This commentary is part of the annual Energy Futures Forum, a project from the CSIS Energy Security and Climate Change Program exploring changes to the energy and climate landscape over the next 10 years.
The United States—and by extension the West in general—has a responsibility and opportunity to support struggling economies on their way toward development and decarbonization, stabilizing regions at risk and ensuring the global community is on track toward achieving the necessary greenhouse gas emissions reductions to avoid catastrophic climate change.
A domestic decarbonization strategy
The United States is on track to reinvent itself through a series of policies aimed at a green industrial revolution, fueled by unprecedented amounts of financial support. Yet, recent U.S. policies focus on internal investments and in fact may have negative external impacts.
The foundation for this trajectory was laid with the Bipartisan Infrastructure Law, also known as the Infrastructure Investment and Jobs Act. The subsequent CHIPS and Science Act provides funding for research and development and to support investing in semiconductor manufacturing capacity in the United States. Shortly after came the Inflation Reduction Act (IRA), which contains a series of incentives for climate- and energy-related investments across a range of sectors and technologies. Together, these three laws represent a significant influx of funding into the U.S. economy, especially clean technology (cleantech) sectors, the total amount of which is yet unclear due to the uncapped provisions in the IRA. However, the laws set out timeframes for the funding to be available, which means that most of the funds will be disbursed within a 10-year timeframe.
As a result, total additional investment in energy supply infrastructure for the years 2023 to 2032 could be as high as $3.5 trillion, and according to the REPEAT modeling results, most of it is in solar and wind. This would be nearly twice the capital investment compared to the business-as-usual scenario and could make the United States the world’s number one installer of renewable energy.
There are, however, several caveats in the projected growth of cleantech investment in the United States. These range from the general economic outlook as a main driver for investment to global commodity prices, workforce availability, permitting and land use conflicts, as utility-scale renewable energy projects already face a wait time for grid-connection of 4.5 years on average according to the Progressive Policy Institute’s Paul Bledsoe and Elan Sykes. With more projects expected, the wait time could increase dramatically, rendering the economics of project development challenging.
Another complicating factor stems from the fact that many projects rely on selling tax credits as part of their revenue stream. With many more projects expected to come online, vying to sell tax credits, a notoriously opaque market, there is a risk that this could drive down the retail value of those tax credits.
From an outside perspective, this trio of new industrial policy makes investments in the United States more attractive, especially in the cleantech sectors. Installing a wind park or a solar array in the United States now looks more appealing for investors, compared with before. Consequently, it is expected that significant financial flows will be drawn into the United States and away from less attractive investment environments. Adding to this, countries across the globe are confronted by a continuing energy crisis, resulting from Russia’s war against Ukraine, which translated into a food crisis for some vulnerable countries, resulting from high prices for synthetic fertilizers.
Impacts on developing countries
While debt crises and Federal Reserve interest rate hikes continue to constrain fiscal space in Global South countries, including least developed countries, developing countries and emerging economies, none of the United States’ new industrial policy laws provide explicit support to third countries.
Besides redirecting investment and financial flows, these three laws will also impact trade flows as some materials will be required to be manufactured in the United States, such as iron and steel, or also in countries associated through free-trade agreements, such as in the case of the extraction and processing of critical minerals in passenger electric vehicles (EVs), or require certain shares of the value of goods to derive from domestic source or that the assembly takes place in North America.
These stipulations might encourage a diversification of supply chains, increasing their resilience against future shocks, which is indented for products such as critical minerals and semiconductors. In other cases, the consequence may be less intentional, such as in the field of scrap steel, copper, and aluminum, to name just a few goods where the massive increase of demand in the United States could impact global prices and reduce availability for other markets.
As a positive impact, the projected demand for cleantech, could lead to economies of scale and learning effects, lowering the global cost for these technologies according to the Boston Consulting Group.
Either way, the trio of green industry laws will have a tangible impact, both on the U.S. economy and globally and it will be key for the United States to manage the global repercussions.
The United States has several options for sharing its green prosperity. The main limiting factor in view of the current power balance in Washington is that direct funding will be somewhat limited. Hence, anything but money needs to become the mantra for the next two years.
Building on the three U.S. green industrial policy programs, the administration could take the following steps:
- Ensure embassies and consulates are staffed and equipped to serve as one-stop gateways both for in-country demand for U.S. cleantech and foreign companies interested in becoming part of the clean and resilient supply chains required for meeting the new demand in the United States. This involves building partnerships that emphasize sustainability, both at the regional and at the global level, as exemplified by the emerging Minerals Security Partnership which still lacks balance between users and producers.
- Ensure that Export–Import Bank of the United States bank provides lower cost offers for cleantech providers, increasing the scope and scale of the Environmental Exports Program. The subsequent strategic plan for the years 2026 to 2030 should elevate cleantech and climate to a primary goal and significantly increase the share of environmental exports.
- Ensure that the U.S. International Development Finance Corporation (DFC) and the Millennium Challenge Corporation (MCC) place a stronger emphasis on climate investments. While DFC aims for climate neutrality by 2040, the FY 2023 investment threshold for climate is set at only 33 percent of funds. Likewise, MCC has focused 40 percent of investments on climate from 2015 to 2020. Both could dramatically increase these shares.
Additional options for executive and congressional action on sharing green global prosperity and address some of the most pressing issues include
- the launch of a regional guarantee platform for cleantech investments in Africa;
- technology transfer, including through a cleantech intellectual property (IP) bank;
- capacity building, including through research and education hubs;
- trade facilitation for climate and trade;
- the renewal of the African Growth and Opportunity Act (AGOA) as a green trade instrument (post 2025); and
- debt for climate offers.
A regional guarantee platform for Africa would provide cleantech investment guarantees for private investors into individual projects. By bundling these project guarantees beyond the national level onto the regional scale, the platform achieves two important outcomes: First, it spreads the risk by having a multitude of projects, across sectors and in multiple geographies in the portfolio. Second, it reaches a volume, where re-insurance providers—or other institutional investors—can come on board. This latter part, in turn, is crucial since development finance institutions alone can never reach the size of financing or guarantees required for the global climate transition. The public investors can, however, reduce the risk for reinsurers by offering first-loss capital. Such a platform could be initiated by the United States, allowing other public entities to join, as well as re-insurers, philanthropy, and other institutional investors.
Technology transfer can be fostered by, among others, setting up a cleantech bank for IP rights, serving as an intermediary and buffer between creators of IP and potential users. Bundling and streamlining processes on both sides would dramatically lower transaction costs. Furthermore, the bank can offer low-cost financing for interested users. On the supply side, the federal government could instruct recipients of research grants to make their findings available to the green IP bank.
Capacity building is an integral part of building capital in the Global South and needs to follow a systemic approach, building out an education and research infrastructure with the long-term goal of co-developing cleantech in the future. As such, national laboratories could offer programs to educate staff from the Global South and even set up training and education hubs in partner countries, in cooperation with local universities and colleges, as well as U.S. Agency for International Development and other federal departments and agencies such as Housing and Urban Development, the Environmental Protection Agency, and the Department of the Interior.
Trade facilitation for cleantech products to and from the Global South can play a supporting role as it reduces transaction costs for international trade which can constitute a significant barrier, especially, as the Organization for Economic Cooperation and Development’s Javier López González and Silvia Sorescu found, for small- and medium-sized enterprises.
The current design of AGOA does not explicitly factor in sustainability considerations or embedded greenhouse gas emissions. The expiry of the current system in 2025 provides an opportunity to relaunch AGOA as a vehicle to explicitly reward climate-active exporters in sub-Saharan Africa, while at the same time removing trade privileges for goods that are adversely contributing to climate change, considering both direct and indirect emissions.
Debt relief for climate can take various forms, ranging from debt forgiveness or restructuring for climate action (or ambition), to climate-conditional grants and loans, to debt-for-climate swaps. The latter category has received a lot of attention recently, as evidenced by a 2022 IMF working paper. Debt-for-climate swaps can take various forms of replacing debt with commitments for climate action, either directly between creditor and debtor or in a triangular constellation with a funder, aggregator, and a group of creditors in the middle. This approach is still in its early phase but has been met by interest by some developing countries.
The proposed actions need to be coordinated to maximize the total impact in terms of aiding development and climate action. A strategic plan to combine these measures would achieve a better outcome than insulated single-issue programs.
Likewise, while each of these actions can be taken unilaterally by the United States, the benefits would increase if these steps could be taken in coordination with international partners in plurilateral and multilateral settings, including with the European Union, the G7 and others. The ambition to collaborate with partners in these matters should not keep the United States from acting as others will be likely to follow their lead, creating sustainable equity in the Global South and implementing the goal of shared prosperity.
This article by Max Gruenig was first published by the Center for Strategic and International Studies (CSIS). You can read the original here.