ETC Highlights Global Trade Hurdles in Energy Transition Briefing

Global Commerce in the Energy Transition: Principles for Clean Energy Supply Chains and Carbon Pricing, the ETC’s latest briefing note, focuses on how carbon pricing and technological advancements might hasten the global energy transition. Global progress might be seriously hampered, meanwhile, by rising worries about consolidated supply networks and the idea that changes to the carbon border are protectionist. The ETC briefing suggests the best course of action on two important trade-related issues:

Developing domestic supply chains: six principles for policy.
Carbon pricing and carbon border adjustment mechanisms (CBAMs): gaining global agreement to policies which can drive decarbonization of “hard-to-abate” sectors.

Six policy guidelines for nearshoring clean technology supply chains

Over the past ten years, the price of a number of sustainable energy technologies has drastically decreased. In 2024, over two-thirds of electric cars sold in China were less expensive than internal combustion engine (ICE) vehicles of comparable size and quality. The cost of solar PV modules has decreased 94% since 2011, while the cost of lithium-ion batteries has decreased over 92% since 2010 while doubling in energy density.

Because of its strategic vision, low capital costs, technical innovation, and dynamic entrepreneurship, rather than just its low labor costs, China has spearheaded this trend and currently maintains dominating market shares in a number of clean technologies.

Six guiding principles for the best possible policy:

Aim for diversified supply chains, not complete autarky.
Clarify different dimensions of “”security”—economic vs. national security—with different implications in different sectors.
Tailor policy by technology, focusing nearshoring efforts on sectors where cost-competitive domestic production can be achieved.
Base any use of tariffs on factual analysis of current subsidies in compliance with World Trade Organization (WTO) rules.
Focus primarily on the location of employment and value-add rather than ownership, recognizing that inward investment can be a major driver of technology transfer.
Work with China to increase climate finance flows to lower-income countries, supporting accelerated deployment of clean technologies.

“In an ideal world, free from geopolitical tensions or supply chain risks, China’s stunning technological progress and cost reduction would be welcomed as enabling a faster and cheaper energy transition worldwide. But there are economic and security-related reasons for seeking to develop domestic supply chains. Well-designed policy can ensure that those objectives are met in a way that drives further technological progress and cost reduction,” stated Adair Turner, Chair of the Energy Transitions Commission.

Carbon pricing and CBAMs: gaining global agreement to a vital policy lever

In some sectors of the economy, low-carbon technologies are already cost-competitive, but in “hard-to-abate” sectors such as steel, cement, chemicals and shipping, using available decarbonization technologies will entail a “green cost premium.” Carbon pricing is therefore required to make decarbonization in these sectors economically feasible. While 53 countries now have some form of carbon pricing, covering over 20% of global emissions, only the EU has prices high enough to significantly influence the economics of decarbonization.

If one country or bloc, such as the EU, imposes carbon prices on energy-intensive internationally traded sectors, producers will shift production to countries that do not impose carbon prices, preventing any emissions reduction—unless other countries implement equivalent carbon prices. The ideal solution involves countries globally agreeing on carbon prices for “hard-to-abate” sectors, and the International Maritime Organization recently took a crucial step toward that approach for shipping. Until that approach is in place for other “hard-to-abate” sectors, CBAMs are essential to support decarbonization, are not protectionist, and are the only way by which developed countries can take responsibility for imported emissions.

The ETC therefore strongly supports the EU’s imposition of a CBAM and its recent commitment to make the CBAM more robust.

Progress towards the ideal internationally agreed solution should, however, be fostered by

Seeking agreement, for instance through the WTO, on international standards for the measurement of carbon intensity.
Providing technical assistance to developing countries seeking to deploy carbon pricing.
Allocating some of the revenues which will accrue to the EU CBAM to support climate finance flows to lower-income countries.

“The world is entering a new industrial era powered by clean energy. Clean industrial projects are flourishing in diverse geographies, opening opportunities for new trade dynamics. But well-designed policies, including carbon pricing, supply-side financial incentives, and demand-side regulations, are essential to make projects viable and precipitate final investment decisions,” said Faustine Delasalle, Vice-Chair of the Energy Transitions Commission and CEO of Mission Possible Partnership.

Global Trade in the Energy Transition: Principles for Clean Energy Supply Chains and carbon pricing builds on existing ETC analysis, Better, Faster, Cleaner: Securing clean energy technology supply chains. However, the institutions with which ETC’s commissioners are affiliated have not been asked to formally endorse this briefing.