By Conor Gallagher
It was all rainbows and unicorns during a recent meeting between US President Joe Biden and European Commission President Ursula von der Leyen as they announced that EU-extracted and processed minerals will be covered by the Inflation Reduction Act’s (IRA) clean vehicle tax credits.
In recent months European officials have been complaining about the IRA and its $50 billion in tax credits to entice Americans to buy electric vehicles assembled in North America. To be eligible, a portion of the minerals that are used to make the batteries must come from countries that have free trade agreements with the US.
But the IRA doesn’t define “free trade agreement,” and it isn’t defined elsewhere in US law, which means that the Treasury will decide what kind of trade agreements will be included. Comments from US Secretary of Treasury Janet Yellen signal that it will adopt a loose definition so that smaller non-comprehensive trade arrangements can count as “free trade agreements.” This would allow the US to include allies like the EU, UK, and Japan.
“Today we agreed that we will work on critical raw materials that have been sourced or processed in the European Union and to give them access to the American market as if they were sourced in the American market. We will work on an agreement,” von der Leyen told reporters after meeting with Biden.
Sounds great. But while Biden and von der Leyen sell this as a win for “the most comprehensive and dynamic economic relationship in the world,” the problem is that the EU has little in extraction or refining within its borders. As the European Commission notes:
The EU’s industry and economy are reliant on international markets to provide access to many important raw materials since they are produced and supplied by third countries. Although the domestic production of certain critical raw materials exists in the EU, notably hafnium, in most cases the EU is dependent on imports from non-EU countries.
The supply of many critical raw materials is highly concentrated. For example, China provides 100 % of the EU’s supply of heavy rare earth elements (REE), Turkey provides 99% of the EU’s supply of boron, and South Africa provides 71% of the EU’s needs for platinum and an even higher share of the platinum group metals iridium, rhodium, and ruthenium.
Russia is also a major supplier to EU of metals like palladium, titanium, platinum and aluminum.
While the EU does indeed contain deposits, many aren’t being mined as Europeans often oppose the dirty process, and even if they’re mined, they then need to be processed, which the EU lacks the ability to do. From Politico EU:
But Europe can’t mine its way out of reliance on China without also ramping up its refining and production capacity, said Marie Le Mouel, an affiliate fellow at the Bruegel think tank.
“There’s more of a dependency on Chinese manufacturing than on the actual materials that go into these components,” Le Mouel said.
Brussels is trying to move quickly to do this with legislation in the works that would force member states to speed up permitting. More on that later, but importantly by the time the EU might actually be mining and refining, the agreement with the Biden administration could be dead.
The US Congress could simply pass legislation defining “free trade agreement” which would end the critical minerals arrangement. The next president could also terminate the executive agreement.
The European Commission is trying to play catch up and roll out its own proposals, but its Critical Raw Materials Act (CRMA) and Net-Zero Industry Act (NZIA) appear to fall far short of the IRA.
The CRMA would allow the EU to label some projects as “strategic” and fast-track the permitting process so that processing facilities could be granted approval in less than 12 months, and mines could theoretically be operational within 24 months (compared to an average of 10 years today).
The proposal aims for the EU to process 40 percent of the strategic raw materials it uses by 2030.
The NZIA would allow projects to bypass many environmental and social impact reviews. But the proposals do not earmark any new money, and the policies do nothing to change Europe’s disadvantages, which include the US’ subsidies and much lower energy costs.
Speaking of the latter, at their meeting von der Leyen made sure to thank Biden for
blowing up the Nordstream pipelines ensuring that US LNG companies can make record profits off shipping gas to Europe his assistance in helping the EU manage its energy crisis:
Indeed, you helped us enormously when we wanted to get rid of the Russian fossil fuel dependency by — you helped us enormously by delivering more LNG, helped us through the energy crisis.
Now claiming to have learned from the mistake of importing cheap Russian gas, the EU plans to not be dependent on any single third country for more than 70 percent of imports for any strategic raw material by 2030. This is seen as targeting China.
Chinese companies could see reduced exports to the EU under the proposed rule that no third country commands a green tech market share of greater than 65 per cent. From the South China Morning Post:
This means Chinese firms would likely lose out on lucrative European solar tenders, as the country provides more than 90 per cent of the bloc’s solar photovoltaic wafers.
It remains to be seen from where the EU will purchase such products. Frans Timmermans, the bloc’s climate tsar, said the EU won’t try to compete with China on “cheap” solar panels but will turn its focus to advanced equipment.
To recap: The critical minerals carveout doesn’t do anything for the EU until it gets mines and processing facilities up and running. Brussels’ proposed policies are also no match for the IRA. And the US will continue to enjoy windfalls from exporting LNG to Europe and poach European industry.
A quick note on the latter: the spin in Europe now appears to be that the IRA actually isn’t that bad, and they’re now blaming themselves for overreacting. Consider this recent piece from Reuters, “Fears of European industry exodus to U.S. may be overdone.” It goes on about how Europe already has its own subsidies before this part buried towards the bottom:
A survey of the German Chamber of Commerce and Industry (DIHK) released on Wednesday showed one in 10 German firms plan to move production to other countries, and North America came out as the region with the brightest business prospects. One reason cited was energy costs.
Belgian central bank governor Pierre Wunsch said Europe’s higher energy and carbon emission prices were likely to be have a greater impact than the IRA, which might for some companies be “a final straw”.
“It’s possible in some very energy-intensive sectors, new activities will go the U.S. or maybe Asia, but we will gain in others just because the exchange rate will adjust,” he said.
Recall that French President Emmanuel Macron went to Washington at the end of November to deliver the message that the EU would get tough on China if the US backed down on the IRA.
Well, this is all the EU appears to be getting, and yet Brussels will soldier on as the junior partner in the West’s race against China to secure critical minerals. As the joint statement from Biden and von der Leyen notes:
The Clean Energy Incentives Dialogue will become a part of the EU-U.S. Trade and Technology Council where it will also facilitate information-sharing on non-market policies and practices of third parties—such as those employed by the People’s Republic of China (PRC)—to serve as the basis for joint or parallel action and coordinated advocacy on these issues in multilateral or other fora.
Big picture, both the US and EU are way behind China.
A recent BloombergNEF study estimated that half of global spending on low carbon energy technology is happening in China, totaling more than the combined efforts of the EU and US.
One hurdle for the US and EU is that their residents don’t want the mining projects in their backyard. The governments have tended towards sourcing from Africa and South America where they are in competition with China.
For example, Sweden has the EU’s only heavy rare earth metal deposit of note. It’s not a new discovery; it was identified decades ago, but the public remains largely opposed to mining it because of negative effects on animal habitats and the country’s second largest lake, which is less than a mile from the site.
In the US, the Biden administration just put up a two-decade roadblock to a major copper and nickel mining project in northern Minnesota. While US environmentalists celebrated the move, it came right after the administration lined up a deal for the same minerals from Africa.
But even more than the mining is the processing. The RAND Corporation explains just how much ground the US needs to make up:
Starting up a new mine and processing facility can cost up to $1 billion and take more than a decade. Scientists have developed more environmentally friendly ways to separate and process rare earths, but there will still be impacts that need to be addressed. And while China has entire labs devoted to rare earth mining and processing, the U.S. now has only a handful of scientists who truly focus on rare earths.
Processing rare earths and other critical materials—not just digging them out of the ground—is the real bottleneck. If every proposed processing plant outside of China were to somehow come online by 2025, researchers found, they could produce around 134,000 tons of usable rare earth material every year. Projected demand by 2025, outside of China: 140,000 tons and growing fast.
The US better get moving if it wants to keep to its timeline for a war with China.