Written by Anushree B, Girl Economics Science Reporter
It is internationally agreed that climate crisis is of urgent importance and requires cooperation between borders, but this enthusiasm is seldom reflected in appropriate action. Using renewable energy sources will be instrumental in affecting appropriate change, and yet many countries with limited capacity for renewables are reluctant to implement such changes due to the high costs incurred. However, a promising solution has been posited by the Potsdam Institute for Climate Impact Research (PIK), who published a study detailing how relocating production to renewable-rich countries could significantly lower costs for those who are renewable-constrained, whilst maintaining industrial competitiveness.
Why green relocation?
By 2040, it is predicted that there will be a difference of 4 cents per kilowatt-hour (4ct/kWh) in electricity prices between geographical areas where renewable energy is plentiful, such as Australia, Chile and South Africa, and areas in which it is not. This implies a large disparity in the price of electricity, where it is considerably cheaper for renewable-rich countries to produce materials such as green steel and chemicals. As a result of this, industries in renewable-scarce countries, such as South Korea, Japan or Germany, can reduce production costs by relocating these operations to more favourable places.
Other decarbonisation strategies include the import of industrial goods, the import of intermediate goods and the import of hydrogen by ship. Importing hydrogen is the least cost-effective strategy and will likely decrease competitiveness in the long run. The need for specialised infrastructure to transport hydrogen, coupled with rising ship fuel costs make hydrogen imports a very expensive option. The study proposes the relocation of renewable energy production to countries in which resources are abundant, as well as the import of intermediate goods, such as iron sponge, ammonia, and methanol, as a more economical alternative. It is estimated that renewable-scarce countries will save 40% of costs for green chemicals and 20% of costs for green steel, should they relocate energy-intensive primary production.
This shift, dubbed the ‘renewable pull’, would encourage investment into low-emission production facilities in renewable-rich countries, promoting the clean-energy transition. While there are other factors which may affect this, such as the reliability and efficiency of supply chains, none are as significant as the cost-savings due to the production relocation. The countries which are renewable-scarce can redirect their efforts on refining activities, as opposed to engaging with the costly primary production processes. For steel, this may look like focusing on the finishing of the steel products instead of processes such as blast furnaces, which are much more energy- intensive, further promoting industrial competitiveness in these nations.
Deindustrialisation?
Despite concerns of ‘deindustrialisation’, Falko Ueckerdt, co-author of the study claims that it is only the early processes in long and complex supply chains that will be affected. He asserts that both parties will benefit: developing countries may be able to capitalise on their inexpensive and natural abundance of renewable energy resources, allowing them to export materials such as green steel and chemicals. Conversely, developed countries, who do not have such access, will be able to divert their attention to refining and advancing goods.
Key takeaways
-> The use of renewable energy for production is pivotal for reducing greenhouse gas emissions. However, not all countries have access to natural resources and are unable to do so.
-> Green relocation may allow renewable-scarce countries to cut costs by up to 40% for green chemicals and 20% for green steel.
-> Green relocation may allow importing countries to focus on refining and advancing goods, promoting industrial competitiveness.
-> The shift may reconfigure trade patterns but will likely benefit both importing and exporting countries.