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This commentary is part of Energy Rewired, a project from the CSIS Energy Security and Climate Change Program studying the industrial strategies of major economies for the energy transition. The project examines countries’ big bets on emerging energy technologies and how these will rewire the world’s energy map.
The energy transition will rewire the world’s economy. In 2020, despite the effects of Covid-19, global trade in fuels reached $1.5 trillion, almost a tenth of the total trade in goods. Oil, gas, coal, and chemicals together accounted for 39 percent of all shipping traffic in 2020. The move away from fossil fuels to low-carbon energy sources will change what “international trade” means. This shift presents enormous strategic challenges.
The energy transition is, in fact, two transitions: an industrial transition and a minerals transition. There is growing awareness about the minerals transition: that the world must produce more minerals, that these minerals are located all around the world, and that the extraction and processing of these minerals will create enormous value as well as externalities. While the solution set is still being developed, the public discourse on that front is improving.
The industrial transition, by contrast, is often caricatured. There is recognition, of course, that China has a commanding position in the supply chains for low-carbon energy. Similarly, there is a desire to reshore industries and ensure that some of the investment in supply chains is located in the West. The move from resource extraction to manufactured goods presents opportunities for new industrial clusters and new trade routes to emerge, but how these dynamics will evolve is far from clear.
What is clear is that the energy transition offers an opportunity to revisit and rewrite trading relationships established decades ago. It also offers a chance for countries to participate in energy value chains that were hitherto closed to them. It is a world that redefines what “energy security” means. But is also a world where the desire to build things at home will clash with the logic of scale and global supply chains. The energy transition will rewire the world—but how much of that wiring will cross a border is anyone’s guess.
Climate policy is industrial policy. And industrial policy is often climate policy, even as an afterthought. Consider Australia’s hydrogen strategy, which mentions the word “climate” 13 times in 136 pages, and never in the context of climate being a driver for the strategy. The motivation, instead, is politics and economics: “The development of our hydrogen resources could enhance Australia's energy security, create Australian jobs and build an export industry valued in the billions.”
This is a profound shift in energy policymaking. It means that climate benefits might come from places that are pursuing industrial strategies rather than decarbonization. Saudi Arabia, Russia, Australia, for example, are investing in hydrogen not only (or primarily) to reduce their emissions, but also to build export industries. Japan and South Korea have articulated hydrogen strategies rooted in their fuel cells. In the United States, deploying clean energy technologies is not enough: from solar and offshore wind, to batteries and hydrogen, the focus is on supply chains. Success is measured in dollars and jobs created—not only in tons of CO2 abated.
As climate policy merges with industrial policy, a few derivative shifts are taking place. First, the policy toolkit is changing. Countries are supporting industries to build competence in climate-related sectors. In doing so, they are avoiding the instruments of the past that were meant to supercharge deployment (like feed-in tariffs). The goal is not just to deploy as much as possible, but to create new industries.
A related shift is that unobstructed trade is no longer sacrosanct. In the United States, the mood has soured on free trade. Even though the Build Back Better Act did not (or has yet to) become law, it was replete with incentives that favor domestic production. That such provisions might contravene the rules of the World Trade Organization was secondary and almost irrelevant. The momentum towards implementing a carbon tariff in the United States, without a corresponding domestic price on carbon, would likely flout trade rules too, but support for it is growing.
Even in the European Union, where support for world trade rules remains high, climate policy and industrial policy are fused together and there is a strong domestic bias in climate policy (for example, the recent EU push for a tenfold increase in manufacturing capacities for electrolyzers in Europe). There is still, of course, an understanding that trade and global supply chains will be needed. But trade is a residual of what cannot be developed domestically.
The shift away from trade raises big questions about decarbonization. Economies of scale were essential in lowering the cost of solar, wind and batteries over the past 15 years, and that scale leveraged trade. The International Energy Agency’s “Net Zero by 2050” report makes a case for global supply chains, arguing that governments must carefully manage “domestic job creation and local commercial advantages with the collective global need for clean energy technology deployment.” Without such coordination, the path to net zero became much harder.
But global supply chains present their own risks. In the Unites States, there is a recurring argument against solar based on China’s dominant position in the industry—why substitute, the thinking goes, domestic gas for Chinese solar? Human rights abuses in Xinjiang have added credence to that sentiment. As new technologies take off, similar challenges will arise.
The old energy map connected natural resources to markets. The new energy map will be messier. Anyone wanting to map this new world should look for four ingredients. First, what existing industrial competencies might be helpful for the future? Countries will invest in what they have. Second, what resources might be an asset—for example, superior wind or solar potential, sites to store carbon, critical minerals, and so on? Third, what infrastructure might be useful, either as is (e.g., electricity transmission) or after being repurposed (e.g., gas pipelines converted to hydrogen or shipyards reused for offshore wind)? And fourth, are there institutions to govern the complex relationships dependent on success?
The offshore wind industry in the United States offers an example of how climate ambition and industrial strategy might come together. There is, to begin with, an ambitious federal target for deployment, supported by a detailed schedule for leasing acreage. There is, similarly, appetite among states to procure power from offshore wind (and to pay a premium for it). There is a clear supply chain component that brings together public money, private investment and a focus on existing assets that need a new purpose (e.g., ports). There are emerging institutions to coordinate between industry, government, labor, and civil society. And there is a strong transatlantic nexus with European firms invested in the United States.
Such industrial clusters are visible around the world—from northwest Europe to the Middle East to Australia. They are collectively redrawing the map of world energy. This map, of course, will still be rooted in the physical world and constrained by it. Such constraints are especially visible in hydrogen. Energy importers—Germany, Japan, and Korea—worry that they will not have the space and resources to be self-sufficient in hydrogen. Exporters are thinking the same way, which is why Australia, the United Arab Emirates, Saudi Arabia, and others have hydrogen strategies. There is an existing trade architecture on which countries will try to build. The old system will not disappear. It will evolve.
The geography of the energy transition will consist of three overlapping maps. First, there is the trade in critical minerals. In terms of location, this will be different than oil, gas, or coal. But in form, the trade will be familiar: resources will be extracted in some part of the world, they will be moved to refineries and processing centers, and from there, they will be turned into final products. Many of the old concerns will apply—diversification, bottlenecks, conflicts over extraction, rent seeking—but with different specifics.
Second, there will be a trade in new energy sources: hydrogen, ammonia, biofuels, carbon (to be stored), and others. Some of this trade will follow existing routes: there is already, for example, interest among countries in the Asia Pacific to replicate in hydrogen the trade that now exists in oil and gas. And of course, the world will continue to trade in oil, gas, and electricity—the last of these, perhaps, over longer distances. That map will also be familiar.
The third map will be more complex. It will consist of the trade in low-carbon products: solar panels, wind turbines, electrolyzers, new engines, and so on. The location of this activity is not predetermined. What is the optimal place to build solar panels? What is the ideal place for low-carbon steel or cement? Who will make the best engine for low-carbon fuels for ships or planes? None of this is set. This is a map whose outlines are barely scribbled right now.
As the world transitions, countries have an opportunity to rethink their strategic relationships. Russia’s invasion of Ukraine has rendered this question moot, but before the war, several European countries were thinking of importing hydrogen from Russia. Would that have been wise? The dilemma applies to other importers: should northeast Asia replicate in hydrogen the dependence it now has on Middle Eastern oil and gas? This raises a related question: is it better to encourage hydrocarbon producers to diversify into new energy sources, and thus maintain and renew old trade routes, or is it better to use the energy transition to engineer a clean break from geopolitically thorny relationships? These questions are hard—but important.
The meaning of energy security will also evolve. Importing oil from Saudi Arabia is not the same as importing a solar panel from China. But it is hard to say that a country should be indifferent about where its solar panels come from. Over the past year or so, the importance of tracing solar supply chains has become clear. The same logic will apply to other commodities: How should countries measure exposure? Do policymakers have access to the data needed to map supply chains? How can policy ensure redundancy in supply chains? As new industries scale, it will be essential to keep asking these questions.
The most significant policy choice of all, however, is whether and how much to rely on global trade. The energy transition presents enormous economic opportunities. Countries want to capture some of that value for themselves. This is sensible and desirable—local value creation can enhance policy ambition on climate. Yet it is also easy to waste a lot of money supporting industries that will never take off. And the international trading system is not equipped for such domestic value creation.
In an ideal world, government support for climate-relevant industries would be narrow, targeted and time-bound. Without it, it is hard imagining that the world is making the progress it needs to lower emissions; but overdo it, and the burden on the transition will be massive. Of all the policy dilemmas presented by the energy transition, the question of how much to do at home versus abroad tops the list as the thorniest one.
Nikos Tsafos is the James R. Schlesinger Chair in Energy and Geopolitics at the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
This commentary is made possible by support from the Hewlett Foundation.
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