A Marshall Plan for the Clean-Energy Transition

In 2021, the leaders of the world’s leading economies gathered for the G7 summit in Cornwall to pledge “tangible actions in all sectors of our economies and societies” and “to secure a cleaner, greener, freer, fairer and safer future for our people and planet.” In what was dubbed the “green Marshall Plan,” they committed to meet a $100 billion target in annual climate funding, embraced the vision of a green recovery and a clean transformation, and stressed partnerships as being key to achieving that vision.

The analogy is well chosen. The United States recovery aid after the Second World War was instrumental in Europe “building back better” toward a free, democratic, and economically prosperous future. A strong transatlantic partnership was also key for Western Europe’s ability to stand up the growing military threat from the Soviet Union. What is more, energy was a central pillar of the European Recovery Program or Marshall Plan.

At the time, it was oil that made the global economy go round, and more than 10 percent of Marshall Plan spending went to oil purchases. In the 21st century, it will be low-carbon technologies and clean energy sources. Investment needs are significant if the world is to be put on track to meet the Paris Agreement climate targets. By some estimates, spending in the energy sector will need to increase from around $2 trillion to almost $5 trillion a year by 2030, and then stay roughly at that level until 2050. Massive amounts of capital are to be mobilized across all energy sources, carriers, and fuels, notably renewables and green hydrogen, in pertinent sectors including transport, power, and industry as well as for infrastructure, grids, or demand-side measures such as energy efficiency.

Market forces alone will not get us there. Investment in renewable energy, though growing, remains at a fraction of what is needed. Technology learning curves, though steep, will not deploy clean technology within the time we have, and across the globe. Managing the global energy transition requires a plan, leveraging the innovation potential of global markets, and leadership to manage the process and potential fallout.

The Transition Needs to Be Just

The Paris Agreement defines the fight against climate change as a matter of shared but differentiated responsibility. Given their much higher historical greenhouse-gas emissions, rich countries are called to go first in reducing their carbon dioxide output, and thus to bear a larger share of the upfront costs. Developing countries, by contrast, may decarbonize later so as to have some time for achieving economic development to a level at which they can manage the transition.

From a climate-justice perspective, shared but differentiated responsibility is an important guiding principle for global action within the UN Framework Convention on Climate Change (UNFCCC). Yet, it comes with two distinct downsides. First, countries failing to take early and determined clean-energy choices risk carbon lock-in. Path dependencies in energy systems are notoriously strong, as some of the infrastructure, once built, tends to be around for half a century—think coal-fired power plants. Every dollar spent in fossil infrastructure today therefore raises the costs of shifting gear later. Second, decarbonizing late may come with a growing competitive disadvantage. As the frontrunners make trade policies conditional on climate ambition, laggards may end up facing deteriorating terms of trade, setting in motion a vicious circle of decreasing competitiveness and lowering clean-energy investment. Moreover, countries failing to strategically position themselves in the clean-technology value chain are likely to remain restricted to few segments of it, such as deployment, and will find it hard to move into manufacturing or other forms of industrial upgrading.

As current trends suggest, clean investment already is worryingly lopsided. Developing countries have trailed those of the Organization for Economic Co-operation and Development (OECD) and China for much of the past decade when it comes to spending on renewable-energy supply and low-carbon infrastructure. Coronavirus pandemic recovery programs have further widened the gap, as industrialized countries took greener, bigger investment decision. Emerging-market and developing economies other than China now “account for nearly two-thirds of the global population but … just one-fifth of clean energy investment.” This suggests that the world is heading toward a global divide in the energy transition, a function of clean-energy capital flows preferring the Global North and the vast market of China while shunning much of the Global South. As a corollary, the latter will also miss out on much of the low-carbon technology traveling on the back of foreign direct investment (FDI).

Lopsided clean-investment patterns risk perpetuating uneven development trajectories in a decarbonizing world economy. This raises important questions of equity pertaining to the global energy transition. Moreover, future emissions will primarily stem from emerging economies and developing countries. It is the non-OECD world—not limited to China – whose transition trajectories will decide whether dangerous climate change can be kept at bay. In short, the way forward needs to be inclusive and just.

A Marshall Plan for the Energy Transition

Three elements will be key for getting there: leveraging markets and scale, an open-architecture approach setting clear incentives for climate ambition as well as costs in case of inaction, and leadership to avoid friction during the decarbonization process.

Leveraging Markets

As the International Energy Agency notes, “almost half of the emissions reductions needed in 2050 [for net zero emissions] come from technologies that are today at the prototype or demonstration state.” Any global effort needs to start here. To bring those clean technologies to market and to deploy them on time, innovation curves need to be significantly steeper than they have been so far. This is a matter of scale. The imperative, therefore, is to build on the vast markets in industrialized and newly industrializing countries to bring about the scale effects needed.

The transatlantic economic space will be instrumental, though not exclusively so, for a Marshall Plan for the clean energy transition.

The transatlantic economic space will be instrumental, though not exclusively so, for a Marshall Plan for the clean energy transition. It is home to globally leading high-tech companies in the low-carbon domain, and it holds the bulk of “world class patents” in many sectors pertinent to the energy transition. It is characterized by highly integrated trade relations and represents around 40 percent of nominal global GDP. It also accounts for roughly two-thirds of the outward and inward stock of global FDI. Making full use of an integrated transatlantic market for clean technologies will boost innovation, ease their path from demonstration to rollout, and bring down unit costs from storage solutions to Power-to-X technologies. This is the precondition for successful global deployment at scale.

For this to happen, significant barriers need to be reduced. This includes abolishing remaining EU and US tariffs on environmental goods and services, setting common standards on clean technologies, and aligning trade policies with the joint goal of fostering an integrated transatlantic clean-technology space. As a formidable regulatory actor with exclusive trade competences, the EU is well-positioned to match the United States in these domains. The much-discussed Transatlantic Green Technology Alliance should be the platform for these efforts. Advancing and coordinating green public procurement on both sides of the Atlantic may spur beneficial industry-level dynamics in which governmental support helps further clean solutions.

Leveraging markets will mobilize the private capital needed to underpin the necessary clean-energy investment, and it will profit from the innovation capacity of companies and the private sector.

Leveraging markets will mobilize the private capital needed to underpin the necessary clean-energy investment, and it will profit from the innovation capacity of companies and the private sector. That said, this rests on the liberal model, which may or may not be compatible with the policy paradigm in other countries, notably China, embraced. China is leading the way in solar, photovoltaics, or battery technologies, and it has an edge in manufacturing these. Its vast market is an asset in scaling up technology solutions. Therefore, much would be gained from making Beijing an ally to transatlantic efforts.

However, zero-sum logics may prevail also in the energy transition. As countries gravitate toward technology leaders, one plausible scenario is a clean-technology Cold War between blocs led by the West and China, moving the world away from international cooperation. What is more, the geoeconomic fallout of the Ukraine war may well include an additional push towards global decoupling.  An integrated, market-based approach may therefore remain centered on the established industrialized countries on both sides of the Atlantic, and by extension other OECD countries such as Japan.

An Open and Inclusive Approach

A Marshall Plan for the clean-energy transition requires the leadership of a committed core group of countries in the form of the transatlantic alliance. Economic benefits inevitably will accrue to them through technology leadership, a competitive edge coming from setting global standards, or their companies capturing value from research and development to deployment.

Clearly, a trade- and FDI-based alliance of transatlantic technology leaders benefits economies elsewhere by bringing down costs and facilitating the rollout and deployment of clean solutions. Yet, it risks being overly exclusive, thus coming close to a climate club in which ambitious countries discriminate against less ambitious ones through less preferential trade. Though such a club would incentivize non-members to ramp up their climate efforts, some of them may find it hard to mobilize the necessary financial means for decarbonizing their energy systems.

As much as technologically advanced countries will need to lead the way, the pathway toward net-zero therefore needs to be open for emerging economies and developing countries to join the efforts. The governance approach should be one of “open architecture,” which would be much preferrable to a club when it comes to decarbonization. Such an approach would offer various flexible entry points for non-core countries, depending on their commitments and financial capabilities.

At the same time, the industrialized core can clearly highlight the costs of low ambition. Most important is economic prosperity withering away in case of climate inaction.

A central tool here is conditional access to an attractive and deep clean-technology market. China, for example, may be attracted by the economic opportunity for its burgeoning clean-technology sector, and in return be asked to drop its local-content requirements, forced joint ventures, and other coercive practices when it comes to its home market, which in turn would improve global learning curves. Another tool would be to incentivize more ambitious steps in the shape of climate finance and targeted technology transfer. The former will need to be significantly expanded beyond the (currently not even filled) annual fund of $100 billion as well as focused on getting capitals costs down and on de-risking clean-energy projects in emerging economies and developing countries so as to close the investment gap. Africa will be a key target region in this effort, given its demographic trends and strong economic growth potential but sluggish clean-investment record. Technology transfer could involve offering climate-ambitious countries selective access to clean-technology intellectual property rights, thus responding to some long-standing demands to that effect by developing countries. Such an offer may be attractive for India, which may pledge more stringent coal phase-out policies in return. Countries rich in the critical minerals needed for clean technologies may also see opportunity for industrial upgrading and capturing larger segments of the clean-energy value chain, beyond resource extraction.

At the same time, the industrialized core can clearly highlight the costs of low ambition. Most important is economic prosperity withering away in case of climate inaction. New trade agreements can be made conditional on commitments to climate action and financial support can be linked to sustainability targets. The toolbox to raise the costs of non-action is vast and in part established practice, and it can be further expanded.

The open-architecture governance approach will work more through carrots than through sticks, and in the spirit of partnership and tangible offers rather than though coercion. Though it is meant to complement the UNFCCC process and to enhance global efforts in light of too-slow progress, it can clearly work in a multilateral framework.

Leadership to Avoid Friction

Even if well-intended, an open and inclusive approach to the energy transition may encounter friction. Uneven transition patterns are unlikely to be fully avoided, path dependencies may prove too strong to allow for quick-enough shifts in national energy systems, and populist temptations to stall the energy transition may emerge given the magnitude of the economic and lifestyle changes required. The transatlantic alliance will be instrumental in exerting leadership and managing the process.

Leadership means walking a thin line. Global competition is needed to bring about the best and most cost-effective solutions. A global-commons problem, however, cannot be solved with zero-sum logic. Therefore, leadership needs to embrace competition but it must not be framed in terms of winning the “green race,” as this may risk throwing the world back into the mode of great-power competition. What is more, transition processes are notorious for their unforeseen dynamics. Most fundamentally, they are all but linear. For example, in transiting from planned to market economy, some former communist or Soviet countries in Europe ended up in the European Union while others got stuck with oligarchic structures dominating their economic and political system. Leadership therefore needs to embrace the uncertainty coming with the transition from high carbon to low carbon.

This may even extend to coping with petrostates that end up finding themselves deprived of their incumbent economic model. Given the strong path dependencies underpinning oil economies, fossil-fuel revenue streams will be hard to replace in time to avoid growing social tension. Current oil and gas exporters may well end up becoming a source of instability for their region and beyond. In leading efforts toward a global clean-energy transition, the committed core must therefore not shy away from considering the security consequences of going low-carbon.

Western countries may have the economic and financial clout to lead, but they may no longer possess the political legitimacy to do so. They therefore need to lead by example and to signal clear commitment. In addition to implementing a rapid transition domestically, this means funding the transition abroad. Its aid to Europe after the Second World War amounted to some 2 percent of GDP for the United States. By comparison, the annual investment need for the energy transition is estimated to be around 4.5 percent of global GDP by 2030, a share that by 2050 will go back to the current 2.5 percent. Given that the US economy represented some 40 percent of global GDP after the war, the global clean-investment needs compatible with the Paris Agreement are comparable with the cost of the Marshall Plan to the US budget. The argument can therefore be made for a significantly higher Western share of publicly mobilized and leveraged climate funding.

As the experience with the Marshall Plan demonstrates, this is likely to be a good investment. Besides fighting climate change, the benefits for industrialized countries include new markets that are opened up for a green-economy model that could be served by their domestic companies and their clean-technology solutions. More fundamentally, however, it is in their enlightened self-interest to avoid a situation in which one part of the world goes green while the rest if left short of the financial means and the technology solutions needed to transition into a low-carbon future. The likely social impact in developing countries and the knock-on effects for international political stability may well exceed the costs of enabling their clean-energy transition.

Andreas Goldthau is the director of the Willy Brandt School of Public Policy, Franz Haniel Professor for Public Policy at the University of Erfurt, and research group lead on energy transition and the Global South at the Institute for Advanced Sustainability Studies.

This year the German Marshall Fund marks its 50th anniversary and the 75th anniversary of the Marshall Plan. These historic moments serve as an opportunity to highlight the achievements of one of the most important American diplomatic initiatives of the 20th century and how its legacy lives on today through GMF and its mission. Learn more about GMF at 50.