The Price of Green Fragmentation: How Trade Splits Threaten the Energy Transition

The paper shows that geopolitical decoupling in green technologies, such as EVs, batteries, and renewable-energy components would sharply raise costs, cut trade, and slow the global clean-energy transition. Using a newly granular input–output method, the authors find substantial welfare losses and higher long-term emissions as green supply chains fracture.

The European Central Bank, working with researchers connected to institutions such as the Bank of Italy and EU policy bodies, delivers a timely analysis of how geopolitical tensions threaten the delicate supply chains underpinning the global green transition. The study argues that existing economic tools are too crude to capture vulnerabilities embedded in electric vehicles, rare earth minerals, wind turbines, solar panels, and battery components, because standard inter-country input–output (ICIO) tables lump green technologies together with traditional ones. To overcome this blind spot, the authors build a new, highly granular methodology that isolates 129 specific green products using HS6-level global trade data and sector-level user patterns from industry and academic research. This innovation allows them to reconstruct the global green-technology network with unprecedented clarity.

Why Granularity Matters

A central finding emerges even before the main scenario is simulated: more detail dramatically changes the economic picture. When the researchers simply split each sector into two or three equal sub-sectors, the economic cost of a global trade shock more than doubles or triples. Aggregated ICIO tables assume that products inside a sector are perfectly substitutable, treating an EV like any other vehicle or a lithium-ion battery like a lead-acid engine starter. But real green technologies have limited substitutes, concentrated suppliers, and highly specialized supply chains. Disaggregating the ICIO exposes these rigidities, revealing deeper fragilities in global production networks that conventional models entirely miss. This methodological insight becomes the backbone of the paper’s real-world analysis.

The “Green War” Scenario

The authors then construct a geopolitical scenario that reflects the world’s growing economic polarization. They divide countries into three blocs: a Western bloc led by the US, EU, Japan, and allies; an Eastern bloc led by China and Russia; and a neutral bloc composed largely of emerging economies in Asia, Africa, and Latin America. They simulate a sharp rise in non-tariff barriers, equivalent to a near-halting of trade, on all green products traded between East and West. Crucially, this simulation is run not on today’s economy but on a projected 2030 landscape shaped by International Energy Agency forecasts for explosive growth in EVs, renewable-energy installations, and green electricity. The result is a realistic, forward-looking portrait of what supply-chain decoupling would mean in an era where green technologies have become central to both climate action and geopolitical competition.

Economic Shockwaves Across the Blocs

The model paints a troubling picture. Trade in green goods between East and West plunges by 15–20%, with only mild diversion through neutral economies. Welfare falls everywhere: up to 3% in both blocs, though the Eastern bloc suffers slightly more because its export-oriented green industries lose access to Western markets. Prices for all green goods rise globally, but downstream products such as electric vehicles see the sharpest jumps as higher costs cascade through upstream minerals, chemicals, and batteries. The result is a contraction in global demand for green goods of more than 2%, including a staggering 9.5% decline in Western EV consumption. Firms and households respond by substituting back toward more polluting technologies, eroding the efficiency gains the green transition is meant to deliver. These outcomes contrast sharply with the muted effects predicted by traditional models, underscoring the importance of the authors’ granular approach.

A Climate Setback in an Era of Urgency

The environmental consequences of decoupling are equally significant. Using OECD emissions data and their tailored ICIO structure, the authors calculate that global emissions intensity rises noticeably. The world emits an additional 50 million tonnes of CO₂-equivalent annually, similar to the yearly footprint of Finland or Bulgaria, and nearly one gigatonne over two decades, equivalent to adding a top-tier emitter like Japan. The fragmentation of green supply chains thus slows global decarbonization precisely when rapid progress is essential. The paper ultimately warns that protectionist industrial policies, however strategically motivated, carry hidden climate and economic costs that are far larger than commonly appreciated. Policymakers seeking energy security or technological supremacy may inadvertently undermine global climate goals unless they recognize the interdependence at the heart of green production networks. By revealing how standard models underestimate these risks, the authors call for more granular economic tools to guide decision-making in an increasingly unstable geopolitical landscape.