The Commanding Heights – The Green Tech Revolution

2022 was a dramatic year in markets, economies and across geopolitics. 2023 may bring more of the same and even greater change. David Skilling and I have written that the next year(s) could be characterised by Clausewitz’ dictum that politics can be ‘war by other means’ in the sense that strategic competition between the large regions will be the dominant theme acting on international political economy. In this note, we focus on a key element of this – the revolution in energy policy and new technologies.

Energy and technology are two key domains in the strategic competition ahead, with governments around the world looking to secure a leading position.

Technology is commonly thought to dominate the commanding heights of the global economy. National economic policy is often focused on developing an edge in technology, from the US and China to small economies such as Singapore and the Netherlands. And China, the EU, and the US, are increasingly focused on strengthening strategic autonomy in leading technology sectors. Economic sanctions and restrictions are being placed on technology flows and investments between the competing blocs – and this will strengthen through 2023, drawing in a broader range of countries. Choices will need to be made.

Through 2023, we expect to see a substantial acceleration in the amounts of government capital flowing into strategic areas of technology in the US, China, Europe and elsewhere. Massive amounts have been legislated (and more proposed) in the US for investment in infrastructure and innovation in the US. Priority areas include AI, big data, quantum, 5G, semiconductors, and so on.

Strategic Autonomy

These are the sort of measures that China has been making for some time. And Europe is increasingly focusing on strategic autonomy, which has implications for strategic investment in innovation: from semiconductors to developing leading global competitive positions in the green economy.

There are costs to global economic fragmentation due to the push for strategic autonomy. But as in other domains, competition between countries can be a good thing – creating sharper incentives for investment and innovation. During the Cold War of course, geopolitical competition led to greater innovation; President Kennedy’s commitment to land a man on the moon was largely motivated by the rivalry with the Soviet Union.

Israel is another example in which geopolitical tensions have supported strong innovation performance, with spillovers from the defence innovation complex. Israel’s R&D spending is among the highest across advanced economies. Higher investment in innovation and technology can generate productivity gains.

But the experience of the past two years, reinforced by the impact of Russia’s invasion of Ukraine, shows that the world has not dematerialised. Energy remains a core element of competitive advantage. The US is advantaged with its high measure of energy independence relative to Europe – which is currently facing competitive pressures, particularly in energy intensive sectors.

Energy investments will be accelerated for a variety of reasons: in response to the current high prices and supply concerns; as a matter of industrial policy; to comply with net zero targets; and as a matter of strategic autonomy. Economies that can rapidly move to renewables (electricity, green hydrogen) will be advantaged. In 2023, the pace of this transition is likely to be stepped up.

Those countries and firms that can combine technology/innovation leadership as well as security of supply of critical flows of commodities and energy will out-perform. In our view, poles of technology focused investment will be in strategic priority technologies from semiconductors and AI/data to defence technologies (drones, fighter programs) and green technologies (batteries, hydrogen).

As technology and energy are increasingly framed in strategic terms, the pace of change will increase markedly. 2023 will likely represent an inflexion point in the extent of strategic investment.

Implications

Invest behind areas that are strategic priorities given the sums of government capital that will be flowing, as well as other policy and regulatory support

Go long countries that are at the centre of the technology and energy revolutions. The US has been advantaged over the past decades by having strong positions in both (uniquely so).

The nexus between corporates and governments will intensify – those companies that can become part of the strategic innovation landscape will thrive.