Since the establishment of the European Union as a supranational entity with a common security objective, the foreign policy perspectives of the body seem to be dwindling as the making of foreign policy is delegated to the states.
However, this philosophy is in many cases at odds with the vision of European energy and transition security. This is primarily due to the fact that European energy policy has lacked a strategic perspective for decades (Dempsey, 2021), as clearly admitted in the European Energy Security Strategy (European Commission, 2014). Energy resources have not been considered from a security perspective, but like other commodities as a market resource for economic growth, and therefore low prices of strong producers have always been preferred to diversification for more resilience. This is clearly reflected in the large dependence the Union has built on fossil fuels from Russia, including a 40% dependence on its gas (Dempsey, 2021). Despite the constant concerns of Western strategic allies and the events of 2008, 2009, and 2013, dependence on Russia has not decreased in the long term because the EU’s lack of strategic mentality has prevented it from diversifying its demand for pipeline gas for the Maghreb economies or increasing its LNG import capacity, primarily due to price concerns (Dempsey, 2021).
But fossil fuels are not the only strategic commodities the EU has left unguarded. There is also a lack of coordination among EU members in promoting the supply of raw materials and byproducts for the green energy transition, an issue that has been discussed at length in recent studies (Leonard et al., 2021; Kemseke, 2022; Lazard & Youngs, 2021).
Russia has effectively abused its position as a major supplier to disrupt international fossil fuel markets and, in particular, has put the EU in a bind to find gas to get through the winter, not only hurting its economy (Bachman et al., 2022) but also diverting supplies from developing economies (Shah & Hirstein, 2022). This can be attributed to Russia’s evil intentions, of course, but also to the EU’s lack of strategic foresight.
As if awakened from a dream, the EU has finally committed to further accelerating the energy transition, not only in terms of climate policy, but also in terms of energy independence and diversification, especially through electrification and the inclusion of hydrogen (as in the REPower Europe Initiative) (European Commission, 2022).
However, accelerating this transition will lead to a surge in rare earth consumption, which raises the question: How does the EU intend to balance the external policy needs and consequences of such an undertaking?
THE SUPPLY CHAIN IMPLICATIONS OF THE ENERGY TRANSITION
To safely electrify the economy, the EU must first secure its supply chains for rare earths, an industry currently controlled mainly by China, another systemic rival of the Union (Ebner 2014, Kulik, 2019; Van Veen & Melton, 2020). Rare earths consist of 17 materials with similar chemical properties that are essential to the production of most energy transition technologies, such as permanent magnets, high-performance batteries, solar panels, wind turbines, and electric motors (Schmid, 2019). Currently, China controls over 90% of the international rare earth supply chain, so the country can be considered to have an international monopoly on it (Vekasi, 2019; Kalantzakos, 2019; Ebner, 2014).
Moreover, China has used its monopoly on rare earths as a tool before, mainly to force technology transfer in its favor and eliminate competition in the renewable energy sector, as happened during the Senkaku crisis in 2011 (Kalantzakos, 2018). Nevertheless, the EU did not reduce its dependence on Chinese supply chains, as it changed only temporarily after the Senkaku crisis, but soon returned to the same level (Hou et al., 2018). Although the EU has taken a number of steps to reduce dependence (including encouraging the opening of REE mines in the EU) and created bodies such as the European Raw Materials Alliance (ERMA) and the European Rare Earth Competence Network (ERECON), these are advisory bodies that lack the traction (or foreign policy will) to counter Chinese grip on the market, which threatens EU REE consuming companies and their energy security.
There is a parallel here between the energy crisis caused by the war in Ukraine and the looming threat to the EU’s rare earth supply. The lack of political will and strategic foresight on the part of the EU’s private sector and public institutions creates the conditions for political exploitation by a systemic rival of the EU. Russia and China, although not the same, have shown the same will to use the “supply” channels of influence described by Hirschmann (1945), and there are no mechanisms for the EU to secure its supply of rare earths in the event of a major trade action by the Chinese government. Most processes to reduce dependence on Chinese rare earths have either been scaled back or Chinese capital has been introduced into the process (Ebner, 2014).
To mitigate this risk, the EU needs to ensure a more diversified rare earth supply chain that includes more than just mining, which has been the focus since the Senkaku crisis (Ebner,2014). However, unlike oil and gas, there are no market incentives to increase production and refining capacity outside of China, as Chinese market power keeps prices low (or ensures high volatility), which drives out competition (Ebner, 2014; Vekasi, 2019).This means that policies that rely on market mechanisms, which are the EU’s main tool, will not be effective. This is not a question of economic efficiency, but of security.
But solving dependence on China would bring a new set of problems that also need to be addressed, including which partners to ally with and how to reduce the EU’s hunger for raw materials.
Many countries with significant rare earth reserves are problematic as trading partners due to lack of governability (Malaysia, Dem. Rep. Congo), lack of environmental standards formining (India, Tanzania), or the existence of a regime contrary to the values supported by the Union (Russia, Myanmar) (Kamenopoulos et al., 2015). The aimless support of new rare earth projects without considering these aspects would create new strategic, environmental, and moral dilemmas. Countries with low governability or authoritarian regimes could use rare earth trade to fuel conflict, repression, or illegal activities, putting EU companies at risk of supply chain disruption and repeating security dilemmas in the region.
Meanwhile, the energy transition, if poorly monitored, could spawn a new variant of the same resource extraction that has led to resource-based conflict in developing countries and produced environmental hazards (Lazard & Youngs, 2021). It is clear that some technologies are more resource-intensive than others, and the EU must prioritize a less resource-intensive transition model and set standards to avoid over-exploitation of resources abroad by EU companies or their suppliers.
HOW TO CREATE AN EU-ORIENTED SUPPLY CHAIN OF REEs
To address all these issues, the EU needs to:
- Encourage the development of rare earth value chains (not just mining) outside of China, preferably with key allies deemed appropriate in terms of environmental andhuman rights standards, and use long-term purchase programs at stable prices.
- Use ERMA and ERECON as platforms to coordinate price contracts with rare earth consuming companies in the EU, as the Japanese government did after 2011.
- Promote standards among EU REE mining, manufacturing and purchasing companies to exclude suppliers without human rights and environmental standards and reward responsible mining and sustainability in their operations.
- Review energy transition technologies from a resource intensity perspective and prioritise lower resource-intensive technologies in public programmes and policies.
Since the 2011 Senkaku Islands incident, the EU has focused on promoting market mechanisms to bring EU-based REE mining and refining projects to life (Ebner, 2014). These measures included: opening mining projects inside and outside the EU and forming alliances with REE-producing countries (Ebner, 2014); and later, creating public-private discussion forums such as ERMO and ERECON to promote private sector diversification.Nevertheless, these mechanisms relied on market solutions to a problem that requires strong political influence. Markets do not necessarily generate strategic security.
Japanese government policies that created public price stability programs with alternative rare earth suppliers (mainly Vietnam and Australia) enabled Japanese companies to reduce their dependence on rare earths from China from 90% to 60% after the Senkaku crisis (Vekasi, 2019, Shida, 2019).
However, Japanese policy still has not reduced China’s control over the rest of the supply chain (separation, refining, and product creation). If, as Ebner (2014) says, price instability and high entry costs are the main problem with REEs (a problem that plagues any strategic material that has been heavily politicized), then the best solution is to create stable prices for the market. Creating state-sponsored price stability with more expensive alternative suppliers would of course reduce economic efficiency (as would diversifying Russia in the case of gas), but it will protect the Union from political exploitation.
Of course, increasing resilience is not just about changing the main supplier. Alternative suppliers must: 1) be numerous to avoid shifting dependence; 2) be reliable (unlikely to disrupt supplies intentionally or due to internal unrest); and 3) adhere to standards of sustainable and humane extraction to avoid resource-based conflict and human rights abuses. These assessments are a key component in selecting resilient supply chains and trading partners, rather than substituting one threat for another (Kamenopoulos et al., 2015).
Finally, dependence on raw materials in general should be reduced by scaling back resource-intensive projects such as lithium batteries in favor of more resource-efficient means such as hydrogen for energy storage. The EU must avoid unsustainable resource extraction in developing countries to reduce the risk of conflict over water, land, and food in these regions (Lazard & Youngs, 2021; Leonard et al., 2021). Where possible, these projects should also promote autonomous energy and resource systems in key EU allies with strong standards supported by EU capital. A good example of this is the current German projects to develop clean hydrogen systems in Morocco and Ukraine, which not only open up new sources of hydrogen for the Union, but also create infrastructure in these countries to build their industries and use the resource for themselves as well. This would be an opportunity to create energy security, gain autonomy and consolidate the EU’s position as a climate policy champion in the world.
The grim picture of the war against Ukraine and the energy crisis facing the EU gives us a clear message. These policies will not lead to more energy at lower prices because economic efficiency is not one of the outcomes of these policies. But prioritizing economic efficiency and ignoring energy security can make the bill much more expensive in the long run. The EU must avoid suffering the same blow it suffered with its dependence on Russia.
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