How turning value chains green can accelerate the global transition to net-zero emissions

Covid-19 has wreaked havoc on global value chains, but it could also spark a rethink of how to organise them and where to locate production
Going green can become a competitive advantage for emerging economies seeking to join global production systems and fulfil climate commitments

Erik Berglöf

Published: 1:30am, 7 Nov 2021

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Clogged ports, long shipping delays and skyrocketing transport costs are all evidence of the havoc Covid-19 continues to wreak on global value chains. Firms are reconsidering where to locate production, whether and how much redundancy their operations need and which inventories to hold as a buffer against future shocks.

The effects are rippling through the global economy, creating additional uncertainty and slowing recovery. Moreover, with policymakers in Glasgow for the UN Climate Change Conference, there is increasing pressure to decarbonise production and transport along global value chains.

How quickly this happens is of great importance. Global value chains account for about half of global exports, and emerging and developing economies’ share of these production networks has increased significantly since the 2008 global financial crisis.

For example, a low- or middle-income economy no longer needs to produce a whole car to enter the global automobile supply chain. It is enough to specialise in one small component.

Against this backdrop, a recent report from the Asian Infrastructure Investment Bank examines the pandemic’s impact on global value chains. It shows how they can become tools for achieving the 2015 Paris climate agreement’s goal of limiting global warming to 1.5 degrees Celsius, relative to preindustrial levels.

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The evidence from previous crises that disrupted key supply chains – such as the 1999 Jiji earthquake and the 2011 Fukushima nuclear disaster – suggests strong efficiency pressures and heavy dependence on personal trust in supplier relationships favour a return to the status quo. If this pattern holds, current pandemic-induced global value chain disruptions will prove temporary.

But this time might be different. Covid-19 has hit the global economy much more broadly and lasted much longer than most previous shocks.

The pandemic’s impact stems less from the initial shutdown in China in early 2020 – from which the Chinese economy and global value chains recovered fairly quickly – and more from the rapid increase in demand triggered by government stimulus and the unleashing of accumulated savings. The asynchronous opening of economies has also amplified the supply disruptions.

It could take years to determine the full effect of the Covid-19 on global value chains. The pandemic could spark a fundamental rethink of how to organise them and where to locate production. Resilience has become a buzzword in this discussion.

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At the same time, geopolitical concerns are creating pressures for economies to reduce their supply dependence on individual countries while decoupling is already under way in important hi-tech industries.

Recent spikes in energy prices are a reminder that global value chains face an even greater challenge as the world seeks to accelerate the transition to net-zero emissions. With production geographically dispersed and intermediate products shipped back and forth over long distances, pressure to decarbonise global value chains is mounting.

At the same time, emerging and developing economies must meet their nationally determined contributions under the Paris agreement.

But the drive to decarbonise global value chains also represents a great opportunity to accelerate the net-zero transition.

Because such production networks rely on lead firms’ capacity to increase efficiency throughout the supply chain, these companies can play an important role in pushing the net-zero agenda. Many have committed to becoming carbon neutral by 2050, and central banks are putting pressure on these firms’ creditors to reduce climate risk in their loan portfolios.

Likewise, countries that want to attract and retain global value chain investments will have additional incentives to offer green infrastructure, including access to renewable energy, emissions-free multimodal transport systems and high-speed broadband.

Going green can thus become a competitive advantage for emerging and developing economies seeking to join global production systems and fulfil their Paris commitments.

To realise the full potential of this virtuous circle of decarbonisation pressures on global value chain lead firms and host countries, transparency and traceability must increase at every level of production and in all aspects of the value chain.

Without careful measurement of carbon footprints and consistent implementation of international standards, market forces and regulators cannot play their vital roles.

The multilateral development banks can facilitate sustainable investments along value chains, incorporating the best technologies and standards while helping to ensure transparency and traceability of emissions.

They can also assist private-sector investors in managing policy risks, which can discourage infrastructure investment. Without private and institutional capital, emerging economies will not close the infrastructure gap with developed countries.

The pandemic has highlighted the importance of global value chains for the world economy, particularly in helping emerging economies climb the value-added ladder and bridge the prosperity gap.

But it has also put the spotlight on the role they can play in accelerating the net-zero transition across countries and sectors. As the world leaders in Glasgow are fully aware, we will need every available tool to ensure a sustainable future.

Erik Berglöf is chief economist of the Asian Infrastructure Investment Bank. Copyright: Project Syndicate

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