Governments and investors are responding to the global sustainability imperative. The former increasingly see support for climate investment as not only necessary to reducing carbon emissions, but also to catalyse a new wave of economic development. This blurring of climate change goals and economic development goals has sparked global competition for climate investment, and accusations of ‘beggar-thy-neighbour’ and mercantilist policies between the major trading blocs.
In 2005, less than 2% of global greenfield foreign direct investment (FDI) was in activities related to climate change and the environment (climate FDI). By 2018, climate FDI had grown considerably, but still accounted for only 12% of global FDI. Since 2020, there has been explosive growth in climate FDI — 39.4% of all global capital investment in greenfield FDI projects in 2022 was climate FDI, with total investment approaching close to $500bn.
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The location of climate FDI has been very concentrated. Over the two-year period from 2021/22, the top 15 countries attracted more than three-quarters of climate FDI (see chart 1). In 2022, investment became even more concentrated with the top five countries attracting 65% of global FDI.
Of the top 15 countries, 37% of FDI from 2021/22 went to emerging markets and 63% to developed economies, although more than half of the countries in the top 15 were emerging markets.
The greenfield FDI numbers belie major differences in the composition of climate FDI that the top countries are attracting and the level of competition between countries for different parts of the value chain.
Chart 2 shows the breakdown of climate FDI in the leading recipients between renewable energy FDI (primarily solar and wind energy, and hydrogen facilities) and all other climate FDI (primarily manufacturing supply chains).
In many of the leading destinations for climate FDI, this is almost entirely based on attracting the electricity generation and hydrogen facilities. These types of investment are less competitive across countries (although there is competition for financial capital) being primarily based on the investment projects ready to offer (IPROs) in each country, such as solar and wind auctions.
By contrast, Hungary, China, Canada, Mexico and the US are by far the most specialised countries in non-electricity generating climate FDI, especially in the manufacturing supply chain. These FDI projects are much more contestable as companies establish global or regional export platforms, and there is much more competition for these mobile investments.
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Governments have been providing investment incentives for decades. These subsidies have generally been aligned with the sector and location’s priorities and reflect the level of competition to win investments. There is generally less competition to win renewable energy projects focused on electricity generation as they are more supply driven. The competition is more about which countries and states can offer a good pipeline of investable IPROs for investors. However, given the global imperative to reduce carbon emissions reflected in national targets, renewable energy projects are heavily subsidised in many countries.
There is more competition for FDI for manufacturing projects in the climate FDI supply chains, such as the production of cleantech equipment. While these projects tend to gravitate close to the renewable energy electricity generation projects (especially in the wind sector, given the costs of moving large and bulky wind blades, turbines and towers), these projects often receive high subsidies due to the competition to attract global value chains and the large economic development impact these investments can be high.
According to data from IncentivesFlow, between January and March 2023, the average incentive awarded per job created in three countries (Canada, Spain and US) that are successfully competing for renewable energy investments and related global value chains was very similar, at around $60,000 per job — far higher than the average incentives awarded in most other sectors. As a percentage of capital investment, governments in Canada and Spain awarded incentives around 20% of capital investment compared to less than 10% in the US.
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Mobilising climate FDI: subsidies are not enough
The US Inflation Reduction Act (IRA), and EU and Chinese subsidy programs that provide tens of billions of dollars for climate related investments are game-changers in accelerating climate FDI and the associated economic development from increased investment.
While China and the US are being accused of using beggar-thy-neighbour policies through unfairly subsidising cleantech industries and thereby shifting investment and global value chains to their countries, there is a much bigger picture that is slowing down carbon emissions and reducing the pace of climate change. Arguably, the subsidies war over clean FDI is a ‘race to the top’ rather than a ‘race to the bottom’, and the US administration is right in that the EU should offer matching subsidies rather than complain about the IRA diverting investment — the EU passed its Chips Act on April 19.
What the world needs is much more climate FDI. When we look back at the IRA decades from now, we will not see it as unfair trade policy, but a pivotal moment in increasing government commitment across the developed world to finance climate FDI and help to slow down the pace of climate change.
While the subsidy programs are welcome news to accelerate climate FDI in the three regions of the world that are responsible for the vast majority of carbon emissions — US, Europe and China — they are not enough. The regulatory environment has not caught up with the change in policy targets and supporting subsidy frameworks, which is resulting in huge delays for investors being able to implement their climate FDI projects. At the same time, trade frictions with China have created supply chain bottlenecks.
In the US, it can take more than four years to get a renewable energy project hooked up to the grid and there are delays of more than a year for vital components from China. In both the EU and UK, it is taking up to four years to get planning consent for renewable energy projects. The EU does plans to reduce this to two years and the UK to one year.
The Energy Transitions Commission estimates that the world could miss out on up to 3500 terrawatt hours of clean electricity generation from wind and solar in 2030 (a shortfall of more than 20%) if key barriers to wind and solar deployment are not addressed.
Governments must prioritise renewable energy projects, streamline permit approvals and enable key components to be imported, or the realisation of renewable energy capacity will be too low to hit carbon targets and provide the green energy that electric vehicles, batteries, wind and solar components, and hydrogen production need.
The challenges to attract and implement climate FDI are further accentuated in developing countries, who not only often lack the zoned sites and electricity infrastructure to fast-track investment, but also cannot subsidise investors as in developed economies. Far more support is also needed for developing countries to attract climate FDI.
There is global competition for climate FDI, which is ratcheting up the subsidies being offered to companies. This is accelerating climate FDI and if governments can make the regulatory changes needed so projects can be implemented much faster, it is still possible for FDI to make a major contribution to slowing down the pace of climate change while at the same time delivering substantial economic development benefits.
This article was originally published in The fDi Report 2023. Download the full report here