The EU’s Plan on Critical Raw Materials
But also — Germany’s Combustion Engine, ECB, Net-Zero Industrial Plan, Electricity Market
The Briefing
On March 16, the Commission presented its much anticipated Critical Raw Materials Act. Through this regulation, the Commission seeks to improve the bloc's supply of critical raw materials and limit its dependence on China.
The stakes are high for the EU, which is currently trying to maintain the competitiveness of its industry while achieving the climate goals of the Green Deal.
CONTEXT • "Without a secure and sustainable supply of critical raw materials, there will be no ecological and industrial transition," summarised Margrethe Vestager, Executive Vice President for a Digital Europe.
Yet the EU depends almost exclusively on imports for its supply of critical raw materials. The bloc buys 97 percent of its magnesium from China. 63 percent of the world's cobalt, used in batteries, is mined in the Democratic Republic of Congo, while 60 percent is refined in China. And the list goes on.
At the same time, the demand for these raw materials is growing exponentially. For instance, the Commission estimates that global demand for lithium — an essential component of certain batteries — will increase 89-fold by 2050.
Security of supply is therefore extremely uncertain, prompting the bloc to seek to minimise the risk of shortages. By the end of 2021, a drop in magnesium exports from China was enough to send shockwaves through the entire European automotive industry.
TARGETS • The regulation proposed by the Commission establishes a list of targets to be reached by 2030 in order to secure supply:
Extraction in the EU will have to supply at least 10% of its annual consumption.
Processing in the EU will have to produce 40% of its annual consumption.
Recycling in the EU should produce at least 10% of its annual consumption.
In addition to these objectives, the Commission updated its list of critical raw materials and drew up a list of so-called "strategic" raw materials — as they are crucial in certain key sectors.
MEANS • To achieve these objectives, the Commission wishes to limit current delays for authorizations of projects relating to critical raw materials in the Member States. Obtaining a mining permit in the EU currently takes an average of 10 years, as opposed to the 2 years envisaged by the Commission in its proposed regulation.
The European executive is also banking on recycling. For example, permanent magnets — produced from "heavy rare earths" refined exclusively in China — will have to better inform consumers about their recyclability.
DEBATES • However, the prospect of extractive activities in the EU is not to everyone's taste. While local extraction of strategic raw materials seems essential to foster the energy transition, some see it as a double-edged sword, as the opening of mines could contribute to the erosion of biodiversity.
For Swedish MEP Sara Skyttedal (EPP), the dilemma is more easily solved: "Many important objectives are in conflict with each other, and we, as legislators, must have the courage to make choices. Europe must now choose strategic autonomy and access to critical raw materials. We have to admit that this is more important than other things and, yes, it is more important than Natura 2000 or the interest of a single indigenous Sami village." Debates will certainly be lively.
On the industry side, the federations Euromines and Eurométaux believe that the Commission's proposal goes in the right direction. However, the objectives put forward remain purely incentive-based and the means of achieving them remain vague.
CHINA • In the background, it is clear that Europe wishes to gain more strategic independence from China. Without naming the Asian rival, the regulation sets the following target for 2030: "no more than 65% of the Union's annual consumption of each strategic raw material at any relevant processing stage shall come from a single third country".
Euractiv notes that this target was 70% in a previous version of the text, which highlights the difficulty of decoupling from China.
PARTNERS • As a result, the European executive remains pragmatic: the EU will not be able to secure its supply and reduce its dependence on China if it acts in isolation.
The Commission is therefore banking on the creation of a club for critical raw materials, which Ursula von der Leyen has already mentioned during her recent meeting with Joe Biden. Bilateral agreements on the topic are also relevant diplomatic tools for the EU, in particular with partners such as Chile — from which 78% of the lithium consumed by the bloc comes — and Australia.
WHAT NEXT? • This is just the beginning of the legislative process. The European Parliament and the Council of the European Union must now establish their respective positions. The two co-legislators will then have to agree on a common version of the text.
The Commission hopes that the regulation will be adopted before the European elections in May 2024. This leaves less than a year for the legislators. However, one factor must be taken into account: the energy agenda is already particularly full. It is therefore not certain that the negotiations will be concluded before the elections.
PLAYLIST • In the meantime, be sure to check out the new playlist from the Internal Market Commissioner, whose team has been working extra hours to find a title for each critical commodity. No guarantee on the musical coherence of the final product.
In Case You Missed It
GERMANY • Since the beginning of March, member states have been divided over the final adoption of a ban on the sale of new combustion engine cars and vans by 2035.
Germany — which has rallied Italy, Bulgaria and Poland to its cause — is blocking final adoption of the text. These Member States want the Commission to allow the use of "e-fuels", synthetic fuels made from hydrogen and CO2, which can be used in traditional vehicles. On the German side, Olaf Scholz's Social Democratic Party has lost popularity and fears job losses due to the ban on the sale of new combustion engine cars.
Germany would like to see the creation of a credit system for producers of cars using these alternative fuels, which would be ratified by the adoption of a delegated act by the Commission. Pascal Canfin, chairman of the European Parliament's environment committee, however, said he saw no legal basis for the Commission to propose such measures, calling the request illegal.
On the other side, France, Spain, Belgium, Denmark, Ireland and the Netherlands support the original plan. On March 16, Roberta Metsola, president of the European Parliament, called on Germany and its allies to respect the agreement that was reached last year on the text.
The German blockade could not only jeopardise the end of the sale of combustion engine cars by 2035, but also delay the adoption of the text, which has already taken more than two years to negotiate.
MONEY • On 16 March, the ECB decided to increase its three key interest rates by 50 basis points (0,5%). The eurozone’s deposit rate now stands at 3%, in line with what the Frankfurt-based institution had earmarked last month. A few senior decision-makers were worried that a rate hike would add fuel to the fire, after the downfall of Silicon Valley Bank and the acquisition of troubled Crédit Suisse by UBS.
“The Governing Council is monitoring current market tensions closely and stands ready to respond as necessary to preserve price stability and financial stability in the euro area. The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, the ECB’s policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed and to preserve the smooth transmission of monetary policy”, the ECB said in a press release.
NET ZERO INDUSTRY • On March 16, the European Commission unveiled its proposed Net-Zero Industry Act to support Europe's decarbonized industry as part of the Green Deal Industrial Plan. The plan is one of the EU's responses to the U.S. Inflation Reduction Act (IRA), which makes European firms consider relocating across the Atlantic to take advantage of subsidies and tax credits.
The aim of the Net-Zero Industry Act is to create better conditions for energy transition projects in Europe and to attract foreign investment. The Commission aims for the EU's strategic net-zero technologies — which include photovoltaic panels, wind turbines, carbon capture and electrolysers among others — to reach 40% of the bloc's deployment needs by 2030.
The place of nuclear and alternative fuels within the Net-Zero Industry Act is however ambiguous. Both technologies are mentioned in the Commission's plan, but remain absent from the list of strategic net-zero technologies in the annex. This ambiguity follows from divisions within the College of Commissioners on the place to be given to these technologies.
This Net-Zero Industry Act marks a turning point for the EU. Faced with the measures taken by the United States and China, the bloc has no choice but to embark on the unfamiliar path of industrial policy.
ELECTRICITY • On March 14, the European Commission presented the broad outlines of its future electricity market reform, designed to protect consumers from electricity price hikes.
Initial drafts indicate that the initial inclination — supported by France and Spain — to embark on a major reform of the electricity market has apparently been replaced by a series of more targeted and less bold measures.
The Commission is primarily interested in ensuring more secure access to electricity for consumers and businesses by encouraging the use of long-term electricity contracts, power purchase agreements and the introduction of national "suppliers of last resort".
Despite the fall in prices since last August, industry representatives say that the desire to propose a quick reform has led the Commission to overlook key aspects of this evolving market, such as capacity mechanisms, which are considered essential to ensure a more sustainable energy transition. The proposal is seen as a quick fix to deeper problems, exacerbated by Russia's invasion of Ukraine, which would require a more thorough review in the long term.
What we’ve been reading
For the CEPS, the Clingendael Institute, and the ECR Group, Adriaan Schout and Daniel Gros have written a paper that evaluates the performance of the euro since its inception and presents different outlooks for its future.
The Peterson Institute’s Alan Wm. Wolff calls for the EU to provide leadership in the defence of multilateral trade.
In his newsletter Trade Secrets, FT journalist Alan Beattie criticises trade conditions imposed by the EU on less well-off countries as often ill-conceived, leading to legitimate anger from its trade partners.
This week’s newsletter is brought to you by Julie Houillon-Leonis, Maxence de La Rochère and Augustin Bourleaud. See you next Monday!