Developing countries can benefit from climate policies of world’s biggest economies

The world’s largest economies are intensifying their efforts to address the existential threat of climate change through green subsidies, carbon pricing, and regulation. These initiatives are both necessary and welcome, but they will reshape global demand for goods and services in ways that affect the economic prospects of developing countries, which rely on international trade to drive growth and generate jobs.  

In previous blogs, we discussed some of the challenges posed by the new climate mitigation policies. These include meeting complex requirements to measure the carbon content of traded goods or to demonstrate that cultivation of commodities such as coffee and cocoa hasn’t resulted in deforestation. We noted that many firms in developing countries will have trouble meeting these requirements without substantial technical and financial assistance. Overall, developing countries may have to reorient more of their resources and trade than developed countries to remain competitive under these new mitigation policies.

In this blog, however, we will focus on the considerable opportunities based on World Bank analysis of climate policies including the EU Emissions Trading System (ETS), Critical Raw Materials Act, and Renewable Energy Directive; the US Inflation Reduction Act (IRA); and China’s ETS and vehicle fuel standards.

Polices to limit greenhouse-gas emissions—such as ETS and emission regulations – and green subsidies will boost demand for renewable energy and the critical minerals needed to make solar panels, wind turbines, batteries, and high-efficiency appliances. Developing countries’ exports of critical minerals are now valued at $246.4 billion a year; global demand for exports of critical minerals is expected to double in volume over the next 15 years if countries’ announced energy access targets and net-zero commitments are realized, according to the International Energy Agency’s Critical Minerals Market Review 2023. That represents a prime opportunity for countries like Mozambique (with more than half of the world’s graphite reserves), Argentina (22 percent of lithium), and Indonesia (18 percent of nickel). 

Stricter CO2 and fuel economy standards will also fuel demand for other green-tech goods such as electric vehicles (EVs), solar panels, wind turbines, and their components, including batteries. With this increased demand, the global green technology and sustainability market is projected to experience a five-fold increase from 2023 to 2032, according to Global Market Insights 2023. Developing countries’ exports of green-tech goods and components to China, the European Union, and the United States now come to about $185.6 billion. The biggest winners in the short to medium term are countries that focus on exports to the world’s three biggest economies. These include North Macedonia, Tunisia, Mexico, and Serbia (Figure 1). In the case of North Macedonia and Tunisia, green tech goods and components bound for those markets make up about 12 and 9 percent of GDP, respectively making for a potentially significant economic impact.  

Not everyone will be likely to gain from increased demand for EV components in the United States. Starting in 2029, only batteries fully produced or assembled in North America will qualify for tax credits offered under the IRA. That will benefit Mexico, which will also likely ship more fully assembled EVs to the United States to take advantage of the tax credits. Other middle-income countries with the capacity to build vehicles are likely to see higher sales of EVs to the European Union. These include Morocco, Türkiye, and Vietnam.

Here are some steps developing countries can take to comply with the increasing number of climate policies and regulations of key trading partners, boost carbon competitiveness, and seize the opportunities offered by green transition:  

• Strengthen efforts to achieve Nationally Determined Contributions by promoting the development of renewable energy and help firms decarbonize; 
• Facilitate technology adoption by reducing tariffs and non-tariff measures on goods and services critical in adaptation and mitigation; attract foreign investment in green sectors with export potential; and strengthen links with green global value chains by addressing legal, regulatory, and administrative barriers to doing business; 
• Promote the green transition of the economy by establishing carbon pricing mechanisms based on international standards; and
• Strengthen quality infrastructure – including carbon measurement, reporting, verification and accreditation and overall traceability infrastructure – to facilitate compliance.  

For their part, China, the European Union, and the United States should avoid protectionist instruments, like local content requirements or discriminatory subsidies, which harm the development prospects of low- and middle-income countries and delay their green transition.

They can support the green transition by sharing best practices, including on environmental and labor standards; phasing in trade-related sustainability requirements to give developing countries with weak institutional capacity time to catch up; and providing financial and technical assistance. 

Climate effort is to be welcomed, but proliferation of climate policies and standards increases compliance costs for developing-country exporters. For instance, there are at least 20 standards for decarbonization of steel, each with different methodologies. Multilateral organizations such as the World Bank have an important role to play in promoting the harmonization of standards and recognition of standards of developing countries.

Source: blogs.worldbank.org