Clean tech and the new protectionism

Protectionism is on the prowl again, and it is preparing to feast on the global clean tech sector.

Concerns are mounting that the protectionism that has re-emerged in the economic downturn is having a disproportionate impact on green firms, as governments vie to attract the companies that many predict will become the giants of the low-carbon economy.

The most notorious example to date is the Chinese government's decision to introduce a "Buy Chinese" policy, requiring projects paid for using economic stimulus funds, including large numbers of low-carbon projects, to apply for government permission to purchase products from outside China. Under the edict, government investment projects are unequivocally advised to "buy domestically made products unless [they] cannot be obtained in reasonable commercial conditions in China".

Several foreign wind turbine manufacturers, including Vestas Wind Systems of Denmark, US-based GE Energy, Spain's Gamesa and Indian firm Suzlon Energy, all subsequently failed to make it to the second round of bidding for 25 wind energy projects worth more than $7bn (£4.3bn), prompting howls of outrage from industry groups.

"It seems the central government has decided that this must be awarded to Chinese manufacturers and not foreigners who have invested big in China," Joerg Wuttke, president of the European Union Chamber of Commerce in China, told the Financial Times. He argued that Chinese companies had been handed a clear advantage by their government after bidding criteria were introduced that focused solely on turbine unit prices and excluded factors such as life cycle costs.

However, governments hoping to chastise China for its protectionist instincts have to tread a very fine line, given their own attempts to tilt the playing field as they too seek to attract clean tech investment.

US President Barack Obama may have eventually decided to ditch controversial plans for a "Buy American" policy as part of the US stimulus package, but other governments can do little but look on jealously as billions of dollars in grants, "soft loans" and tax breaks are handed out to renewable energy and clean tech developers. Individual states are also getting in on the act, offering massive tax breaks and relaxing planning rules in their attempts to develop clean tech hubs. Executives at Japanese and European car manufacturers must curse the fact that the US tax payer is paying for their US rivals to convert themselves into developers of green vehicles.

The situation is no better on this side of the Atlantic, where rumours abound that governments are playing fast and loose with the rules governing state aid in an attempt to attract clean tech manufacturers.

Germany is reported to be using state-owned banks and utilities to offer renewable energy developers "soft loans" and free grid connection, while speculation that Spain is operating a covert "Buy Spanish" policy for wind farm projects refuses to die down. "There have been reports that tenders for projects were scrapped at the last moment and then the criteria was redefined to help Spanish turbine companies," said one industry source. "It's hard to believe, but it is worrying that these stories are out there."

None of these protectionist measures are directly related to the row that is brewing over proposed "carbon tariffs", designed to stop carbon-intensive firms from migrating to countries in which there are fewer carbon regulations. But they provide an intriguing backdrop that governments are bound to exploit in the event of a full-blown trade war. Such a war looks increasingly likely, with some US politicians demanding that tariffs are levied on any carbon-intensive products imported from countries that fail to sign up to the anticipated Copenhagen deal later this year, and China and India decrying any such move as protectionism.

In many ways, it is unsurprising that protectionism and clean tech should become so entwined. The first industrial revolution was built on a foundation of tariffs, levies and trade barriers, and every subsequent strategic industry, from textiles to computers, has been favoured by state aid and tax breaks at some point.

But that has not stopped some within the clean tech sector worrying about the long-term implications should firms become reliant on favourable governments and dodgy kickbacks to survive.

"Emerging companies need to be able to win market share in their own right by having the right technology for the market, not by relying on favourable tenders or protectionist measures," observes Craig Bennett of the Corporate Leaders Group on Climate Change. "These types of policies will not help to make emerging companies robust and what governments need to realise is that protectionism is almost always an admission of failure in other areas."

He adds that governments should be able to nurture a successful clean tech industry without reverting to excessive subsidies, let alone "buy domestic" policies.

"What governments need to appreciate is that if they get policies right, they will not need to go down this route," he argues. "They could be getting the same results through policy measures, regulations and green procurement policies – get those right and you do not have to protect your own firms."

Others are fearful that the emergence of protectionist measures could undermine much of the goodwill currently enjoyed by clean tech firms, and dilute wider environmental warnings on climate change.

"Clean tech is currently seen as supporting the environmental agenda and the urgent need to reduce emissions, but if it starts to be used to develop a monopolistic agenda, it could backfire quickly," warns one industry source. " People will start to ask if these companies are about saving the planet or just making profits they don't deserve."

There are also concerns specific to the UK's clean tech sector. The government has long been reluctant to dirty its hands with overtly protectionist measures and has even balked at some of the more acceptable interventionist policies now widely adopted by its European neighbours.

As a representative for the department for Business, Innovation and Skills explains: "Our policy has long been that protectionism is a bad thing and we work hard to discourage countries from going down that route… Our view is that clean tech firms will benefit from open markets, both in terms of inward investment and increased exports."

But partly as a result of this long-standing policy, clean tech firms are fearful that the UK is losing ground to rivals in Germany, Spain, France and the US where, depending on your point of view, governments are either more willing to support emerging businesses or happier to bend competition rules.

"There have long been complaints from across the business world about the UK's relative scrupulousness when it comes to EU directives," observed one renewable energy industry insider. "We are seeing that same concern translate into clean tech. There are undoubtedly more attractive markets than the UK out there and we are facing a real competition."

Bennett agrees that the UK's hands-off approach has at times handed an advantage to rival clean tech hubs.

"Many other countries are far more proactive when it comes to stimulating new markets and there are lessons for us to learn from that," he said. "There's this culture in the UK of sitting back and hoping the free market will magically deliver new markets – but that is why Germany is building all our wind turbines. "

However, there is one silver lining for clean tech firms as they try to come to terms with the new culture of protectionism – at least it shows that governments finally care.

Leonie Greene of the Renewable Energy Association, said: "In a way it's kind of positive that people are so keen to get the economic benefits and energy security that come from clean tech that they are willing to employ these measures. But, having said that, it is still basically unfair."