This report does not constitute a rating action.

The end of the Washington Consensus and rising geoeconomic risks are reshaping domestic policy priorities. As policymakers are increasingly focusing on immediate security, jobs, and affordability issues, sustainability has taken a backseat. This weighs on the economics of the transition to net zero and means it is unlikely that global warming can be limited to 1.5 degrees Celsius.

Clean technology have been deployed too slowly to prevent greenhouse gas (GHG) emissions from rising further. Robust demand in emerging markets still exceeds production capacity and energy-intensive technologies, such as AI, could weigh on the progress.

That said, some milestones have been reached, led by Asian and European industrial exporters. Clean technologies are deployed at scale and have become profitable in the power, transport, and even residential sectors. The U.S. is deploying renewables too, as profitability gains are increasingly obvious.

However, the next stage of the transition to net zero will depend on the deployment of new technologies--such as carbon capture, utilization, and storage (CCUS), and hydrogen--which rely on public support to gain scale and move to maturity.

As geoeconomic risks dilute climate policy, the transition to net zero will take more time. Policy uncertainty and a decline in public funding reduce investment returns of clean technologies. Trade tariffs increase the cost of the transition further, especially in the U.S.

Industrial leaders in China, the EU, and APAC will continue to pave the way. As part of their economic and energy security strategy, these regions will likely remain among the leading producers and adopters of clean technologies. In comparison, the U.S. is now more focused on improving domestic supply chains and tackling the increase in energy demand than on achieving net-zero emissions.

Overall, we expect geoeconomic risks will play a more significant role in determining the pace to net zero, not least because cheap clean technology exports from China will likely remain a source of international trade tensions.

The Clean Tech Revolution Is Still Ongoing

Global carbon emissions continue to rise. They were up 0.8% year over year in 2024, according to the Global Carbon Budget. The World Meteorological Organization expects global mean temperatures will exceed pre-industrial levels by almost 2 degrees Celsius over the next five years.

In contrast to the steady decline in emissions in the EU and the U.S. in the past 20 years, energy demand in emerging markets--particularly China and India--has picked up and continues to outpace the increase in renewable energy capacity (see chart 1). Affordability and capacity expansion take precedence over sustainability goals in those fast-growing markets.

Chart 1

Global liquid oil demand and China's fossil fuel demand may peak before 2030, thanks to technological progress and economic rebalancing in China. However, replacing fossil fuels will take time. It depends on emerging markets' growth trajectory and could be derailed by the expansion of energy-intensive technologies, such as AI.

Coal decommissioning outside of the EU and North America is not on the cards for the next few years, according to S&P Global Commodities Insights, which expects a modest reduction in GHG emissions of only 13% by 2050.

That said, the energy mix is shifting toward low-carbon technologies. Low-carbon energy sources, including nuclear energy, supplied 18.5% of primary energy in 2023, up from 14.2% in 2013, according to the Energy Institute. Data from the International Energy Agency also suggest that more than one-third of technologies contributing to net zero are now commercialized.

Clean technologies gain momentum. In 2024, investments in low-carbon energy sources accounted for 80% of total energy investments in Europe and 55% in Asia (see charts 2 and 3). This represents about 3%-4% of gross capital formation in many European countries and some emerging markets--such as Chile and Brazil--6% in South Africa, and 10% in the UAE (see charts 4 and 5).

Chart 2

Chart 3

Chart 4

Clean technology trade has doubled to 2% of global trade in 2023, from 0.9% in 2019. China, APAC, and the EU are at the forefront, with China accounting for about 37% of global clean technology exports in 2023. In contrast, the EU accounted for 14%--or 37% including intra-EU trade--while the U.S. contributed less than 5% (see chart 5).

Chart 5

Industrial Exporters In APAC And Europe Benefit From The Rise In Clean Technologies

China's success in the clean technology space is not the norm. Some European countries and emerging markets have committed a large share of domestic investments to clean energy. Unlike in China, however, the rewards were modest, even if other objectives, such as energy security and demand needs, had been met.

China's pioneering role in clean technologies partly results from economic fundamentals, including its extensive industrial know-how, the large domestic market, and its ability to innovate. Overall, data on environment-related patents suggest that large industrial exporters tend to be clean technology leaders, likely because they are in a better position to innovate than countries where industrial know-how is limited--for example Latin America or Africa (see chart 6).

Chart 6

Large domestic markets propel clean technologies, as they offer more opportunities for innovators. China and the U.S. account for more than 40% of environmental innovation globally, even though their shares of clean energy investments are lower than those of the EU. Broader innovation trends also matter.

For example, the development of electric vehicles (EVs)--which requires technological advances in the energy and digital space--has been quicker in China than in Europe. This is partly linked to Europe's sluggish digitalization, which hampers the European industry's competitiveness. (see "Why Tech Firms Love Electric Vehicles," April 28, 2025).

Differences in climate, industrial, and trade policies matter

The transition to net zero is often likened to a policy-led industrial revolution. This is because political action is necessary for economic actors to internalize the cost of carbon, while public support is instrumental to the development of new technologies. Yet, countries in the EU, the U.S., and China have approached the net-zero transition differently, as sustainability goals are aligned with other policy preferences and constraints.

The EU started on the path to net zero in the 1990s. So far, it has put more focus on pricing carbon--for example via the emissions trading system (ETS)--and regulating companies' environmental effects than on providing subsidies. In recent years, more public investment flowed into the rollout of renewables to improve energy security, while industrial policies were less prominent. This is because the region remained committed to trade and competition in the Single Market. The mix of investments, subsidies, and taxes differs at the member state level.

In contrast to the EU's "stick-based" approach, the U.S. has focused more on "carrots" until recently. The Inflation Reduction Act (IRA) provided a wide range of subsidies for clean technologies. At the same time, the U.S. has increasingly resorted to tariffs to protect its domestic industries from external competitive pressures, in particular from China. Yet the country has done little to price carbon emissions at the federal level.

China stands out for its wide range of support policies. These are part of a broader strategy to move up the value chain, target clean technology industries, and improve energy security. Generally, China's spending on industrial policy accounted for about 1.7% of GDP in 2019, compared with 0.4%-0.7% in Germany, the U.S., Japan, and South Korea (see Di Pippo et al., 2021).

In contrast to other markets, China's support policies are more diverse and go beyond supporting research and development. They include preferential financing access through monetary policy tools, state investment funds, state-owned banks and enterprises, public procurement policies, subsidies to stimulate demand and supply, clear policy targets, and command and control policies.

China will expand its carbon market established in 2021, to aluminum, steel, and cement this year. Even so, pricing remains low, suggesting its contribution to reducing emissions is limited.

Policy divergences have caused international economic frictions. Imports of cheap and subsidized clean technology goods from China have eroded other countries' industrial competitiveness. As a result, antidumping and countervailing tariff measures for products--including EVs, solar panels, and batteries--have been in place for a while, even outside the U.S.

Geoeconomic Security Risks Put Climate Concerns To The Back Burner

Countries are now focused on managing near-term economic and geopolitical risks, sometimes at the expense of long-term sustainability. In particular, the U.S. has rolled back most of its climate- and environment-related policies after the current administration took over. Some pushback is also visible in the EU but less so in China (see chart 7).

Chart 7

The U.S. promotes "energy dominance" instead of net zero. On the back of rising energy demand, the U.S. energy strategy is shifting away from promoting intermittent clean technologies to favoring stable energy sources, including gas and nuclear energy. AI and data centers will account for 10% of total electricity demand by 2030, from 4% currently, according to S&P Global Commodity Insights. Industrial reshoring could add to that, as the U.S. seeks to cut its trade deficit.

At the same time, the U.S. has started to withdraw from the Paris Agreement and financial commitments it made at the Conference of the Parties. The current U.S. administration revoked policy support for clean technologies, including:

• Not renewing leases for offshore wind farms;
• Changing regulations on methane emissions;
• Changing carbon targets for energy generation;
• Removing EV mandates; and
• Changing policy wording.

At the time of writing, most of the IRA looked likely be revoked by the reconciliation bill, leaving tax credits just for nuclear energy and CCUS. By contrast, oil and gas exploration and coal mining have become easier.

The EU remains committed to reaching net-zero emissions but not at the expense of its industry and jobs. Over the past few years, EU industry has struggled to remain competitive. It grappled with high energy costs, rising competition from China, and stricter environmental rules, compared with other regions.

Therefore, the EU is recalibrating its policy framework to compete with countries that rely more on industrial policies (China) and tariffs (the U.S.) to promote their industries, rather than on multilateral institutions--such as the World Trade Organization

Energy security has also gained prominence since the invasion of Russia in Ukraine. This has led to the inclusion of more energy sources, even in Germany, which now also considers nuclear in its energy mix. Additionally, fiscal space is tight and defense needs have become more pressing, which means less public funding is available for the support of clean technologies.

The EU Clean Industrial Deal seeks to address some competitiveness issues by.

• Favoring the rollout of cheap renewable energy;
• Providing policy support to create more demand and supply for the market development of clean products;
• Loosening state aid rules to help create national or European champions that can compete globally; and
• Reducing the regulatory burden, for example by exempting small companies from the Corporate Sustainability Reporting Directive or the Carbon Border Adjustment Mechanism.

Additionally, from 2026, a carbon tax will be applied on imports from hard-to-abate sectors, in line with the Carbon Border Adjustment Mechanism. This will help domestic players compete with exporters from less environmentally stringent jurisdictions.

Even so, the EU has fallen behind. Although the EU continues to lead in more complex second-generation clean technologies, it is not a hotbed of innovation. Potential technology transfer from competitors could help. For example, Chinese companies that invest in the European automotive or battery supply chain are required to share their knowledge.

Whether European industry stays ahead depends on its broader economic strategy, focus on digitalization, and policy support. Current efforts to integrate the Single Market further could increase companies' scale and profitability.

Meanwhile, China has made its clean technology industry a new productive force and pursues its climate and energy transition agenda. Chinese companies' leadership in many clean technology sectors--including EVs, batteries, and solar photovoltaic--has helped them displace incumbents in traditional markets--such as the auto sector--and absorb some of the domestic excess capacity linked to the property market downturn. The rollout of renewables supports the country's energy security objective and the Chinese government confirmed its policy commitment by issuing its inaugural green bond in April 2025.

Although Chinese policymakers increasingly focus on propping up domestic demand, the measures they announced so far may not suffice to solve the Chinese industry's overcapacity issues. The latter will likely continue to be exported to the rest of the world at low prices.

This could accelerate the addition of low-carbon energy capacity in regions where the buildup of a domestic industry is difficult in emerging markets in Africa and Latin America.

Yet China's overcapacity issues could also incite more trade barriers elsewhere. This is unless Chinese producers share their technological know-how and set up more of their supply chains outside of China to cope with more protective trade policies.

Policy Shifts Will Slow Progress To Net Zero

The recalibration of domestic policies is weakening the case for clean technology investments. Past innovation trends highlight the importance of policy to spur innovation (see chart 8). Environmental technology innovation in the U.S. declined during the first Trump presidency, while the implementation of the ETS in the EU in 2005 and China's Made in China 2025 agenda propelled innovation in the clean technology space.

Chart 8

Companies need more policy clarity to commit to investments with sunk costs. U.S. climate policy uncertainty has increased by 6 standard deviations (see chart 9). This could result in a temporary decline in investments of 30% for high-emitting firms, according to elasticity estimates by Berestycki, C. et al. (2022).

Chart 9

Less public spending on the net-zero transition will slow the development of early-stage technologies. Returns on investments for technologies such as hydrogen or CCUS remain uncertain. This is even more the case if public support is uncertain and risk appetite reduces. For context, S&P Commodities Insights forecasts that 96% of clean technology investments will flow into renewable power over the next five years. Very little goes to hydrogen and CCUS, even though hydrogen projects are becoming more concrete in Europe and China.

Speeding up the energy transition in emerging markets may become more challenging. Development finance is being scaled back in a risk-averse environment. UN Trade and Development expects a decline of 18% in 2025, compared with 2023. Yet less than half of climate finance outside of high-income countries is private (see chart 10). Country risk or a lack of infrastructure often limit private investments outside developed markets, something that development finance often targets to alleviate.

Chart 10

Tariffs increase the costs of clean technology adoption in the U.S. Although supply chains have been reshored and diversified to some extent since the first tariff increases in 2017, price increases in the U.S. will materialize regardless (see "U.S. Renewable Power Sector Update: Solar Developers Shine On Through Hazy China," May 5, 2025). Clean technology imports no longer rely on China but on other Southeast Asian countries, such as Malaysia, Thailand, and Vietnam. However, the U.S. has also raised tariffs on imports from these countries. Meanwhile, local production has not increased enough to meet elevated demand and is now at risk, because IRA tax credits will likely expire at the end of 2025.

As a result, clean technology adoption will slow as costs increase. Domestic suppliers will take advantage of tariffs by raising prices, while the cost of imported products, such as batteries, will increase (see chart 11). Nonetheless, the rollout of renewables will likely continue, because gas and nuclear energy alone cannot meet rising energy demand over the short term.

Chart 11

The effect of U.S. tariffs on other countries will depend on how they accommodate the resulting manufacturing overcapacity from China. Where the resulting low prices are not seen as an immediate threat to the local industry and tariffs are not raised, the rollout of clean energy technologies could even accelerate.

Overall, less cooperation to tackle carbon emissions will increase the costs and the time it takes to reach net zero, as well as losses associated with climate change. This could result in a new area of public policy and spending needs, as adaptation investments rise in importance. Critical minerals and rare earths will also become increasingly important for energy security and the expansion of AI. Their production is concentrated in a few countries and China already controls most supply chains.

External Research

• Trade and development foresights 2025: Under pressure, UN Trade and Development, 2025
• Measuring and assessing the effects of climate policy uncertainty, Berestycki, C. et al., OECD Economics Department Working Papers, No. 1724, 2022
• Red Ink: Estimating Chinese Industrial Policy Spending in Comparative Perspective, Di Pippo G., Mazzocco I., and Kennedy S., 2022
• Made in China 2025, Chinese government, 2015

Related Research

• U.S. Renewable Power Sector Update: Solar Developers Shine On Through Hazy China, May 5, 2025
• Why Tech Firms Love Electric Vehicles, April 28, 2025
• Credit FAQ: How The Global Climate Policy Pendulum Influences Our Credit Ratings, April 9, 2025
• Development Needs Explain Transition Costs In Emerging Markets, July 24, 2024
• Shifting Green Growth Narratives Are Fostering The Energy Transition, March 20, 2024
• Lost GDP: Potential Impacts Of Physical Climate Risks, Nov. 27, 2023

Head of Climate Economics:

Marion Amiot, London 44-0-2071760128; marion.amiot@spglobal.com