Harnessing the Potential of Open Trade and Investment Flows in the Wind Energy Industry

By Jacob Funk Kirkegaard, Peterson Institute for International Economics; Thilo Hanemann, Rhodium Group; and Lutz Weischer, World Resources Institute.

The political debate concerning climate change and global trade and investment flows has increasingly taken on a defensive posture in the United States and other developed countries. The spotlight has been on the competitiveness of energy-intensive industries and potential border adjustment mechanisms to prevent carbon leakage, as well as on the need to grow and protect industries that will gain from a low-carbon future and create millions of new “green jobs” at home.

This paper analyzes the global wind power industry in light of the latter debate and shows that global integration—broadly defined as increasing cross-border trade and investment flows —can make a strong positive contribution in the form of green technology cost reductions and innovation while still creating predominantly local jobs. As such, national trade and investment policies that promote increased global integration of the wind industry are a powerful ally in the fight against climate change.

Our analysis starts with a brief summary of current and future global demand for wind turbines and the role of government support in this demand picture. Next, we show how the wind energy sector is developing into a truly global industry characterized by high levels of growth and competition and how this process is increasingly driven by cross-border investment rather than trade. Then we map out the globalization potential of different components in the value chain and analyze existing barriers to further global integration. Finally, we discuss the distributional consequences of greater globalization and especially the outlook for green job creation along the wind value chain, before we conclude with a set of policy recommendations.

Our principal findings are:

1. Local demand creation draws in local production. Demand for wind energy through long-term government support policies creates the basis for local supply of wind capital equipment and services and associated local job creation; policies that put a price on carbon will further help to make wind more competitive and increase the overall demand for turbines and equipment.

2. Cross-border investment rather than trade is the dominant mode of global integration. Standard international trade in wind energy equipment is relatively small and declining. Instead, foreign direct investment (FDI) flows dominate the global integration of the wind sector, and the cost structure of the wind industry favors the emergence of regional production hubs in markets of sufficient size.

3. Abolishing trade tariffs will have limited effects on the wind industry. Principal barriers to global integration are not at-the-border tariffs but rather several nontariff trade barriers and formal and informal barriers that distort firms’ investment decisions.

4. Intellectual property rights (IPRs) are currently not restricting firms’ access to wind power equipment markets. Intellectual property plays only a very limited role in the cost structures of the wind industry, and technology is widely available for licensing. IPRs therefore cannot be considered a major impediment for market participation for firms from both developed and developing countries.

5. A highly globalized wind industry will create jobs locally. Wind energy is a generally more labor-intensive source of electricity supply compared with fossil fuel generation. Due to its specific characteristics, a globalized wind industry will still create lasting and highly localized employment opportunities.

The wind energy sector has historically seen steep industry learning curves and corresponding declining average project costs. During the early years of the (onshore) wind industry in the 1980s and 1990s, industry productivity rose rapidly and average project costs for installed capacity declined from $3.5 million to $4.5 million/MW in the early 1980s to between $1 million and $1.5 million/MW by 2001–04.

However, during the 2004–08 period, the historical declining trend in installed project costs in the wind industry inverted and average total project costs instead rose by up to 50 to 80 percent. This change was driven partly by supply constraints and partly by rapidly rising commodity prices. The recent cost increase in the wind industry mirrored the surge in capital costs across different power generation technologies during this period. The fact that other sources of energy also became more expensive can partly explain why the demand for wind power did not fall. However, the sector even continued to expand rapidly. It is striking to see how global installed capacity tripled from 2003 to 2008—matching over this period average annual global growth rates in installed capacity of 26 percent—during a period in which industry cost rose significantly. This was possible only because of continued political commitment to developing the sector.

Future Competitiveness of Wind Power

Governments’ targeted direct financial support and explicit policy promotion of wind power (and other renewable energy sources) are, when offered on a stable and sustained long-term basis, likely to continue to play an important role for future wind industry growth. However, wind energy is likely to benefit increasingly from indirect policy measures, too, and begin to compete on an increasingly commercial basis with other sources of power supply.

Comparative estimates suggest that the most cost efficient wind power—onshore production in coastal (i.e., good wind) areas—becomes competitive with traditionally generated power even at moderate fossil fuel prices once environmental, security of supply, and other usually nonmonetized externalities are accounted for.

Imposing a price on carbon emissions is one important way of internalizing some of these externalities. The increasing use of policies imposing a price on carbon emissions will therefore be a major additional growth driver for wind energy in the future. Similarly, the establishment of official renewable energy targets in the United States, European Union, China, and other countries and the resulting expansion of FITs or RPS rules in power supply will continue to offer strong demand support for wind energy. A wind industry relying increasingly on demand support from, for instance, economy-wide and relatively stable carbon pricing would face far less political risk to its demand side (i.e., the risk that direct government financial support be suddenly withdrawn) and hence present potential investors with a more stable long-term investment outlook. This stabilizing effect would likely provide a powerful independent boost to the demand for wind energy and allow manufacturers to further expand economies of scale.

In the future, the cost competitiveness of the wind sector when compared with other sources of energy supply will therefore become more important for the growth of the industry. An analysis of the current cost structure of wind investments provides insights into the determinants of the future competitiveness of wind power. Wind is a highly capital intensive way to produce power, with 75 to 80 percent of total lifetime production costs made up of upfront fixed capital costs—the turbine itself, foundations, electrical installations, grid connections and control systems, wind mapping/site consulting, and financing.22 On the one hand, this capital intensity raises large upfront project financing requirements. On the other hand, it reflects one of the most appealing aspects of wind energy: very low variable costs. Unlike with natural gas or coal power production (where fuel costs can make up the majority of total project life costs), variable fuel input costs for wind are zero, since the wind blows for free.

Instead, variable costs for wind energy projects are only operation and maintenance (O&M) costs, consisting of such things as insurance, servicing, repair/spare parts, and administrative costs. Sample surveys of existing wind farms in the United States and Europe suggest that average annual O&M costs account for roughly 1 percent of total project costs, thus accumulating into about 20 to 23 percent over the standard lifetime of a wind turbine.

Correspondingly, major future cost improvements for wind industry investments would have to be concentrated in the dominant capital equipment cost segment. Historically, global integration of manufacturing sectors has driven down cost through facilitation of economies of scale, increased competition, technological innovation, and just-in-time production techniques with lean global supply chains.

When asked about the outlook for the wind industry investment breakdown, interviewed industry experts generally expressed the belief that the relative cost share of fixed upfront capital should decline as technology learning, global integration of supply chains, and increased global competition yield better turbine design and cheaper components.

At the same time, however, at least three trends in the wind industry might cause wind industry costs to rise in the future. First, offshore wind, which gains importance particularly in Europe, entails between 50 to 100 percent higher capital and variable O&M costs compared with onshore wind turbines, due to more adverse conditions.

Second, some concerns exist regarding the future trends of wind O&M costs, as the rapid scaling up of average turbine sizes in newly installed capacity means that no estimates for late life O&M costs are available yet for the vast majority of globally installed capacity.

Third, as power cannot yet be economically stored and wind energy is a variable producer, introducing large shares of wind power into an electricity system increases total infrastructure costs of securing constant grid balancing.

On balance, industry analysts agree that with continued global integration of wind power manufacturing and related continued steep wind industry learning curves, future capital cost declines will dominate construction, O&M, and grid connectivity cost trends, and the long-term decline in total wind industry investment costs seen until around 2004 will resume. Maintaining strong policy support for carbon pricing, other renewable energy support measures, and trade and investment policies that promote global industry integration will be crucial for this scenario to unfold.

Industry Structure

Wind turbine investments can essentially be broken down into two main categories: capital equipment (i.e., turbines) and everything else. Similarly, two distinct, but overlapping, “value chains” exist in the wind industry: the wind turbine production value chain and the wind power production value chain.

Today’s global wind power equipment industry is relatively concentrated, with the top 10 turbine manufacturers accounting for 85 percent of the market in 2008, albeit reflecting the rapid growth of new entrants in a booming market; this is a decline from a top 10 market share of 95 percent upto 2006. The 2008 market presence of the world’s 15 largest wind turbine producers, accounting for 95 percent of supplied capacity in 2008.

European firms dominate the world’s wind turbine market, with eight of the top 15 firms and close to 60 percent world market share. At the same time, the bottom left corner of figure 1 shows that several Chinese companies, supplying only their domestic market, are capitalizing on the strong growth in installed wind power capacity in China. Similarly, recent years’ strong growth in the US market has
benefited local producer GE Wind, allowing it to almost eclipse global market leader Vestas in terms of global market share in 2008, while relying almost exclusively (90 percent) on its domestic US market.

The figures also indicates the importance of a large domestic market for wind turbine producers, as 13 of the top 15 companies’ origin is in the five countries with the most installed cumulative capacity in 2008 (in the order of United States, Germany, Spain, China, and India). Only Mitsubishi of Japan and global market leader Vestas do not have large domestic markets, although in the case of Vestas, the company has evidently benefited from Denmark’s early embrace of wind power, which made this country the fourthlargest
wind power market in the world in terms of installed capacity as late as 2004.

Developing nations’ firms—with four out of the top 15—are clearly present among globally leading wind energy firms. All of these four companies come from either China or India but have pursued very different global growth strategies. While Chinese wind turbine manufacturers have so far relied almost exclusively on their domestic market’s potential for growth, India’s Suzlon has both dominated its domestic market for wind power and expanded its global reach through investments in other countries.

The company has both invested in new production facilities abroad (“greenfield investments”) and acquired a series of foreign competitors (cross-border M&A transactions). The principal encouraging point for the developing world, however, is that developing countries tend to follow the same broad pattern as developed countries with respect to wind market participants. Create a sufficiently large domestic market (as in China and India), and domestic wind turbine suppliers emerge. As in the early Californian and European pioneers, in the developing world, too, today it is local demand creation that matters most.

Leading wind turbine producers do not independently produce every part of their turbines but rely on an extensive network of external suppliers for a big share of the up to 8,000 individual components that a standard utility-scale wind turbine consists of. As such, the industry’s sourcing strategies and supply chains are of critical importance. Some segments of the industry supply chain, like blades and gearboxes, are characterized by large degrees of vertical integration and direct control and ownership of the turbine manufacturer, while for other segments, such as towers and bearings, turbine producers rely overwhelmingly on external producers.

Interviewed industry experts identified a common need among globally leading firms to ensure the quality of their components and two different supply chain strategies being used to achieve this:

Some firms have moved towards increased vertical integration, producing their own components, which guarantees supply and enhances quality control over key components. Others have increasingly relied on the rapidly improving supply capacity from smaller external suppliers, especially in the emerging non-European production hubs in the United States and China. In the latter case, the leading wind turbine producers demand that local external suppliers produce according to world industry standards.

The wind power production value chain consists of the planning, construction, and operation of grid connected wind farms. Unlike the manufacturing supply chain of turbine production, wind power production consists mainly of related services, such as assessment of suitable wind park sites, wind investment financing, logistics, construction services, and the subsequent O&M services and power sales.

The direct involvement of leading turbine producers in the wind power production supply chain varies from project to project. Some transactions are on an “everything included basis,” such that the turbine producer will also be responsible for the planning, deployment, and subsequent O&M servicing.

However, as the wind power industry customer base has increasingly become large established utilities, the wind power production supply chain is gradually being taken over by these utilities, which often possess the required in-house capacity for managing the complete process. The 15 largest global utilities, dominated by European, US, and Chinese players, in 2008 owned approximately 36 percent of all installed wind production capacity.

With the European shift toward offshore wind power and the associated increase in financing requirements, as well as the growing use of portfolio requirements for utilities in some parts of the world, this trend can be expected to accelerate. Current State of Global

Integration in the Wind Industry

Most debates surrounding globalization focus on the most visible mode, namely trade in goods and services. The same is true for the different initiatives to harness globalization for making green technology cheaper, better, and more widely available: They almost exclusively focus on cross-border trade flows and related tariff and nontariff barriers.

However, the analysis of the global wind industry shows that trade has become relatively less important in the wind industry and firms have mainly used cross-border investment as a mode for global integration of their value chains. An analysis of traditional cross-border world trade in wind turbines and related components is complicated due to various technical obstacles.

Unsurprisingly, the top global exporters of wind turbines are the home countries of the leading wind turbine manufacturers, with Germany, Denmark, India, and Japan accounting for more than 90 percent of the 2008 global total. The United States was by far the largest importer of wind turbines in 2008, with developed economies Denmark, Spain, Japan, and Germany shipping 85 percent of total US imports.

The domestic focus of China’s leading wind turbine producers is verified by the modest scale of Chinese exports in 2008.  Global trade magnitudes were relatively modest for an industry with $45 billion to $50 billion total sales in 2008 and $51.8 billion in investment in 200837 at around 10 percent. Given the bulk of many parts of wind turbines and the associated need for special transportation equipment and high costs, this relatively low level of trade is not surprising.

Moreover, the level of trade intensity in the wind industry is declining. Global wind turbine exports rose by more than 50 percent from $3.19 billion in 2006 to $4.85 billion in 2008, measured in current prices. Yet, during this period of more than 20 percent project cost increases in the wind industry, global annual installed wind capacity nonetheless went up by more than 75 percent from about 15,000 MW in 2006 to 27,000 MW in 2008.

A rough and ready estimate therefore suggests that global cross-border trade intensity in the wind industry might have fallen by as much as a third from 2006 to 2008. The decline in cross-border trade intensity in the wind industry implies that the share of local content (produced by domestic and foreign-owned firms) increased. This is caused partly by new domestic-only turbine producers (especially in China), as well as rapidly rising levels of FDI by leading manufacturers in new, growing wind energy markets. The Chinese market supply has changed from being dominated by foreign turbine producers in 2005 to be supplied by local manufacturers at levels as high as 70 to 80 percent in 2008–09.

Wind turbine investment flows into or within the European Union grew steadily to about $750 million from 2003 to 2008, while the really big increase to nearly $1 billion annually is found in investment flows into or within the United States in 2007 and 2008.

China in comparison saw relatively few investments early in the period, but in 2008 and 2009 became the third largest destination. Meanwhile investment inflows to other destinations remained limited. India was not a major recipient of investment, reflecting the relative unattractiveness of the domestic market in the absence of broad and stable support policies. The impact of the global financial crisis is clearly evident with the collapse of investments in 2009.

The rapid growth of the US market has turned the United States into an important destination for FDI. All leading European, Japanese, and Indian wind turbine producers (except Germany’s Enercon) operated production facilities in the United States or planned to begin operating by 2010.

China has experienced a similar, if smaller recent boom of foreign investment in wind energy equipment manufacturing. In all major markets there also is a trend known from the auto industry that major parts suppliers follow in the heels of turbine producer FDI and locate their own production facilities close by.

USITC (2009) identifies a large number of US-based suppliers to turbine manufacturers, which have recently entered the market place. Another organizational trend seen among several large turbine producers is a move towards increased vertical firm integration, with several leading turbine producers moving to take production of key components in-house in recent years.

Correspondingly, the local content of wind turbines installed in the United States has increased quite dramatically in recent years.  US local content has risen from an average of less than 20 percent from 2001–06 to just over 50 percent by 2008. This rise in US local content will predominantly have come at the expense of the principal European exporting nations, especially Germany and Denmark.

Exporters from low-cost manufacturing countries are not a serious competition for newly emerging domestic suppliers in the United States thus far. Early attempts of sourcing turbines for the US market from China such as the GreenHunter-MingYang cooperation were cancelled in light of improved domestic supply capacity. The recently announced wind farm in Texas by US-based private equity firm US Renewable Energy Group (US-REG) and China-based Shenyang Power Group highlights two interesting developments: First, wind power needs large amount of capital, and capital inflows from China might—given the vast amount of foreign exchange reserves and its increasing financial power—begin to play an increasingly important role in financing the low-carbon future of the United States.

Second, public investors might sometimes make choices of wind turbines that are not purely related to price and quality competitiveness or other commercial calculations but to industrial policy objectives or political quid-pro-quo expectations. Yet, this investment is also part of a broader non-wind industry financial diversification trend in capital inflows from China, and as long as such projects do not become the dominant form of wind power investment, they should not be misread as an indicator of a switch away from the predominantly local supply chain organization for the entire industry.

The finding that relatively large national markets for wind turbines tend to see either the emergence of dominant domestic wind turbine producers (as in earlier years in Denmark, Germany, Spain, United States, India, and now China) or the inflow of wind turbine producer FDI50 is consistent with several strands of the theoretical FDI literature. The “proximity-concentration hypothesis” from Brainard (1993) and Markusen and Venables (2000) suggest that FDI is positively correlated with high transportation costs, as found in the wind industry. Similarly, as posited by Helpman, Melitz, and Yeaple (2004), in a world of heterogeneous firms, FDI will increasingly dominate export sales in sectors where fixed establishment costs decline and variable trading costs remain high.

Future of Globalized Wind Industry Value Chains

We just illustrated the gradual consolidation of the wind industry into regional production hubs with increased levels of local content in the United States and increasingly China and continued selfsufficiency in but declining exports from the European Union with corresponding declining global trade intensity in the industry. Current debates in the United States and other developed economies voice the concern that these patterns could be reversed and that large parts of the value chain could migrate to low-wage destinations, especially China and India.

However, given the cost composition of major turbine components, such a scenario seems unlikely. The most likely future for the industry is continued market-seeking, FDI-driven global integration, and possibly the emergence of new domestic producers in sufficiently large markets. Trade flows will likely remain a complement, allowing firms to flexibly source certain low-trading cost parts.

Raw material costs are by far the most important component in all principal wind turbine components, ranging between 60 to 90 percent of total costs. With raw materials accounting for the lion’s share of total turbine costs, rapid turbine cost inflation during the recent run-up in world commodity prices was unavoidable. Labor on the other hand accounts for a rather modest share of total turbine costs: Aside from the final assembly process of the full nacelle (i.e., of gearbox, generators, bearings, and other main components inside the nacelle), which is relatively labor intensive, only blade production entails significant labor costs. Intellectual property included in “other costs” category accounts for perhaps 2 percent of total turbine costs, with intellectual property in gearboxes, bearings, and blades accounting for the bulk hereof.

This combination of low labor input, high transportation costs and uniform world commodity prices makes it difficult for turbine producers to achieve large cost reductions by shifting turbine production to low-cost locations. Barring unexpected radical new innovations in wind turbine design or other factors distorting the global cost picture, industry investment location decisions can therefore be expected to remain predominantly market-seeking (i.e., investments in turbine production facilities go to the countries where demand for turbines exist) and regionally dispersed. The reemergence of globally dominant centers of wind turbine production similar to Europe during the 1990s is unlikely.

Regarding the potential for increasing global integration of wind industry value chains, industry experts expressed the belief that some turbine components (noticeably relatively easier to transport bearings and gearboxes) will be more mobile and subject to industry consolidation and economies of scale in the future.

As such, increased global sourcing of such less bulky components could be envisioned from Northeast Asia (China, Korea, and Japan), where forgings and cast iron supply facilities are abundant. Similarly, several industry experts conveyed that some countries would be able to continue to benefit from existing strong competitive positions in wind sector related services, such as R&D services in Denmark and Germany and perhaps financial services in the United States. Within regional production hubs, countries with relatively low labor costs might have an advantage in the final assembly of the nacelle if they possess the necessary infrastructure and skilled labor. This seems to suggest a win-win situation with opportunities for different countries to develop comparative advantage in different activities along the wind value chain.

Global Integration and Local Job Creation

As the wind industry benefits from significant direct and indirect government financial support, it is unavoidable that expectations of job creation play an often decisive role in investment and regulatory decision-making. In this light, investment and trade policies that foster global integration may be interpreted as the equivalent of shipping green jobs overseas.

However, our review of existing literature suggests that wind power creates more jobs than power generation from traditional fossil fuels, while our analysis of wind industry value chains shows that globalization will have only a relatively small impact on local job creation compared with other industries during the process of global integration.

Comparative studies on the job impact of various energy sources have shown that wind power on average generates more jobs than do fossil fuel–based power sources during manufacturing, construction, and installation, reflecting both the complexity of wind turbine sourcing and production described and the relatively dispersed nature of wind power (many turbines versus a single power plant).

At the same time, wind power generates fewer jobs during O&M/fuel processing phases than do other sources of energy. This should not be surprising though, as first of all wind power requires no fuel processing (and as a consequence faces no supply security concerns), and second the wind industry as discussed above is characterized by rapid productivity improvements.

On average, wind is likely more employment intensive than fossil fuel–based power generation but generates less employment than, for instance, solar PV power production. There are no reliable or accurate estimates for global employment levels in the wind energy sector.

According to EWEA, about two-thirds of the estimated 155,000 European wind industry jobs are with wind turbine and component producers, with the rest made up by wind farm developers, installation and O&M workers, independent power producer and utility wind workers, wind/site consultants, and financial advisors.

The relatively large share of turbine/component producer jobs in Europe reflects the continent’s status as the principal global exporter of wind turbines, as well as being the home base of most multinational wind companies. For the United States, AWEA quotes 85,000 US jobs in the sector in 2008 (up from 50,000 in 2007). The AWEA employment breakdown shows US manufacturing jobs making up about a quarter of US total employment, with “other employment” comprising wind farm developers, financial and consulting services, contracting and engineering services, part-related services, and transportation and logistics accounting for the bulk of US employment. This is noteworthy as it suggests that the United States has a comparably low share of manufacturing jobs compared with the other big regional markets.

A key question for policymakers is to what degree future additional global integration of the wind industry will affect local job creation in the sector. For them, the risks in committing taxpayers’ money in support for the sector are evident, if ultimately many “green wind jobs” end up being offshored. Our analysis provides two key reasons for why these risks are lower than in other industries.

First, wind jobs will overwhelmingly follow wind power demand, as the wind industry is characterized by FDI-driven global integration and the emergence of new domestic producers in markets of sufficient size. This will ensure that global employment growth result in localized job creation in at least the big three regional production centers in the European Union, United States, and China. It will also mean that Europe will continue to lose some of its existing “export dependent jobs” to predominantly US and Chinese locations, while on the other hand the continent seems likely to benefit from most future job generation in the offshore wind sector.

Second, the characteristics of both supply chains described in table 5 make wind power relatively immune to jobs offshoring also in the long term compared with both fossil fuel and other renewable energy sources (especially solar PV). While the first (turbine production) chain is characterized by the bulky and hard-to-transport nature of many manufactured components, the second (wind power production) chain is predominantly made up of logistics, construction, and other wind services tasks bound to the local area.

Precise forecasts of employment creation should be treated with care. First, many of the most optimistic forecasts rely on methodologies that include, in addition to direct and indirect (from input output table analysis of supply chains) job creation, so-called induced job creation —that is, jobs resulting from the spending by people directly and indirectly supported by a green project, such as grocery store clerks, retail sales people, or child care providers.

These effects are real, especially in many rural areas with few other sources of economic activity, but calculating the real and additional independent net job creation arising in this way is fraught with uncertainty. Second, the same learning curves that are making wind power ever more efficient and cost-competitive are making it less labor intensive. As with almost all manufacturing processes, we expect a shift in wind turbine production towards more capital-intensive processes, particularly in regions with high labor costs such as the European Union and United States. Similarly, as turbine designs improve and become more reliable, O&M should become both easier and less labor intensive.

Nevertheless, all sources and future projections that we have reviewed agree that the wind sector is destined for considerable job growth in the coming decades as global installed wind capacity continues to expand briskly. Wind energy has several appealing characteristics for policymakers seeking to build support for renewable energy by making a case for job creation.

First, particularly during a period of growth, wind energy is likely to remain more labor intensive than traditional energy technologies.

Second, the range of jobs created is attractive, including both blue collar manufacturing and a wide array of skilled scientific, engineering, and service roles. Finally, experience to date powerfully suggests that the bulk of jobs created will be where the market is—in other words, effective long-term measures taken to promote wind energy deployment will largely create employment in the same country or region.

Concluding Remarks

The wind power sector is among the most important commercial industries for climate change mitigation and is rapidly growing. Much of this growth is driven by government support aimed at not only reducing emissions and energy imports but also nurturing a new industry that promises substantial localized job creation. In this paper we have taken a closer look at the value chains underlying this industry to better understand some of the drivers and barriers to realizing this potential.

The very rapid growth of the wind industry in recent years has been closely tied to direct government policy, taking the form of financial support measures and increased mandating of renewable power production or consumption requirement for utilities. The recent spike in commodity prices and associated cost increases in the wind power sector had only a negligible effect on industry global growth rates.

The effects of the current financial crisis and global recession on future growth rates are also quite minor. Credible long-term government policy commitments to the wind power sector continue to trump cyclical swings in the broader economy.

The wind industry provides a clear example of how a “green Keynesian industrial policy” can work. If government policy creates sufficient demand for wind energy, local supply of wind turbines and related services will emerge either from new local entrants or via FDI. The wind industry is led by those countries that have developed large policy-supported wind energy markets.

In part this has in some countries been aided by explicit LCRs, which have meant that building capacity in these markets was required. But it is largely due to the nature of wind technology itself. Wind turbines and their most important components are large, bulky, and difficult to transport, making trading them relatively expensive. This has meant that FDI rather than traded goods have played the most important role in internationalizing the industry.

Perhaps reflecting this, traditional tariffs are quite modest in the wind industry today. However, nontariff barriers remain widespread, including LCRs, national industrial standards and licensing demands, and in particular politicized investment decisions biased in favor of local producers.

Accordingly, leading companies in this industry are based in those countries and regions that have established clear long-term policy drivers. Given EU leadership in applying this policy, European companies have historically been dominant. But there has been a relative shift to US and Chinese companies as the domestic markets in both countries have grown rapidly in recent years, as well as to India.

The wind industry boasts prominent and successful developing-country participation with four of the top 15 globally leading turbine producers in 2008 being from emerging economies.

Commodity costs and localized investments dominate the wind industry’s value chains. Conversely, labor cost differentials and intellectual property are less important drivers of cost. Intellectual property in particular is broadly and commercially available and as such is not a significant barrier to wind energy development.

Job creation is significant and likely to remain concentrated in countries with significant domestic markets, though the labor intensity of the industry will decline as production becomes more efficient.

Our findings yield several policy implications:

1. The wind industry is a successful globally integrating industry with considerable developingcountry participation. As such, it underlines the important gains possible for both developed and developing countries from a long-term vision of a global approach to a new energy economy.

2. With wind industry development led by cross-border investment, rather than trade issues, policymakers can encourage economies of scale and efficiency gains through three investment policy actions:

* Although provisions such as LCRs have been used to secure political backing for financial support measures for wind energy and drive local employment creation, our analysis suggests that such job creation would likely occur without these requirements, especially in countries with large domestic wind markets. Given the importance of international cooperation on clean energy policy, LCRs should be phased out as soon as possible.

* Policymakers could focus on the establishment of global wind industry product standards and/or mutually agreed product certification requirements for relevant key wind turbine components.

* Global integration of the wind sector could be encouraged through the establishment of an international sectoral Green Power Government Procurement Protocol, initially among “like-minded” countries, requiring enhanced transparency, national treatment, and nondiscrimination among local and foreign wind turbine producers, when large wind project contracts are awarded.

3. Government support and enabling environments have been and will be crucial to the development of the wind industry. Policies that create stable long-term demand for wind energy are a better approach to create local jobs and make green energy cheaper than policies that aim at protecting domestic firms. A global climate change agreement can further support the diffusion of wind power in developing countries by providing support, both in terms of capacity building and financial support, to enable developing countries to put in place policy measures in favor of renewable energy, develop grid systems that can integrate wind power and lower the high cost of capital. Such an integrated approach is more helpful than the bare transfer of intellectual property rights to the developing world.

4. Trade barriers do not constitute a major obstacle to wind power deployment, but conversely provide little protection for domestic industries. Therefore, their removal would have little substantive impact. Governments that support wind power and want to increase the effectiveness in terms of installed capacity per taxpayer dollar spent, should however remove tariffs unilaterally to capture the related minor cost reductions. Furthermore, unilateral tariff removal in wind energy could be a powerful political goodwill gesture in currently deadlocked WTO trade negotiations. Coordinated unilateral action among “like-minded” countries could be the first step towards a global agreement for comprehensive free trade in all “green technologies” modeled on the 1995 Information Technology Agreement.

5. A successful conclusion of a global climate change agreement in the context of the United Nations Framework Convention on Climate Change (UNFCCC) and an associated expansion of global carbon pricing mechanisms and other policy drivers are vital. This will level the carbon playing field between wind and fossil fuel–based energy and potentially render the current effective direct public financial support for the wind sector increasingly unnecessary.

With sufficiently high carbon prices, continued policy support will instead be provided indirectly to the wind industry (and other renewable sources) in an equal manner across renewable and fossil fuel–based energy sources. The risk of political interference in wind industry investment decisions could hereby be abated.