Greening in the Wrong Places: Geography, Policy Distortions, and the Hidden Costs of Misallocated Green Investment

Jorge Arbache and Otaviano Canuto

No 2610, Research papers & Policy papers on Economic Trends and Policies from Policy Center for the New South

Abstract: Decarbonization is reconfiguring global relative prices. As clean energy, natural capital, and location-specific assets become dominant industrial inputs, the relative cost of producing low-carbon goods is increasingly determined by geography. Two systematic distortions explain why the expected reallocation of investment toward renewable-rich economies remains incomplete. First, industrial policy interventions, including subsidies, trade barriers, and certification systems, disconnect effective prices from underlying structural costs. Second, institutional failures create demand uncertainty that leaves structurally competitive projects unbankable. Together, these distortions generate static misallocation, leading to slower technological learning, higher fiscal burdens, delayed emissions reductions, and suppressed industrial opportunities in developing economies. This paper is part of broader research on powershoring and green comparative advantage, which focuses on the idea that decarbonization is a spatial and price reorganization of global production, in addition to a technological transition.

Date: 2026-05
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Persistent link: https://EconPapers.repec.org/RePEc:ocp:rpaeco:pp13_26

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