13. Achieving strategic autonomy: critical raw materials and low-emission hydrogen
Tilman Altenburg
in: Hackenesch, C., Keijzer, N., & Koch, S. (Eds., 2024). The European Union’s global role in a changing world: Challenges and opportunities for the new leadership (IDOS Discussion Paper 11/2024). IDOS.
State of play
The agreed shift towards a net zero industry in Europe and elsewhere increases demand for critical raw materials (CRMs) and low-emission hydrogen. CRMs are inputs to many of the essential industrial goods required for a net zero transition, especially lithium-ion batteries, wind turbines, generators and engines, electrolysers and photovoltaics (Prognos et al., 2023). Also, digital hardware, defence and aerospace increasingly consume critical raw materials. Low-emission hydrogen and its derivatives (including green ammonia, methanol and others) are indispensable for decarbonising the so-called hard-to-abate industries, including steel, chemicals, cement, aviation and heavy-duty road traffic. During the coming years and decades, both hydrogen and critical raw materials will be essential inputs for a variety of sectors with strategic importance for the European economy.
However, in both the cases of CRMs and hydrogen – while demand is set to increase drastically – Europe is and will remain heavily dependent on imports from third, and to a large extent developing, countries. Yet such imports are not readily available – for different reasons. This poses a huge threat not only to specific sectors, but to European economies as a whole, as supply shortages in strategic industries can have enormous knock-on effects spreading to almost any economic activity. The semiconductor shortage in 2022/2023 exemplified this (Haramboure et al., 2023). Moreover, any supply bottleneck may decelerate the net zero transition.
In many developing countries, CRMs and hydrogen are seen as emerging opportunities to increase export revenues, value added and employment. Hence, there is a shared interest in developing these markets and establishing stable trade relations. Then again, interests do not always converge, and trade-offs need to be faced and mitigated. This section highlights such trade-offs and suggests policies aimed at strengthening the respective EU trade relationships with developing countries.
Internal and external influences
Booming European and global demand for CRMs, low-emission hydrogen and its derivatives is good news for many developing countries that are endowed with the relevant resources. In the case of CRMs, some countries enjoy monopolistic or oligopolistic supply conditions and thus have a strong bargaining position vis-à-vis importing countries. This holds true, for example, for cobalt from the Democratic Republic of Congo (DRC); iridium from South Africa; and nickel from Indonesia. In the case of hydrogen, demand has initially been focused on green hydrogen based on renewable energy. Many developing countries are blessed with excellent solar, wind or geothermal resources providing the basis for competitive hydrogen prices. Hydrogen can also be used locally to produce derivatives, such as ammonia, that can be stored and transported more easily than hydrogen. That said, green hydrogen is still significantly more expensive than fossil alternatives, making it difficult for producers and customers to conclude long-term purchase agreements, which in turn are essential to bring capital costs down. The attention of importers is therefore shifting to blue hydrogen, made from natural gas with carbon capture and storage, which entails higher emissions, but in many cases still compares favourably with fossil alternatives. This shift impacts the trading partners: Natural gas-rich countries with carbon storage opportunities are now being wooed by interested importers.
Having said that, resource exports (and minerals in particular) have in the past often been associated with negative development effects. Economically, price and demand volatility often translated into economic instability; domestic value added typically remained low, so that resources contributed little to economic diversification and technological learning; Dutch disease effects discouraged other industries; and labour demand was typically low. Politically, resource rents were often captured by small elites, discouraging transparency and accountability and resulting in poor governance overall. Environmentally, resource extraction practices were often harmful, especially where checks and balances were weak (Sachs & Warner, 2001; Van Der Ploeg & Poelhekke, 2016). While green hydrogen production is not a classical extractive industry (as it is not extracted but produced with substantive investments), it shares some of these characteristics: it is highly capital-intensive and high-tech, absorbing little labour and limiting local productive linkages; and it entails rent-seeking opportunities, as investments plans are sometimes at a multi-billion level and entail complex negotiations about land rights, license fees, tax benefits, and the like.
Against this background, societies in resource-rich countries are very critical about any, especially foreign, investments that do not offer broad-based benefits in terms of value creation, employment creation and revenue sharing, and that are prone to opaque, even corrupt deals. The national hydrogen strategies of developing countries therefore regularly stress the need for intensifying industrial linkages and attracting new hydrogen-related industries from abroad. Any EU partnership with exporting countries should recognise these concerns, ensuring shared benefits, inclusive consultations, transparency and accountability. Not doing so would not only harm Europe’s image in the world, but also threaten project implementation, as public opinion may then easily turn against export projects.
This implies trade-offs. First, Europe competes with other import economies, in particular China, for securing favourable long-term contracts. Europe’s primary goal of securing supplies may lead to situations where secondary objectives, such as shared benefits, transparency and appropriate environmental standards, are sacrificed. Second, Europe wants to become independent of China’s dominance in critical raw material processing by boosting its own processing capacity to a minimum of 40% of European demand (European Union, 2024), much higher than its current share. This conflicts with exporting countries’ desire to add value domestically. Similarly, in the case of hydrogen, European economies explicitly aim to become market leaders in new technologies (such as electrolysis and fuel cells) and to retain hard-to-abate industries at home, again creating a tension with export countries’ industrial aspirations to attract such investments from abroad. These tensions call for political compromises that are more attractive for export countries than the alternative: exporting to other markets, including China.
This attitude is recognised in policy documents – the European Union (EU)’s Critical Raw Materials Act provides support for “strategic projects” in developing countries only when they “would be mutually beneficial for the Union and the third country concerned by adding value in that third country” (European Union, 2024, p. 22). In practice, however, it is difficult to find such partnerships, and existing Memoranda of Understanding, for instance, between the EU and Namibia, are clearly geared towards “export only”. When Indonesia legislated a ban on all exports of unprocessed nickel, Europe filed complaints to the WTO (World Trade Organization), whereas China invested in refineries in Indonesia. As a result, China strengthened its access to nickel while also being seen as a contributor to Indonesia’s industrial development.
Europe can mitigate trade-offs by complementing negotiated partnerships with policies at home: increasing resource efficiency, recycling as much as possible, investing in mining within Europe, and developing substitutes. All this calls for a focus on R&D (research and development) and innovations. Resource-saving and recycling technologies and less resource-intensive substitutes for scarce minerals would reduce Europe’s dependence while at the same time strengthening its international competitiveness and bargaining power.
In the case of hydrogen, the main reasons for the slow development of low emission, especially green, hydrogen are the remaining cost gap between fossil and clean technologies and uncertainty about long-term policy frameworks. The most important European contribution to creating new export opportunity for developing countries is thus to create reliable framework conditions for the rapid ramp-up of the hydrogen economy. It should be noted, however, that European countries have differing interests in the hydrogen economy. Some countries are heavily dependent on hydrogen imports, including Germany; others have great renewable energy endowments, including Spain and Greece; again others, including Norway and the United Kingdom, are keen to develop blue hydrogen for exports; France bets on nuclear energy and is therefore less interested in green or blue hydrogen.
Also, in downstream industries using critical raw materials, European countries may prioritise specific national over Europe-wide interests. Hungary for example has been accused of attracting Chinese lithium-ion battery investments based on lax environmental enforcement and primarily uses its battery cluster as a bargaining chip in negotiations with the European Union (Györffi, 2023). These examples show the importance of defining a coherent European resource partnership strategy avoiding beggar-thy-neighbour effects.
Looking ahead
Imports of CRMs and low-emission hydrogen need to be scaled up massively to maintain the competitiveness of European economies. The respective challenges are clearly recognised in comprehensive EU policy documents, such as the Critical Raw Materials Act and the EU strategy on hydrogen. Yet, these strategies are not backed up by sufficient funding, and implementation lags behind. Political determination is required to avoid dependencies that could cost Europe dearly.
With regard to stabilising CRM and hydrogen trade relations with developing countries, the following principles and priorities need to be taken into account: As a general principle, Europe should offer credible value creation partnerships with exporting countries in which the latter are enabled to increase domestic value added beyond raw material extraction or hydrogen production in exchange for long-term import contracts. This entails foreign direct investment in refineries, smelters, electrolysers and downstream production, for example of fertilisers, sponge iron or sustainable aviation fuel. In parallel, research cooperation and technology transfer need to be intensified. Europe should avoid the escalation of trade conflicts via retaliating measures when developing countries ban unprocessed mineral exports and rather seek collaborative contributions. This is essential to gain credibility as a “just transition partner” and to avoid partners aligning with China instead. Pilot projects in various segments of CRM and hydrogen markets should be developed that can then serve as a signal to the world that Europe’s stands for just transition rather than extractive partnerships.
These are the Global Gateway’s declared goals. The Global Gateway can be seen as Europe’s – necessary and long overdue – response to China’s Belt and Road Initiative (BRI), yet much needs to be done to fill it with life and mobilise the announced resource flows for more resilient connections with the world (see Section 1 in this publication).
An essential issue, especially in the case of CRM resilience, is to improve trade relations with China, given its partial or even full (e.g. graphite) control of global processing. Europe must maintain and deepen its policy of open strategic autonomy (Lippert et al., 2019), avoiding the further escalation of mutual sanctions among the big trade blocs. This also entails greater efforts in domestic mining (to the extent possible), and, above all, circularity and research in downstream research. Europe can try to become a global leader in recycling technology, and it can greatly step up research in materials-saving and substitution as well as specialised capabilities in CRM-using technologies, such as new generations of electric vehicle batteries. This would convert a unilateral dependence on China into a mutually beneficial interdependence. Europe should also avoid that such mutually beneficial interdependence creates intra-European dependence, as exemplified by the Hungarian strategy of developing a dominant position in auto battery manufacturing based on Chinese investments.
Regarding low-emission hydrogen, Europe should undertake and accelerate everything that is needed to ramp up the market. This includes the renovation of infrastructure (pipelines, ports), harmonised certification systems, and above all, maintaining and upscaling instruments to close the cost gap between fossil and clean technologies. The latter may include carbon pricing, emission standards, the temporary subsidisation of the cost difference between hydrogen production and purchasing prices as well as Carbon Contracts for Difference.
Europe should clearly prioritise green hydrogen, given the negative environmental externalities of all other forms of hydrogen. Blue hydrogen will be needed as a second-best bridge technology, but Europe should be careful with supporting the scale-up of blue hydrogen: first, by maintaining strict standards and reliable monitoring and evaluation of “hidden” upstream emissions; second, by avoiding any incentives that may lock in natural gas exploitation as a long-term alternative (see Stamm et al., 2023).
Furthermore, Europe should apply transparency standards to all major hydrogen deals, using the Extractive Industry Transparency Initiative (EITI) standards – which are widely and successfully applied to oil, gas and mining – as a template. Some of the best-endowed countries for hydrogen exports (both green and blue) fare low on indicators of democracy, public accountability, and participation, and many hydrogen deals are huge relative to the size of the host economy and involve a variety of rent-seeking opportunities. More generally, Europe should encourage inclusive pathways to the hydrogen economy, offering policy space and support for domestic industrial linkages, learning and employment, and encouraging other forms of benefit-sharing that would increase societal acceptance. The latter include, for instance, mandatory oversizing of renewable energy generation and seawater desalination; direct dividend payments to citizens; and avoiding overly generous tax breaks for investors (Altenburg & Kantel, 2024).
References
Altenburg, T., & Kantel, A. (2024). Green hydrogen in Namibia: Opportunities and risks (IDOS Discussion Paper 6/2024). IDOS. https://doi.org/10.23661/idp6.2024
European Union. (2024). Critical raw materials Act. Regulation (EU) 2024/1252 of the European Parliament and of the Council of 11 April 2024 establishing a framework for ensuring a secure and sustainable supply of critical raw materials and amending Regulations (EU) No 168/2013, (EU) 2018/858, (EU) 2018/1724 and (EU) 2019/1020Text with EEA relevance. https://eur-lex.europa.eu/eli/reg/2024/1252/oj
Györffi, D. (2023). Diverging paths to zero-emissions mobility: The political economy of building an EV battery industry in Hungary and Sweden. European Commission. https://ec.europa.eu/economy_finance/arc2023/documents/papers/Gyorffy%20D.%20-%20Diverging%20Paths%20to%20Zero-Emissions%20Mobility%20The%20political%20economy%20of%20building%20an%20EV%20battery%20industry%20in%20Hungary%20and%20Sweden%20.pdf
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