Global green growth conundrum

Green growth is the overarching theme across the world and India is no exception, but the trend towards deglobalisation is throwing a spanner in the works

Every country is assiduously wooing investment in manufacturing. Each country wants to have security of supply of all things critical — energy, technology, metals, minerals, computer chips, food. There is a whole “buy local” wave that rides on a “make at home” initiative. The new world order that emerges following these changes may look very different from what we are familiar with.

Apple Inc, for example, has 703 suppliers from multiple countries, as well as 390 customers, according to Bloomberg’s supply chain analysis. The number of suppliers for Samsung Electronics is even higher, at 965. Tesla has 298 suppliers, while Canadian Solar has 96.

“Where is it written that America can’t lead the world in manufacturing again?” President Joe Biden said in his State of the Union address earlier this week. The US climate law, the Inflation Reduction Act (IRA), passed last year offers incentives for local manufacturing of batteries and electric vehicles, among other things, and also gives a boost to technologies like carbon capture. He went on to talk about the incentives that are being offered to “make sure the supply chain for America begins in America.”

About $35 billion have been committed to the North American electric vehicle supply chain since the new law was passed, according to BloombergNEF estimates, even as detailed rules on availing of the incentives are awaited. Over half of this is for battery manufacturing. The next biggest category is cathode and anode material production. Mr Biden also said all federal infrastructure projects would use “American-made lumber, glass, drywall, fiber optic cables.” 

India and PLI

India’s self-reliance initiatives covering 14 sectors under the production-linked incentive (PLI) scheme for domestic manufacturing include batteries and solar panels. “In the medium term, the scheme will help reduce net imports by building domestic manufacturing capacity that will cater to domestic and global needs,” the government’s recent Economic Survey for 2022-23 noted.

The European Union is planning its own set of incentives to boost local manufacturing and ensure that competitive offers by other countries do not end up diverting investments and jobs, which it sees as unfair competition. In its “Green Deal Industrial Plan for the Net-Zero Age” unveiled earlier this month, it cites the US IRA, Japan’s green transformation plans, as well as India’s PLI scheme, and the plans of UK and Canada, and says: “Some of our partners’ initiatives can have undesired collateral effects on our own near-zero industries.” Batteries, solar equipment and green hydrogen are all areas of contention.

The IRA’s tax credits, for instance, could potentially make US green hydrogen the world’s cheapest, according to BNEF. Canada plans to bring its own incentives in line with those of the US. Australia, Brazil and Chile are likely to explore similar options. Germany’s economy minister Robert Habeck and his French counterpart Bruno Le Maire were in Washington this week to improve cooperation with the US on green subsidies and defuse tensions.

Meanwhile, China — which has a dominant presence in the battery as well as the solar supply chain — is considering proposals to restrict export of certain equipment for making solar ingots and wafers. China makes the majority of the world’s wafers, and all the top 10 wafer manufacturers have production facilities in the country.

Colour of growth

Green growth is the overarching theme across the world, and it was a core part of the Indian government’s Budget for 2023-2024, announced by Finance Minister Nirmala Sitharaman on February 1. Green growth is one of the key priority areas for the government, she said. There were as many as 25 mentions of “green” in her Budget speech, from green hydrogen and green energy to green mobility and green jobs.

She announced Customs duty exemption for “import of capital goods and machinery required for manufacture of lithium-ion cells for batteries used in electric vehicles.” Equipment costs can be nearly as much as 70 per cent of the overall expenditure needed to set up a battery pack manufacturing capacity, according to BNEF. She also set aside Rs 35,000 crore  ($4.24 billion) “for priority capital investments towards energy transition and net zero objectives, and energy security” to be channelled through the Ministry of Petroleum and Natural Gas. 

Carbon border tax

Another jolt to global trade could come from the European Union’s recently agreed upon carbon border adjustment mechanism, which would tax imports into the EU according to the amount of carbon emitted in their production. Canada plans to introduce a similar levy, and the US is exploring its options.

What policy and incentives can achieve is visible in Indonesia, which has become the world’s second largest cobalt producer, after the Democratic Republic of Congo. A proposed US import tariff of 200 per cent on Russian aluminium will lead to a global realignment of supply chains for the metal.

Deglobalisation is a word that will be heard increasingly often, even though every single country has benefited from a well-oiled and well-balanced global trading mechanism.

The writer is New York-based editor – global policy for BloombergNEF; vgombar@bloomberg.net