There are growing opportunities to expand the trade in clean technologies. Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada writes about the opportunities from a Canadian perspective on the Policy Options website. There are important lessons for everyone.
The opportunity of green trade
It’s time to think globally about green business opportunities, and to bring green trade fully into the trade policy agenda.
As part of the discussion around climate change and reducing greenhouse gas (GHG) emissions, there’s been growing interest in the trade of clean technology and services, or “green trade.” The focus so far has been on the domestic market for the production and consumption of low-carbon energy, but there’s a much larger business opportunity awaiting in the international green trade market. According to the United Nations Environment Programme, the global market for green trade could exceed $2 trillion by 2020.
My recent Conference Board of Canada paper argues that a global lens should be used when assessing the opportunity that green business holds, and not just a focus on the domestic market. Green trade should also be considered within the overarching trade policy agenda — within existing and prospective trade agreements, most notably the North American Free Trade Agreement (NAFTA) and the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), as well as the government’s emerging “progressive trade agenda.” Engaging actively in green trade would allow Canadian firms to capture the benefits both of the green economy and of international trade and investment. Embracing a steady low-carbon transition and the formation of a lower-carbon economy in Canada would position Canadian clean tech and other firms to reach customers around the world for sales of their green and clean products and services.
An analytical framework is developing for understanding green trade. That framework has a series of components. It starts with potential trade in clean technology, to which clean or green services are added. The next phase is the global and regional value chains that are used to produce green tech and services, and finally two-way foreign direct investment and sales from foreign affiliates are added. Let’s examine each of those components.
At the core of green trade is “pure-play” clean technology, which is any technology designed to reduce GHG emissions and other negative environmental impacts. A recent Conference Board report, by Julie Adès and Jacqueline Palladini, defines this emerging sector in detail in terms of both the supply of Canadian clean tech and the demand for it.
Clean or green services are complementary and integral to the supply of green tech. An example of green service exports would be the installation, training and maintenance accompanying a specific technology that helps to reduce a firm’s GHG emissions.
Global value chains (GVCs) provide another dimension to analysis of green trade. GVCs are the dominant model for international business today, with firms using domestic and international trade to position elements of production wherever they make the most sense for the firm’s competitiveness and profitability. These production elements include conception (via research and development and process innovation), development, design, production, distribution and service. GVC trade could be analyzed from a low-carbon or environmental perspective, such as by understanding related GHG emissions and how they might be reduced. “Integrative trade” (a concept I developed) would complete the picture by assessing the impact of two-way foreign direct investment (FDI) by firms, and of sales from foreign affiliates, on green trade. Green services specifically are delivered via FDI abroad and related sales. GHG emissions and other environmental impacts can also be measured over the life cycle of traded goods, focusing on energy as a key input.
If Canadian green trade is to reach its full potential, key policy challenges will need to be addressed. Fundamentally, the clean tech sector is not well understood compared with more mature sectors of the Canadian economy. It often encompasses new, commercially unproven technologies and related services. Financial and commercial markets may have a hard time defining and assessing the opportunities (and risks) presented by the clean tech and clean services sectors. Public policy interventions can provide support for green trade in four ways:
- Access to sufficient financing at all stages. The 2017 federal budget acknowledged the existence of financing gaps for green tech and services, and provided funding to Export Development Canada (EDC) and the Business Development Bank of Canada (BDC) to begin addressing those market gaps. An ongoing assessment of market gaps for green finance, including trade credit, will be needed, as well as examination of the options for engaging the private sector deeply in green finance.
- Commercialization and launch customers within Canada. For green tech products and services to be sold successfully to a global market, those products and services should ideally have demonstrated their value domestically. Identifying and supporting commercialization opportunities in Canada for green tech, services and investment would thus be an important element of a successful green trade strategy. Sustainable Development Technology Canada already plays an important leadership role here.
- Role of government as an early buyer. The Canadian public sector, at the federal, provincial and municipal levels, can play an important role as an early buyer of green tech and services. Targeted public sector procurement policy could create such opportunities for green tech and services, helping to demonstrate their commercial value. But the legal and practical limitations of such procurement should also be understood, as well as the need to ensure value for money.
- Reaching the global market. Trade policy and promotion should be aligned with green trade ambitions. Global Affairs Canada has already dedicated specific staff resources to promotion of green tech trade, and further capacity could be added across the federal and provincial trade and investment promotion system.
Finally, where does green trade fit within Canada’s existing and prospective trade agreements, notably NAFTA and CETA? Green trade would certainly benefit from trade agreements that create a more level international playing field, including for traded services, for market access via foreign direct investment and for the development and protection of intellectual property. Green trade is a natural part of a progressive, forward-looking trade agenda. High common environmental standards built into trade deals would also, in principle, be positive for the promotion of Canadian green trade. Now is the time to think globally about green business opportunities, and to bring green trade fully into the trade policy agenda.