environmental standards that inadvertently create market access barriers for many developing economies.
The European Union’s Carbon Border Adjustment Mechanism (CBAM), for example, aims to curb carbon emissions by imposing new import duties based on the carbon footprint of products.
However, this policy presents disproportionate challenges for countries with underdeveloped climate policies or limited technological capacity. The UK, Canada and (potentially) Australia are exploring the possibility of imposing similar unilateral measures that could also hinder developing countries’ abilities to participate in trade and attract investment.
Each of these border carbon adjustment measures involves different reporting, verification and product-specific requirements, placing an administrative and financial burden on developing nations.
Countries without the infrastructure to meet these standards face restricted access to some of the largest markets. As a result, developing nations may be inadvertently penalized, even as they struggle to make meaningful contributions to the global climate agenda.
Rebalancing climate finance and trade
With COP29 on the horizon, there is an opportunity for global policymakers to rethink how they approach climate investments and trade policies.
As UN Trade and Development, the World Trade Organization (WTO), the International Chamber of Commerce and the International Trade Centre (ITC) collaborate with Azerbaijan’s Ministry of Economy to host the Trade and Investment House at COP29, these issues will be central to the discussions.
Sessions at COP29 will focus on identifying solutions to help developing nations integrate more fully into the global renewable energy value chain and strengthen their productive capacities.
Another critical element in this balancing act is the growing trend of using trade restrictions as a tool to achieve environmental goals.
While addressing environmental concerns is imperative, the unilateral or regional approach may exacerbate trade imbalances and contribute little to reducing global carbon emissions. Environmental challenges are global, and so must be the responses.
Non-tariff measures, particularly those affecting production processes, should be carefully evaluated to avoid unintended consequences that could limit developing nations’ ability to compete in the global market. Multilateral discussions on non-tariff measures, involving both developed and developing countries, could prevent restrictive measures from further disadvantaging countries that already face barriers to transition efforts.
At the COP29 Climate Finance, Investment and Trade thematic day, UN Trade and Development will join forces with the COP29 Presidency, the United Nations Development Programme and other international agencies to launch the Baku Initiative on Climate Finance, Investment and Trade.
This initiative will focus on addressing climate financing gaps, promoting investment and enhancing trade policies to support a sustainable, inclusive, and equitable dual transition. By leveraging the collective expertise of UN agencies, the WTO, ITC and multilateral development banks, the Baku initiative aims to create a coordinated approach to the low-carbon transition that prioritizes inclusivity and equity.
A sustainable future for all
The imperative to achieve the Paris Agreement targets and the Sustainable Development Goals calls for a collaborative, coordinated approach that ensures developing nations are integral participants addressing the climate change agenda.
For industrial policies to effectively drive climate action, they must also uphold the principles of equity and fairness, avoiding measures that inadvertently reinforce global disparities.
Balancing trade and investment policies is critical for addressing climate challenges. At COP29, stakeholders have an opportunity to rethink industrial policies, ensuring that they are tools for progress rather than instruments of protectionism or inequality.
By fostering global cooperation in technology transfer, capacity building and financing, the international community can support an inclusive transition, ensuring that no country is left behind in the journey toward a sustainable, decarbonized world.
The road to a sustainable future demands both bold actions and inclusive policies. This balancing act – one that fosters equitable industrial policies, integrates developing countries into renewable energy value chains and promotes trade as an enabler to address climate change – is essential for securing a just and sustainable future for all, irrespective of economic status or development level.
This article was first published on 13 November 2024 on SDG Action.