Geopolitics of the green transition and improving EU’s economic security

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28.03.2023 Josep Borrell, High Representative of the European Union for Foreign Affairs and Security Policy / Vice-President of the European Commission

HR/VP Blog - Last week, at the European Council, we had a first exchange on the Net Zero Industry Act and the Critical Raw Materials Act presented recently by the European Commission. This legislative package has major implications for our foreign policy. We need to avoid that our ambitions to reduce excessive dependencies could be considered as a kind of 'green protectionism', as I have heard during the Ibero-american Summit in the Dominican Republic. On the contrary we have to show that it offers new opportunities for our partners.

The COVID-19 pandemic - on masks and respirators - and Russia's war of aggression against Ukraine - regarding gas and oil - have shown how the EU's excessive dependency on certain countries for critical raw materials and key technologies or even ordinary products, can have serious consequences in times of crisis. This is the case even despite existing safeguards, such as long-term contracts, international trade agreements or multilateral rules provided by the World Trade Organisation.

We learned the hard way that dependencies can be weaponised and global markets may not be able to satisfy all demands at all times.

We learned the hard way that over concentration of our value chains can't always deliver what we need. Dependencies can be weaponised and global markets may not be able to satisfy all demands at all times. As said during the Ibero-american summit in Santo Domingo, looking for the cheapest price may sometimes become very expensive…

In fact, during the last decade we witnessed the beginning of a backlash against global trade integration that has been accelerated by the pandemic and Russia's war in Ukraine. Governments and multinational companies are adapting their trade links to accommodate the new challenges. The benefits of economic integration are being re-evaluated through the lens of national security, including most notably by China and the US. Economic security must also become an integral part of EU's foreign and security policy.

Source: European Commission

This experience has reinforced our decision to accelerate our green transition - not only to take our full part in the critical fight against climate change, but also to end our excessive dependence on Russia and on fossil fuels more generally, which we have to import more and more at ever-increasing costs. This is what we have undertaken with the RePowerEU plan.

We have to be careful not to exchange one dependence for another

However, we have to be careful not to exchange one type of dependence (on Russian energy imports) for another one, as we currently rely principally on imports for a large number of technologies and raw materials needed for the green transition. We are particularly dependent on China, which has managed to build up a dominant position through a high level of state-directed investments and massive subsidies.

At this time when we are seeking to diversify our supplies, the fear of deindustrialisation in Europe has been further fuelled by the Inflation Reduction Act (IRA) adopted last summer in the United States. The European Union welcomes of course that the United States, which is still a major emitter of greenhouse gases, is adopting a very ambitious green transition policy.

But our American partners have chosen to achieve this goal through a very different logic than ours based on carbon pricing. It is widely considered an essential element to transition to net zero economies by encouraging greenhouse gas emitters to invest in green technologies, letting the market actors choose the best way to achieve decarbonisation. It is the logic of the EU Emissions Trading System (EU ETS), a cornerstone of EU's climate policy. EU ETS has been reformed recently to make it more efficient and expand its scope.

But if countries scale up carbon price unilaterally they risk losing competitiveness without reducing global emissions because businesses could transfer their production to other areas with lower carbon prices (the so called "carbon leakage").That is the reason why, the EU decided in parallel to introduce a Carbon Border Adjustment Mechanism (CBAM) on some heavily GHG emitting industrial products to maintain a level playing field with our partners.

Carbon pricing to reduce carbon emissions

But in the US, this carbon pricing approach has long been politically very sensitive. Instead, with the IRA (Inflation Reduction Act), the current administration proposed to give massive public subsidies to domestic suppliers and consumers of green technologies, reserving the benefit of these subsidies to products manufactured in the US.

It has profound implications for EU's climate diplomacy. The EU has engaged in a dialogue with the US to limit the effects of IRA's discriminatory measures on European producers. This new context implies also that we have to take additional measures to re-establish a level playing field - with both China and the US - in key technologies and critical raw materials related to the green transition.

That is why, the European Commission presented recently a comprehensive legislative package including a Net Zero Industry Act (NZIA) and a Critical Raw Materials (CMR) Act. These texts have now to be discussed and agreed on by the Council and the European Parliament, as we have begun to do it at the last European Council. However, this process will take several more months, so I am not going to detail here the precise content of the package, which is likely to evolve in the future (but see the presentation made by my fellow Commissioners Frans Timmermans and Thierry Breton).

Re-establish a "level playing field"

I want to emphasise here the general thinking that guides us in this matter and what this means for our external partners. This package indicates a certain paradigm shift for the European Union. The Union has helped build a global economic system based on open and rules-based trade, pushed for respecting and advancing social and environmental sustainability standards, and we remain fully committed to those values. However, the weakening of the WTO and the increasing weaponisation of trade has forced us to equip ourselves with industrial policy instruments, to re-establish a "level playing field" and to reduce excessive dependencies which could be weaponised.

In strategic sectors related to the green transition, actors will benefit from support measures by the EU, including public financing and faster planning procedures. The proposed Acts also set out a range of measures to improve the EU's competitiveness, via investments in research, innovation and skills and introducing the possibility for regulatory sandboxes to test innovative new approaches.

Our Green Deal Industrial Plan is not targeted to any particular country or to embark on any form of 'green protectionism' or 'regulatory imperialism'.

Given our high import dependencies for some critical technologies and raw materials, these changes will affect our partners. However, our Green Deal Industrial Plan is not targeted to any particular country or to embark on any form of 'green protectionism' or 'regulatory imperialism', as some of our critics claim. In fact, our desire to reduce excessive dependencies should create new opportunities to develop our trade relations with many partners.

Regarding critical raw materials, in particular, we intend to promote a trade and economic agenda towards our partners that maximise mutual benefits as opposed to a mere "extractive" approach. We will use the framework of the Global Gateway strategy to support projects which contribute to the diversification of the EU's supply chain while also contributing to our partner countries' efforts to improve social standards, pursue twin transition and develop local value added. This is especially important in our relation with the Latin American countries, which have important reserves of critical raw materials, as lithium, and intend to take advantage of it to develop their own industrial capacities.

Regarding critical raw materials we intend to promote an agenda that maximise mutual benefits as opposed to a mere "extractive" approach.

As High Representative and Vice President of the Commission, I am in charge of ensuring that our internal policies are and stay coherent with our foreign policy priorities. On these topics, like on any other, we remain strong supporters of multilateralism. And in particular, we remain committed to the international rules established by the WTO that protect the poorest countries from the encroachments of the most powerful ones.

It is indeed our firm intention to combine economic security policy measures aiming at reducing our excessive dependencies with the preservation of a global open rule-based trade system, which ensures a level-playing-field. This is in our strategic interest. We will discuss extensively the changes in European industrial policy with our partners and in particular the new opportunities for cooperation that these policies can present for them.