It was possibly a coincidence when both the UK and the EU published their updated strategy documents on critical raw materials in the same week. The UK government published the Critical Minerals Refresh on 13 March 2023 which reinforces the government’s commitment to the Critical Minerals Strategy. Three days later, the European Union’s Critical Raw Materials Act and the EU Net-Zero Industry Act (NZIA) were released alongside each other on 16 March 2023.
These different policies aim to ensure the sustainable supply of critical raw materials which are vital to the digital economy and net-zero transition. The key issues addressed in the strategies include the dependency on imports of critical materials – such as lithium, cobalt, nickel and rare earth metals – and key technologies – such as batteries and solar photovoltaics – as well as increased vulnerability to price volatility and potential supply disruptions.
While the UK has not published specific targets, the EU CRM Act aims to achieve a high degree of self-sufficiency by 2030. For example, EU capacity should reach at least 10 per cent of domestic demand for mining and extraction and at least 40 per cent for processing and refining. Complimenting these, the Net Zero Industry Act aims to achieve strategic net-zero technologies manufacturing capacity of at least 40 per cent of the EU’s deployment needs by 2030.
Countering US subsidies and China’s economies-of-scale
These policies are the UK’s and EU’s response to the intensifying geoeconomic competition from the US and Chinese industrial policies that are putting the UK and EU’s green transition at risk. The US’ major green subsidies package, the Inflation Reduction Act, a $369 billion green tax-break bonanza – and significant ideological shift – was announced by the Biden administration in 2022. It has focused European business attention to the US as the Inflation Reduction Act threatens to pull clean tech investments, and the jobs related to it, away from Europe. One high-profile example is Volkswagen which is considering shifting investments for a car-battery plant to the US where it would receive $10.54 billion in subsidies. Sulzer AG, a Swiss company pioneering chemical recycling technologies, is also moving its investments to the US.
But European markets have also faced challenges from China – ‘the IKEA of the energy transition’. The Made in China 2025 policy has enabled the growth in massive economies-of-scale in solar, wind and battery manufacturing that has created significant challenges for European markets and renewable energy manufacturers as Chinese companies can produce goods far cheaper than in Europe.
However, like with many other recent European Commission plans, there is no new European funding available, meaning funding will fall on EU member states. On the European level, it mainly relies on tweaking and speeding up regulatory and approval processes. A loosening of the bloc’s state aid rules should allow EU member states to subsidize the green transition and help to avoid projects shifting to the US. With this comes a risk of fracturing the single market though. Richer member states will find it easier to subsidize their own companies than the poorer ones despite the rules allowing for higher subsidies to companies in poorer areas.
However, many EU member states remain hesitant to get stuck in a subsidy race with the US. They are likely to argue that the EU already spends a lot in this area, on some measures, even more than the US might do. However, it spends its money on different things, with the US more focused on the deployment of new technologies and the EU focused more on areas such as innovation. It therefore remains to be seen whether all these plans will lead to a boom in green investment like the one starting to get underway in the US.
The European Commission has also come under some criticism for moving in a more protectionist direction with many of its plans. While not quite as stringent as the local content requirements in the US plan, the targets for domestic production still mean government intervention will be required to shift supply chains.
On the one hand, there are several good reasons for a more protectionist approach to clean energy. Europe has long relied on the continued operation of the open global trading system for its energy transition and broader trade strategy while both the US and China have at times actively undermined this. Overreliance on imports of renewable energy equipment needed for the net-zero transition in particular means that they can also be used as a geoeconomic tool. Although this would not have had a particularly large effect on Europe, a recently mooted Chinese export ban on solar PV manufacturing technology is an example of this risk.
Furthermore, Europe has an overreliance on China for supply and processing of many critical raw materials and minerals that are critical for green technology manufacturing – in particular rare earth metals. As highlighted by the International Energy Agency, China’s share in all the key manufacturing stages of solar panels exceeds 80 per cent, and more diversification is therefore needed. As the global acceleration of the green transition occurs, Europe’s dependency on China will increase, which presents a risk to supply chains if geopolitical tensions continue to increase.
The Chinese government has previously used access to these materials as leverage in political disputes, for instance, the 2010 Senkaku boat collision incident. Given the importance of CRMs, the EU is right to actively seek out diversification by exploring both domestic and other sources of supply.
On the other hand, protectionist measures and a push for local manufacturing will risk making the transition towards net-zero both slower and more expensive as Europe will require time and capital to expand its domestic green energy manufacturing capacity. For instance, cutting the dependence on China for electric vehicle batteries is estimated to require more than $160 billion in new capital expenditure by 2030. Also, aspiring for autonomy in a highly globalized economy and transnational technology value chain might make resilience harder to achieve.
Circularity for resilient supply chains
Creating resilient energy systems and supply chains will require moving beyond securing resources, investments in new mining sites, stockpiling and building reserves. Both the UK and EU’s raw material strategies highlight the need for circular solutions to ensure resilient supply chains, including an EU target of least 15 per cent for CRM recycling, as well as a specific recycled content target for permanent magnets.
Recycling alone will not be enough on its own. More ambitious circular solutions can be pursued in the context of the EU’s Circular Economy Action Plan to further reduce demand and create more resilience. These include introducing strict ecodesign requirements for products heavily reliant on CRMs to be more durable, repairable and recyclable or incentivizing their repair and remanufacture.
Beyond this, more systemic lifecycle approaches are needed. For example, the projected demand for critical materials needed for the energy transition – rare earths alone is forecast to increase fivefold by 2030 – is based on the assumption of a status quo in terms of the levels of energy consumption but actually could significantly reduce that material demand through targeted material and energy sufficiency initiatives.