Renewable Energy Policy – Not Just a Domestic Issue

Global investment in renewable energy is estimated at $254 billion. For the countries that invest in them, energy markets provide a great deal of wealth and the potential for growth. One sector of the renewable energy field, solar energy technology components (SETCs), had worldwide exports that increased by 600 percent between 1996 and 2008, with a total value of 95.2 billion US dollars in 2008.

This market requires rigorous analysis to understand the ramifications for exporting and importing countries, as well as the policy instruments for renewable energies and their effect on the overall trade market. This analysis is necessary to determine the correct policy approach to improve energy efficiency and technological innovation, with the potential for growth and financial gains for exporting countries.

In “Determinants of Trade with Solar Energy Technology Components: Evidence on the Porter Hypothesis?“, Felix Groba analyzes annual exports of SETCs from countries of the Organization of Economic Cooperation and Development (OECD) to determine the effects on exports of renewable energy policy, regulatory support for renewable energies, and trade barriers for imports. He finds that countries with stronger regulations in favor of renewable energies for extended periods of time have an exporting advantage. Additionally, increasing the number of effectively enforced import tariffs leads to an overall reduction in SETC exports. Those countries with an exporting advantage have the ability to dominate a relatively untapped market.

The study uses panel data from 1999 to 2007 of SETC trades from 21 OECD exporting countries and 188 importing countries. Groba examines his results to determine if they support the Porter hypothesis, which states that strict environmental regulations can encourage innovation and discovery, leading to a more efficient production process and product and thereby improving commercial competitiveness. If true, a country could improve its exporting potential, leading to growth and financial gains by enforcing environmental regulations.

The author finds support for the Porter hypothesis.  Results demonstrate that countries with stronger regulations on renewable energies have advantages in SETC exports compared to countries with weak or nonexistent policies. The success of the regulatory policy, as measured by the share of solar electricity generation from total electricity generation, also has a positive impact on exports. Doubling this share leads to an increase in SETC exports by almost 160 percent. Regulations for renewable energies support the market for technology production, thereby increasing exports and market growth for SETC producing countries.

Groba finds that one additional year of supportive policy for incentive tariffs is associated with a seven percent increase in SETC exports, and each additional year in support of tax measures targeted to expand solar energy electricity increases exports by two percent. This means that enforcing policies early leads to greater exporting potential.

Focusing on imports, a country with low policy support and high trade barriers has significantly fewer SETC imports than a country that has stronger support for renewable energy and low trade barriers. This implies that countries with high trade barriers have less renewable energy technology and innovation. Doubling the measure of effectively applied import tariffs results in a decrease of exports by up to 150 percent. Import tariffs not only have an effect on their own domestic use of renewable energies but also the exporting potential for SETC producing countries. Overall, the political climate in both exporting and importing countries has a large effect on the trade volume for SETCs.

Solar energy has great potential as an alternative energy source, leading to huge growth potential for an organization or country providing the necessary technology. In general, trade in this area is dominated by a few major exporting OECD countries, most of which invested heavily in support for the technology early in its development.

The effects of policy support lead to two important discoveries for success in renewable energy markets. To become a major exporter of the technology and to see continued growth, it is important to invest via policy support early in the origination of the technology. Additionally, in order to improve energy efficiency through renewable energy sources in developing countries, it is necessary to continue liberalization of these technologies.

High import tariffs create barriers for exporting countries as well as importing countries that are attempting to improve their efficiency. Both of these issues can be resolved through supportive policy for renewable energies, leading to increased imports and exports along with a more efficient system of energy use and market growth in the industry.

Article Source: Determinants of Trade with Solar Energy Technology Components: Evidence on the Porter Hypothesis?, Felix Groba, Applied Economics, Volume 46, Issue 5 (2014)

Feature Photo: cc/(bkusler)