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Creating a European battery supply chain: what is the best response to US Inflation Reduction Act?

The 2022 United States Inflation Reduction Act (IRA), a legislative package aimed at driving American competitiveness in green energy, risks to hinder other countries and Europe in the first place. In fact, the IRA is raising the competitiveness of technologies produced exclusively on North American soil, with some protectionist measures against others, especially China. However, the European Union, which has always proud itself to be a leader in the fight against climate change, through its European Green Deal first and, more recently, its Green Deal Industrial Plan finds itself in the middle.

On the one hand, we should praise President Joe Biden’s efforts as the IRA represents a milestone in the fight against climate change. After all, Europe has always said that we cannot fight this battle alone. The EU is responsible for “only” around 9 per cent of global greenhouse gas (GHG) emissions and the European Commission’s officials have always stated that we need everybody on board to save the planet.

But at what cost? Can Europe lose its competitive edge in favour of a cleaner (and more US-oriented) planet? Not to mention that many Chinese companies, operate in Europe: Chinese solar panels are distributed through European companies and the number of Chinese batteries plants is growing, especially in Central and Eastern Europe. It might seem that European companies do not have many choices ahead: either move their operations to the United States, leaving behind any Chinese components in order to get the subsidies; or keep things as they are, losing maybe suppliers and/or buyers. Unless we change something at the EU level.

First, of all, we have to underline that we are not talking about the energy industry as a whole, but more specifically, about the transport sector. The electric vehicle (EV) supply chain ranks second on the Act’s funding list, with 23 billion US dollars allocated to transportation. For funding access, EV companies must source at least 40 per cent of the CRMs used in battery production from the US or a country that has a US trade agreement. Secondly, the battery components must be manufactured or assembled within the US, Canada or Mexico, with the requirement increasing to 100 per cent by 2029.

The European Commission already confirmed that it has been working to find solutions to ensure that EU-made EVs can also benefit from the IRA, especially after seeing that companies such as Tesla, Iberdrola and Safran are planning to move some of their operations to the US.

In particular, the battery accounts for 30-50 per cent of the value of electric cars, making it a strategic component in automotive manufacturing. The International Energy Agency (IEA) estimates that China produces three-quarters of all lithium-ion batteries and holds 70 per cent of the production capacity for cathodes and 85 per cent for anodes, both key components for battery production. This means that even batteries produced outside of China are likely to rely on components made in China.

In fact, several Chinese companies are entering the European battery market (for example, CATL in Hungary). According to a recent paper written by Márton Czirfusz from the Friedrich Ebert Foundation in Budapest, Hungary and other Eastern European countries are ideal locations for East Asian (mainly Chinese and South Korean) companies that dominate the battery industry, as they provide access to the EU market. Production costs are kept low due to State subsidies for investment, cheap land (particularly important for gigafactories), cheap natural resources (water and energy) and the availability of cheap, flexible labour.

So what is left for Europe to do? Or, at least to the European Union? The Commission’s President Ursula von der Leyen has mentioned the possibility to loosen State Aid rules. However, some argue that it would only favour a few EU countries, the larger and richer ones, which have the financial and the technological means to respond (here we are mainly referring to France and Germany). CEE countries are already less competitive in many aspects and this way, they might be left behind even more.

Brussels-based think tank Bruegel states that the magnitude of the IRA’s effects is very uncertain. Therefore, a solution could be to work more on a local level, by creating a European supply chain that can take on both sides, the US and China.

“The best way for the EU to respond is instead to improve the attractiveness of the EU single market as a location for green investment, with horizontal measures that improve the single market’s functioning in key areas (including energy, finance and skills), as well as specific measures in favour of clean technology,” read Bruegel’s policy paper. “These include better regulation, green procurement rules and EU-level financing supporting new or early-stage clean-tech areas in which EU firms have the potential for sustainable competitive positions. EU funding should also seek to improve EU strategic resilience.”

However, on a last note, the IRA is also creating a dangerous precedent. Violating some World Trade Organisation’s (WTO) rules could actually bring other countries to disregard international norms. And right now, with all the crises we are facing and a planet that is disappearing in front of our eyes, we cannot really afford to fight each other.

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