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22 March 2023

The EU’s response to the Inflation Reduction Act

The EU has responded to the US’ Inflation Reduction Act (IRA) with its own acts of industrial protectionism in the form of its Critical Raw Materials Act (CRMA) and the Net-Zero Industry Act (NZIA) as an extension of the EU’s Green Deal Industrial Plan.

The CRMA sets out targets for the European Union for domestic raw material sourcing, processing, and recycling to reach by 2030. Raw material extraction within the bloc currently sits at just 3%, whereas targets for the extraction of the EU’s new list of strategic raw materials (SRM) have been set at 10% by 2030 with the caveat “to the extent that the Union’s reserves allow for this.” Processing capacity within the union is targeting 40% for 2030, while recycling goals have been set at 15% of the bloc’s annual consumption. The processing goals could be realistic depending on state support, but the idea that recycling could provide 15% of the bloc’s raw material demand is incredibly difficult considering the projected rate of increase in demand for net-zero technology.

Finally the EU is targeting that no more than 65% of the EU’s annual consumption of each strategic raw material at any relevant stage of processing can come from a single third country, this was revised down from 70% from a leak prior to the official announcement. This would mean that heavily geographically concentrated materials like Congolese cobalt or Indonesian nickel would have an effective upper limit on imports, which could lead to an increase in the price of importing to the bloc as it is forced to source from less economic environments. It also gives more leverage to countries with smaller reserves as the EU is imposing upon itself additional supply restrictions, further worsening import conditions and spurring domestic efforts.

Europe’s new classification of strategic raw materials aims to represent materials that “are of high strategic importance, taking into account their use in strategic technologies underpinning the green and digital transitions or for defence or space applications, that are characterized by a potentially significant gap between global supply”. This includes bismuth, boron (metallurgy grade), cobalt, copper, gallium, germanium, lithium (battery grade), magnesium metal, manganese (battery grade), natural graphite (battery grade), nickel (battery grade), platinum group metals, rare earth elements for magnets, silicon metal, titanium metal, and tungsten.

All strategic materials are included within the bloc’s list for critical raw materials, which includes those listed above and antimony, arsenic, bauxite, barite, beryllium, coking coal, feldspar, fluorspar, gallium, germanium, hafnium, helium, heavy rare earth elements, light rare earth elements, niobium, phosphate rock, phosphorus, scandium, strontium, tantalum and vanadium.

Since the last iteration of the EU’s critical raw materials list there has been 4 new additions, including feldspar, helium, battery grade nickel, and manganese. The latter two coming as a result of the increasing importance of battery metals within the bloc. The Commission also floated the idea of a critical raw materials (CRM) club, aiming to “bring together consuming countries with resource-rich countries to foster sustainable investment in producing countries and allowing them to move up the value chain“. This looks an awful lot like the IRA’s “friendly country” terminology, which was after all inspired by European protectionism in the first place. The Commission has said that negotiations over a raw materials partnership between the EU and the US would be the start of this global club, alongside the EU’s recent free-trade agreement with Chile that centered around lithium exports. Should these negotiations conclude positively the creation of this club would likely mean Euro-Sino relations take a further dive as the EU continues work more closely with the US, largely as a result of the IRA.

The CRMA mostly provides targets and context for the NZIA, which aims to improve conditions within Europe for the production of strategic net-zero technologies. The NZIA itself sets the broader target of producing 40% of the EU’s technological needs within the bloc, further showing Europe’s desire to reduce its reliance on China significantly over the rest of this decade. Similarly to targets set by the CRMA, this is not a legal obligation.

These technologies include:

  • solar photovoltaic and solar thermal,
  • onshore wind and offshore renewable energy,
  • batteries and storage,
  • heat pumps and geothermal energy,
  • electrolyzers and fuel cells,
  • biogas/biomethane,
  • carbon capture, utilization and storage, and
  • grid technologies

This is the second time the EU Commission has explicitly supported batteries and energy storage as its own class of technology with regards to legislation, following on from the announcement of EU electricity market reform last week. Support of CCUS schemes within the bloc continues to be disappointingly common, especially as the NZIA counts CCUS schemes as a key pillar to driving net-zero technology manufacturing investments, even setting a target of 50Mt sequestered yearly from 2030 and recognizing that oil and gas companies will be doing the heavy lifting here. The omission of nuclear from the list of strategic technologies is interesting but not unsurprising considering the static cost of the technology and the heated debate within the EU over the wisdom of nuclear,

The pillars of the NZIA are as follows:

  • Setting enabling conditions: the Act will improve conditions for investment in net-zero technologies by enhancing information, reducing the administrative burden to set up projects and simplifying permit-granting processes. In addition, the Act proposes to give priority to Net-Zero Strategic Projects, that are deemed essential for reinforcing the resilience and competitiveness of the EU industry, including sites to safely store captured CO2 They will be able to benefit from shorter permitting timelines and streamlined procedures.
  • Accelerating CO2capture: the Act sets an EU objective to reach an annual 50Mt injection capacity in strategic CO2 storage sites in the EU by 2030, with proportional contributions from EU oil and gas producers. This will remove a major barrier to developing CO2 capture and storage as an economically viable climate solution, in particular for hard to abate energy-intensive sectors.
  • Facilitating access to markets:  to boost diversification of supply for net-zero technologies, the Act requires public authorities to consider sustainability and resilience criteria for net-zero technologies in public procurement or auctions.
  • Enhancing skills: the Act introduces new measures to ensure there is a skilled workforce supporting the production of net-zero technologies in the EU, including setting up Net-Zero Industry Academies, with the support and oversight by the Net-Zero Europe Platform. These will contribute to quality jobs in these essential sectors.
  • Fostering innovation: the Act makes it possible for Member States to set up regulatory sandboxes to test innovative net-zero technologies and stimulate innovation, under flexible regulatory conditions.
  • A Net-Zero Europe Platformwill assist the Commission and Member States to coordinate action and exchange information, including around Net-Zero Industrial Partnerships. The Commission and Member States will also work together to ensure availability of data to monitor progress towards the objectives of the Net-Zero Industry Act. The Net-Zero Europe Platform will support investment by identifying financial needs, bottlenecks and best practices for projects across the EU. It will also foster contacts across Europe’s net-zero sectors, making particular use of existing industrial alliances.

With the exception of CCUS which allows the subsidizing of continued CO2 production, the actions being taken to develop European industry make sense. As a means to set enabling conditions the EU is proposing labelling some projects, whether production or extraction-based, as strategic. Under this law, net-zero strategic projects can be designated as overriding public interest, this should shorten permitting times from 12-18 months to within a year according to EU Climate Chief Frans Timmermans.

The European Parliament and member states will need to debate both laws before they can come into effect, so revisions are inevitable. This could see the further watering down of targets as a result of stubborn member states like Italy, Poland, or Germany as we’ve seen more recently with the internal combustion engine ban revisions. Should these laws come into effect, the combination of protectionism and deregulatory efforts, particularly within the NZIA, should spur investment within Europe and draw back some investment from Americas. The terms of this global critical raw materials club will be incredibly important, especially taking into consideration how this will interact with IRA subsidies.