Flows, Barriers and Drivers of Trade in Environmental Goods: Evidence from the Renewable Energy Supply Sector

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the Renewable Energy Supply Sector Submitted by: ICTSD

1 2009/SOM2/MAG/WKSP/011 Session 1 Flows, Barriers and Drivers of Trade in Environmental Goods: Evidence from the Renewable Energy Supply Sector Submitted by: ICTSD Workshop on Environmental Goods and Services Singapore 28 July 2009

Happening at the WTO on Climate-friendly Environmental Goods? Some Issues important to developing countries.

2 Flows, Barriers and Drivers of Trade in Environmental Goods: Evidence from the Renewable Energy Supply Sector. -Mahesh Sugathan APEC Market Access Group Workshop on Environmental Goods and Services (EGS), Singapore 28 July 2009 Overview What is Happening at the WTO on Climate-friendly Environmental Goods? Some Issues important to developing countries. Analysis of the Friends WTO 153 List Biofuels and Energy-efficient goods ICTSD Mapping Study of Renewable Energy Technologies and Analysis Implications of Findings and Concluding Remarks

3 Environmental Goods and Services, a Growing Market with New Players Global EGS industry: USD 650 billion. Trade in EGS estimated at roughly a tenth of that amount Few developing countries are participating but A handful of emerging economies are becoming important players China, India (wind energy, fluorescent lamps) Mexico, Hong Kong, Korea, Malaysia, Colombia, South Africa or Brazil (Bio-fuel) Total Trade Value ($ '000) Renewable Energy Plant Exporters China Mexico Hong Kong US Germany The WTO Window: the DDA Negotiations on EGS Doha Ministerial Declaration: Para 31(iii) calls for the reduction or as appropriate elimination of tariff and non-tariff barriers to environmental goods and services. No definition exists of what is an environmental good. This has made an agreement difficult to reach. Approaches to Liberalisation List: Bound, MFN permanent liberalisation on pre-determined products. (Friends of Env Goods: Canada, the EU, Japan, Korea, New Zealand, Norway, Chinese Taipei, Switzerland and the US). Project/Integrated: Temporary liberalisation of all goods and services for designated projects. (India and Argentina). Request-Offer: Negotiations on the basis of bilateral or plurilateral requests on products of interest. Offers extends on MFN basis to all Members. (Brazil)

4 The Problem of Dual Use Case 1: Pipes As an Environmental Good: Used in Solar Hot Water Systems Case 2: 6-digit HS code entry (841360) : Pumps for liquids, whether or not fitted with a measuring device; other rotary positive displacement pumps As a Non- Environmental Good: Used in Oil and Gas Transportation Environmental Good Ex-Out: Pumps for Sewage and Wastewater treatment Non-environmental good Other pumps Non-environmental good Other pumps Climate-relevant Environmental Goods-What has been going on in the WTO? Qatar : includes natural gas fired generation systems and advanced gas-generation systems. Canada initially included hydrogen and bio-diesel;new Zealand :methanol and bio-diesel-later dropped. Brazil has informally proposed bio-fuels and bio-fuel technologies. Glass Insulation (Japan and New Zealand). Fluorescent Lamps (Japan, Canada, New Zealand and the United States). US-EU informal 2007 proposal to liberalise 43 climate friendly goods identified by the World Bank and climate friendly services on an accelerated basis. Zero tariffs on these goods by Some Members have proposed a review mechanism to identify and extend liberalisation benefits to new technologies that would evolve.

5 Climate-relevant Environmental Goods-What has been going on in the WTO? 43 products identified by World Bank from an earlier list of 153 environmental goods identified by a few key WTO Members. Renewable Energy products include wind turbines and solar panels. Global trade in these products have doubled from USD 67 billion to USD 119 billion ( ). Rapid growth in imports and exports. Bound and applied tariffs higher for developing countries. Environmental Goods in the broader «153 list» Proposed by Friends of Environmental Goods : Canada, the EU, Japan, Korea, New Zealand, Norway, Chinese Taipei, Switzerland and the US. Air pollution control Management of solid and hazardous waste and recycling systems Clean up or remediation of soil and water Renewable Energy plant Climate-relevant Heat and Energy Management Waste water management and potable water treatment Environmentally preferable products (based on end use or disposal charactersitics) Natural risks management Natural resources protection Noise and vibration abatement

6 153 List-Renewable Energy Plant Top 10 Global and Devg Country Exporters List-Renewable Energy Plant Top 10 Global and Devg Importers-2006

7 Fairly low tariff protection unlikely to be significantly affected by Doha Round Negotiations (if not singled out for special treatment) Bound and Applied Tariffs on EGs as Defined in WTO 153 List in Top 10 Importers Bound and Applied Tariffs on EGs as Defined in WTO 153 List in Top 10 Importing Developing Countries Ad Valorem Tariffs (%) Ad Valorem Tariffs (%) USA Germany China Mexico Canada Korea Hong Kong Denmark Bound Applied Post DDA Malaysia Russia 5 0 China Mexico Korea HongKong Malaysia Brazil South Africa Pakistan Colombia Morocco Bound Applied Post DDA Regression Analysis: Factors Influencing Imports of Environmental Goods (Source: Veena Jha-2007) Category of EGS Tariff sensitivity Bot sensitivity Degree of industrialisation FDI GDP Env regulation Air Pollution Not significant 0.26 Solid waste Not significant * Clean up Not significant Not significant -0.05* Renewable energy Not significant Heat Not significant Not significant EPP Not significant Not significant Not significant Natural Resources Not significant Natural risk Noise Not significant Not significant Wate water * Negative correlation may indicate an import substitution process as a result of the establishment of environmental regualtions

8 Findings by Veena Jha for ICTSD (2007) on the 153/43 WTO List of EGs Roughly 30% of products would be sensitive to tariffs. Compared to other goods in 153 list RE products are more sensitive to tariffs. Elasticity with respect to tariffs is low: one percent reduction in tariff leads to 0.15% increase in trade. Higher the Envtal Performance Index (EPI) ranking of the developing country, higher the trade in climate friendly products. Other factors such as FDI, GDP, more important in determining trade flows than tariffs. Correlation of trade in EGs to Tech Assistance projects is particularly high. Source: Energy-Efficient Goods and Services Various studies estimate that upto 40 per-cent of savings needed to reach Kyoto targets would come from energyefficiency. Many energy-efficient goods problematic to liberalise in WTO context. Eg: Difficult for energy efficient refrigerator vs less energy efficient one. Easier when products are physically distinct. Eg: LEDs vs incandescent lamps. Standard-setting and certification issues may be more relevant than tariffs to promote greater trade in EE products. Greater focus on NTBs? Relevant Services include designing and engineering for energy-efficiency (eg: buildings),installation and maintenance services for energy-efficient goods and technologies.

9 Two Challenges to including EE products as Env Goods Setting the EE threshold for products: OECD (2005) identifies following issues: How countries classify and describe products for which Minimum energy performance standards (MEPS) are required. Test procedures used to measure energy performance. Ways in which standards are specified. Stringency of performance thresholds required for products. Scheduling of reviews of regulations and test procedures. Country specific variables imp for ACs/Refrigerators Reconciling differences would be a major challenge.harmonising costs would mean trade and environmental benefits of specific liberalisation should be large enough Capturing Changing Technology for Preferential treatment Bio-fuels Classification: Ethanol-ag product; biodiesel-industrial (due to manufacturing process) The EGS negotiating mandate does not exclude discussion of agricultural products but Members so far only proposed industrial items. Implications for trade rules (including.subsidies)? Also HS Issues-as both ethanol (for fuel) and bio-diesel are ex-outs-under a broader category of products liberalise only ex-out or broader 6-digit category? Envtal relevance of product important in negotiationswhat if ethanol production is envtally damaging? No way to distinguish ethanol on the basis of PPMs.

10 ICTSD s Further Work on Trade Liberalisation in EGS Technology mapping studies in 4 key mitigation sectors identified by the IPCC Energy Building Transport Industry Specification of technologies for mitigation and identification of corresponding goods Definition of HS codes at 6 digit and beyond; options for new classification Analysis of trade flows, tariff and non-tariff barriers, DCA, GHG mitigation potential Research and analytical insight into UNFCCC negotiations on (potential for trade to enhance) transfer of technology Preliminary Findings from ICTSD Trade Analysis of 64 Products ( HS 6-digit Level) in the Renewable Energy Supply Sector ICTSD Analytical Exercise conducted with support of UNEP

11 Methodology Technologies Mapped by ECN were classified into 78 HS 6 digit codes ( covering solar, wind, hydro, geothermal, ocean and biomass). 21 HS 6 digit codes were screened out based on environmental end-use (as reflected by more detailed US and EU 8 and 10 digit codes) 5 HS codes were added to original ECN list ( i) Undenatured and (ii) denatured bio-ethanol, (iii) solar airheaters (iv) parts of hydraulic turbines, (v) parts of generators and gearboxes. Hence 62 HS codes at 6 digit level were analysed for RE trade flows. Exports of RES products and components that may be used in the RES sector, 2007 ( USD millions) All countries Developing countries Germany China China Korea, Rep Japan Taiwan, China United States Mexico Italy Singapore France Brazil Netherlands Thailand United Kingdom Malaysia Belgium India Korea, Rep Turkey Taiwan, China Philippines Denmark South Africa Sweden Vietnam Mexico Argentina Spain Saudi Arabia Singapore Tunisia Austria Colombia Switzerland Pakistan Ireland El Salvador Brazil Kazakhstan EU Intra-EU EU-27 (excl intra-eu) Source: COMTRADE using WITS

12 Imports of RES products and components that may be used in the RES sector, 2007 ( USD millions) All countries Developing countries United States China Germany Hong Kong, China China Korea, Rep Hong Kong, China Mexico Spain Taiwan, China France Singapore Korea, Rep Thailand Japan India Italy Saudi Arabia United Kingdom Malaysia Mexico Brazil Netherlands Turkey Canada Vietnam Taiwan, China South Africa Belgium Qatar Singapore Argentina Russian Federation Kazakhstan Sweden Algeria Thailand Chile India Pakistan EU Intra-EU EU-27 (excl intra-eu) Source: COMTRADE using WITS Some comments on hydro, geo-thermal and ocean energy products Most cases main countries trading in relevant HS codes are not the main deployers of energy. This implies that mapping of technologies used in these energy sources to HS 6 digit may not be accurate and include a diverse range of products. Further on-site development and grid development may be more relevant to these forms of energy rather than tradeable parts.

13 Solar Energy Products and Components Used in Solar Energy Generation Top Twenty Exporters on Solar Energy Products and Components (in USD Millions) All countries Developing countries China China Germany Taiwan, China Japan Korea, Rep United States Thailand Taiwan, China Singapore Italy Malaysia Korea, Rep Mexico France Philippines United Kingdom India Thailand South Africa Sweden Brazil Netherlands Turkey Switzerland Saudi Arabia 69.7 Belgium Vietnam 60.2 Singapore Argentina 43.8 Malaysia Hong Kong, China 30.9 Austria Costa Rica 13.3 Mexico Macao 9.2 Finland Tunisia 8.8 Czech Republic Ghana 6.7 EU Source: COMTRADE using WITS

14 Top Twenty Importers on Solar Energy Products and Components (in USD Millions) All countries Developing countries United States China China Hong Kong, China Germany Korea, Rep Hong Kong, China Taiwan, China Japan Mexico Spain Singapore Korea, Rep Thailand France Saudi Arabia Taiwan, China Malaysia Netherlands India Italy Vietnam Canada Brazil United Kingdom Turkey Mexico Qatar Russian Federation United Arab Emirates Singapore South Africa Belgium Kazakhstan Thailand Argentina Saudi Arabia Pakistan EU Source: COMTRADE using WITS Morocco Estonia Lithuania Malaysia Korea Rep. Colombia Argentina Slovenia Singapore Hong Kong Slovak Rep. India Brazil Croatia South Africa China Japan US EU Tariffs on solar technology products Series1 The applied tariffs are in generally below 15%. Major importers have low or zero tariffs. Only Morocco which is not a major trader has high tariffs. When prices are falling, tariffs unlikely to be an important market driver. Feed-in tariffs may be more important.

15 Analysis of exports and imports of solar-equipment The global photovoltaic (PV) industry faces an oversupply situation leading to falling prices along the supply chain by at least 20-40% in Further, the global PV market in 2009 is likely to decrease by around 10% in value terms over (SolarPlaza, Nov 2008) China is emerging as the largest player in PV with a substantial share of global trade (exports and imports) as well. China s high share in trade in PV is also indicative of the fact that several components of solar technology have now become tradable. Analysis of exports and imports of solar-equipment However largely environmental end-use HS 6 digit category in solar seems to be where the ex-out of photosensitive semiconductor devices including photovoltaic cells makes up a large part of the trade. Main importers appear to be the main deployers. Costs of solar generation seem to be coming down and tariff reduction could further aid in lower cost of production. However subsidies still needed to ensure grid-parity with conventional electricity generation.

16 Wind Energy Products and Components Used in Wind Energy Generation Top 10 Wind Energy-Installed Capacity (until Dec 2008). Source: Global Wind Energy Council Country MW % US 25, Germany 23, Spain 16, China 12, India 9, Italy 3, France 3, UK 3, Denmark 3, Portugal 2, Rest of the World Total Top , World Total 120,

17 Top 10 Wind Energy-Installed Capacity (Jan-Dec 2008). Source: Global Wind Energy Council Country MW % US 8, China 6, India 1,800 7 Germany Spain Italy 1,010 4 France UK Portugal Canada Rest of the World 3, Total Top 10 23, World Total 27, Top Twenty Exporters of Wind Energy Supply Products and (in USD Millions) All countries Developing countries Germany China Japan Mexico United States Singapore China Korea, Rep Italy Brazil France India Mexico Turkey Denmark Taiwan, China United Kingdom Malaysia Spain Thailand Belgium Vietnam Singapore South Africa Korea, Rep Tunisia Austria Argentina Sweden Saudi Arabia Netherlands Colombia Hungary Morocco Canada Kazakhstan Brazil Syrian Arab Republic 96.1 Finland Chile 57.2 EU Source: COMTRADE using WITS

18 Top Twenty Importers of Wind Energy Products and Components (in USD Millions) All countries Developing countries United States China Germany Mexico China Korea, Rep Mexico Hong Kong, China France Singapore United Kingdom India Canada Brazil Italy Thailand Spain Saudi Arabia Japan United Arab Emirates Korea, Rep Taiwan, China Hong Kong, China Turkey Belgium Malaysia Singapore South Africa Denmark Argentina India Vietnam Netherlands Qatar Brazil Kazakhstan Sweden Algeria Thailand Morocco EU Source: COMTRADE using WITS Analysis of wind energy exports and imports. A third of the world's wind capacity is now under the aegis of the top 20 wind farm owners. Two Chinese manufacturers (Goldwind & Sinovel) and one from India (Suzlon) in total now represent 18 % of the global supply. Apart from wind turbines, the top twenty exporters of components of wind energy supply goods are however not exactly the same as the top twenty producers of wind energy. Eg: India. This shows the limitations of the mapping exercise where a number of components for wind energy may actually be dual use products. However more of a correlation between deployers and importers. India again an exception. Most components locally produced. Large producers such as India may also be producing for the local market, but where assembly is in third countries they may be importing components. China has built up significant capacity along supply chain.

19 Analysis of wind energy exports and imports. Localisation in some countries driven by incentives (such as taxcredits, feed-in tariffs) but also desire by firms to avoid import duties, transportation costs and logistical difficulties. Regression shows that feed-in tariffs affect imports of wind components. In wind-energy there is a rare-gem or HS-6 digit category i.e. HS (other generating sets-wind powered). Mapping export flows in this HS code gives a better fit between the main producers and main deployers of wind energy. Exporter (all) Exports of wind-powered generating sets (HS ) Exports ($million) Exporter (developing countries) Exports ($million) World All developing countries* Denmark India Germany Vietnam Japan China 78.0 India Brazil 1.0 Spain Vietnam China 78.0 Italy 44.5 Australia 36.9 Netherlands 15.8 United Kingdom 15.2 United States 14.2 Greece 5.1 France 4.4 Czech Republic 2.2 Canada 2.2 Estonia 2.0 Austria 1.4 Brazil 1.0 EU-total EU-total (excl intra-eu trade) Source: COMTRADE using WITS

4% Dongfang (China), 3.4% Suzlon (India), 8.1% REpower (Germany), 3.0% Mitsubishi (Japan), 2.6% Others 6.8% Siemens (Germany), 6.

20 Global Market Share of Top Original Equipment Manufacturers (OEM) of Wind Turbines. Vestas (Denmark), 17.8% GE (United States) 16.7% Gamesa (Spain), 10.8% Enercon (Germany), 9.0% Sinovel (China), 4.5% Acciona (Spain), 4.1% Goldwind (China), 3.6% Nordex (Germany), 3.4% Dongfang (China), 3.4% Suzlon (India), 8.1% REpower (Germany), 3.0% Mitsubishi (Japan), 2.6% Others 6.8% Siemens (Germany), 6.2% Source: BTM Consult, International Wind Energy Development: World Market Update 2008, 24 Tariffs of Major Importers of Wind Energy Products for 2007 Source: COMTRADE using WITS

21 Undenatured Bio-ethanol Top 20 Exporters of Undenatured Bio-ethanol (HS ) in 2007 (in USD 000) Reporter Name Exports 000 Brazil 1,439, El Salvador 142, South Africa 85, European Union 70, Jamaica 60, China 53, United States 50, Canada 42, Argentina 38, Guatemala 38, Costa Rica 29, Bolivia 28, Trinidad and Tobago 27, Pakistan 23, Thailand 20, Ecuador 13, Turkey 12, Peru 9, Kenya 7, India 7,

22 Top 20 Importers of Undenatured Bioethanol (HS ) in 2007 (in USD 000) Source: WITS Top 20 Importers of Undenatured Bioethanol (HS ) in 2007 (in USD 000) Source: WITS

Ethanol Import Duties in Select Countries- 2004 Analysis of bio-ethanol trade Targets an important driver though subsidies and tariffs also affect trade More export opportunities

23 Ethanol Import Duties in Select Countries Analysis of bio-ethanol trade Targets an important driver though subsidies and tariffs also affect trade More export opportunities particularly for the lower-income developing countries. Many countries import and process undenatured ethanol and export it on to FTA partners. Carribean countries a good example.

24 Regression Analysis to Detect Drivers of Exports and Imports in Renewable Energy Products Export and Imports Taken as the Independent Variables Import Tariffs, Targets for Renewables, Proportion of Renewables in an Economy, Subsidies such as feed-in tariffs and Patents for RE Technology Registered by a Country taken as explanatory variables. Exports of RE products affected by a composite variable of subsidies and share of RE in Energy Mix as well as patents of RE technology registered by a country. Import Tariffs of country A not very significant in determining exports of country A. Imports of RE products affected more by import tariffs but perhaps more importantly by subsides and targets. No: of patents registered by a county also affect imports. Thus tariff liberalisation is important but may not be as influential as other market drivers in determining trade. Registration of patents appear to boost trade but this is again if foreign firms interested in commercialising technology in market. China has lion s share of registered patents increasingly by Chinese companies Summary of Findings from the Renewable Energy Sector by Veena Jha for ICTSD [forthcoming (2009)] Only a handful of players important in trade in renewables. Any negotiating proposal for liberalising trade will need to take account of this. No matter how careful the mapping exercise, translating renewables to six digit tariff lines has serious limitations. In most cases it would include multiple use products. Emerging economies important players, though their share of trade is less than half that of developed countries. Components for solar and wind appear more tradeable than for geothermal, hydro and ocean.

25 Summary of Findings from the Renewable Energy Sector by Veena Jha for ICTSD [forthcoming (2009)] Liberalizing tariffs alone may not guarantee a diffusion of these technologies or the creation of markets for products used in these technologies in developing countries. Subsidies, venture capital investment important drivers of exponential market growth in developed countries. Given the present grip of the economic and the financial crisis it is unlikely that such venture capital will come to developing countries. Other NTBs need to be addressed. Concluding thoughts Trade liberalisation is only a part of the picture. RE Market creation and energy efficiency may need supportive measures outside WTO. The latter in turn may enhance trade further. Implications for trade and climate change negotiations?

26 Thank You

Climate Change, trade and production of energy-supply goods: The need for levelling the playing field Veena Jha

Climate Change, trade and production of energy-supply goods: The need for levelling the playing field Veena Jha Presentation at the WTO workshop on environmental goods and services. This presentation is