New guardrails needed to protect green investment surge from counterproductive trade wars

Governments everywhere need to promote investment in clean technology — because, left to themselves, market forces ignore the harm caused by carbon emissions.

Governments around the world are engaged in a race to dominate green technologies — the batteries, wind turbines, heat pumps and more needed to combat climate change. This competition could descend into counterproductive trade wars, or it could accelerate progress toward net-zero emissions.

If world leaders want the latter outcome, they’ll need to establish some ground rules.

Last month, the European Commission moved in the wrong direction when it announced an investigation into state subsidies of Chinese electric cars, which have been rapidly gaining market share in Europe. If the probe finds the subsidies to be unfair, it could result in countervailing duties. This would likely prompt retaliation against European manufacturers, some of which are major exporters to China. The upshot would be fewer and more expensive cars, in Beijing and Berlin alike.

No doubt, China’s trade practices are often problematic. But governments everywhere need to promote investment in clean technology — because, left to themselves, market forces ignore the harm caused by carbon emissions. Achieving net-zero emissions by 2050 will require nearly $200 trillion in new investment globally, according to Bloomberg New Energy Finance. The US and EU recognise this: They too are using subsidies to encourage the right kinds of investment.

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To be sure, a carbon tax would be a far more efficient way to achieve the desired result. But to the extent that governments nonetheless opt for subsidies, they shouldn’t be designed in ways that stifle competition. Policies to promote green investment need to let the world’s best and most efficient producers prevail — otherwise the transition to clean energy will be all the more expensive.

Here, the US is a big offender: It’s the world leader in imposing countervailing duties on imports (of solar panels, for example). And the $370 billion in green subsidies contained in the Inflation Reduction Act include domestic-content rules that discriminate against foreign suppliers. In response, the EU has been considering similar requirements of its own. The mere threat of such measures does great harm: Who will invest in new ventures if they fear they won’t be able to serve a global market?

China, the EU and the US are all perfectly capable of competing without walling off their markets. One recent study found that the EU has maintained a large and growing share of global low-carbon-technology exports, despite providing less subsidy than others. Economics also dictates that production of hard-to-transport items such as batteries will increasingly have to be local. As Mercedes-Benz Group Chief Executive Officer Ola Källenius recently put it, speaking about electric-vehicle competition with China, “Let’s keep markets open and let market participants fight it out.”

To that end, a better set of rules is needed. World Trade Organization prohibitions on unfair practices haven’t been particularly effective, and they don’t distinguish between good and bad subsidies. To remedy this, governments should agree to allow well-designed subsidies that generate broader social benefits, provide timely disclosure of what they’re subsidising, set reasonable limits and impose effective penalties for transgressions. Such a framework would leave room for all to protect vital national interests — for example, for the EU and the US to ensure security of critical inputs — without resorting to mutually harmful measures.

Stopping climate change will require an epic transformation of the world’s industry and infrastructure. Letting the most efficient producers succeed is the best and fastest way to get it done.

The Editors are members of the Bloomberg Opinion editorial board. Views are personal and do not represent the stand of this publication.