April 19. 2024. 8:24

The Daily

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A transatlantic opening on green industrial policy?


The EU’s pending Net-Zero Industry Act and Critical Raw Materials Act need not be another point of contention between Brussels and Washington. Instead, it could help advance a new era of transatlantic cooperation to secure supply chains essential to our shared economic and national security, write Abigail Wulf and Kaare Nielsen.

Stakeholders on both sides of the Atlantic anxiously await the release of two important proposals from the EU Commission: the Net-Zero Industry Act and the Critical Raw Materials Act.

Both are expected to send a clear message on the altered geopolitical realities of green energy supply chains while defending European interests in the wake of generous incentives contained within the US Inflation Reduction Act to promote American battery production.

Yet, as recent discussions between EU Commission President Ursula von der Leyen and US President Joe Biden have shown, the pending act need not be another point of contention between Brussels and Washington and could instead help advance a new era of transatlantic cooperation to secure supply chains essential to our shared economic and national security.

Even as many European leaders have lamented America’s newfound foray into industrial policy, there is a growing understanding of the need to diversify supply chains to counter the strategic risk posed by China’s current domination of the critical mineral, materials, and components needed for EVs and virtually every other aspect of modern life.

President von der Leyen’s remarks at Davos affirmed the fundamental reasoning behind much of the IRA, particularly its EV tax credit provisions.

She pointed out that just three countries account for more than 90% of the world’s lithium production needed for EV batteries (most of which is processed in China).

She also noted that Europe is 98% dependent on China for rare earths, vital for EV motors and manufacturing technologies like wind power generation, hydrogen storage, and advanced batteries (among other industrial and national defence uses).

Chinese companies already produce the lion’s share of batteries for European EVs, and several of those companies are building factories within the EU.

By 2030, those factories are projected to supply nearly 30% of Europe’s batteries, up from less than 10% today.

While this could be seen as beneficial by many, especially those eager to decarbonise to meet climate goals quickly, the current situation in Ukraine should cause those eager to praise these developments for pausing and reconsidering the implications of being so reliant upon authoritarian regimes for next-generation energy needs.

Consider also that three German automobile makers (Volkswagen, BMW and Daimler) account for more than a third of all European Foreign Direct Investment into China between 2018 and 2021, making the disentanglement of EV supply chains even more of a challenge.

Enter the IRA, whose EV battery provisions were written in large part to reduce supply chain dependencies for EVs by incentivising production within North America and with existing US Free Trading Partners.

Important European, Asian, and other allies worldwide who are not FTA countries and may depend heavily on Chinese-supplied materials are understandably concerned that their own producers will be excluded from the lucrative US market.

We agree the IRA, as it emerged, should have been more inclusive of America’s friends and partners. The timeline to meet these important new requirements should have also been more achievable.

It is also true, however, that European and other companies based outside the US can reap significant benefits from partnering with North America. For example, according to Benchmark Mineral Intelligence, the EU already ranks second in global processing capacity for nickel, cobalt and manganese.

With limited domestic mining and processing, many US automakers are now scrambling for alternate sources of processed minerals.

Under the new law, other countries could process minerals extracted from IRA-compliant countries (North America or US Free Trade Agreement partners) in ever-growing quantities and still qualify for the EV tax credit. But we know broader US market access will also be required.

As evidenced by von der Leyen’s talks with Biden last week, leaders in both countries are working overtime to resolve these issues to address European concerns while meeting the US Congress’s intent.

While a solution may be in sight, making it work in the face of the inevitable attempt by China and its corporate affiliates to circumvent restrictions will be a continuous challenge.

In all, when it comes to EV market access and production incentives, the US is prepared to widen the gate and open the drawbridge if Europe and other key allies are also willing to build higher walls to reduce dangerous dependence themselves.

While some aspects of the IRA need to change, the answer is not to undo or circumvent new sourcing requirements.

Transatlantic cooperation on raw materials would benefit businesses on both sides and prevent harmful competition for what are scarce resources and specialised expertise.

What is needed is a strategic alliance on friend-shoring, permitting and a race to the top on values and transparency.

The opportunity is on the table to devise innovative industrial policies that accelerate the green transition in ways conducive to our shared economic and national security.