IT’S HARDLY surprising that the year after a war on Europe’s borders cut off its largest source of natural gas, Brussels should be looking to armor-plate its supply chain for green technologies.
The numbers look stark. In 2021, the European Union (EU) got about 42% of its imported gas from Russia. It depended on China for 64% of its wind turbine imports, 89% of its solar panels, and 43% of its electric cars. Beijing is even more dominant in raw materials for the energy transition, with more than 75% of the world’s production capacity for lithium-ion batteries, according to BloombergNEF.
Put that way, the Net Zero Industry Act announced on Thursday looks like a straightforward effort to guarantee energy security in line with measures already under way in the US and China. The European Commission hopes the legislation will ensure a 40% local share for key green technologies by 2030.
The policy, however, is based on a profound misreading of the way commodities and machinery are used in the production of energy. Paradoxically, it may leave the EU more vulnerable in the event of conflict than it would be otherwise. Europe’s own history of using raw materials as a weapon during wartime ought to demonstrate the fallacy of its decision-making now.
One way we categorize the materials used in modern society is to divide them into durable goods and consumables. Durable goods, such as cars and refrigerators, are bought once and used again and again over a span of a decade or more. Consumables, such as gasoline and milk, are purchased every few weeks: To use them is to destroy them, so we need to constantly refill our supplies.
You can make a broad distinction between commodities on the same basis. Food, fertilizers, and fuels are consumables, while most metals and machinery resemble durable goods.
That divide has important national security implications. If you’re dependent on imports for your supply of consumables, foreign nations can bring your economy to a standstill by blocking trade routes. Consumables need to be continually restocked. During World War I, the Allies brought Germany to the brink of famine by cutting off its supplies of nitrate fertilizer, which at that point largely came from deposits of bird droppings around the coastlines of the Pacific Ocean.
With durable goods it’s a lot harder. If the US, Japan, and South Korea stopped exporting cars to the EU tomorrow, most people would barely notice. Annual imports amount to just 3 million or so in a passenger car fleet that numbers more than 250 million. During World War II, the US and UK held scrap drives to recycle steel and rubber from domestic vehicles and household goods for armaments factories. The same allies predicted that Nazi Germany would be brought quickly to its knees because of its dependence on imported metals. In practice, thrift and substitution meant that metals shortages weren’t a serious issue for Berlin at any point.
That’s why restrictions on imports of renewable machinery are misconceived. The 146.7 billion cubic meters of gas that flowed from Russian pipelines into Europe in 2021 is gone for the foreseeable future, meaning the continent had to find immediate alternatives to supply the roughly 775 terawatt-hours (TWh) of electricity you could generate from it.* The 255 gigawatts of wind turbines that were installed at the end of 2022, however, will generate 558 TWh or so of electricity year in, year out, regardless of the state of geopolitics. China can’t cut off Europe’s supplies of wind.
What the measures do achieve is to slow the pace of renewable transition, by forcing up costs for renewable developers and electric-vehicle buyers in an attempt to protect sub-scale European green-energy manufacturing industries.
That is likely to make the region’s energy security weaker, rather than stronger. Europe depends on fuel imports for more than half of its power supply, with domestic reserves providing just 13% of gas, 3% of oil and 60% of coal. It’s also highly dependent on Russian uranium and nuclear fuel to supply its reactors, particularly in parts of the east where plants are based on Soviet designs. Reducing that dependency by moving to domestically-produced renewable power will help the EU in energy-security terms almost as much as it will in climate terms.
With costs for most renewable technologies more competitive than ever, it’s misguided regulatory policy of this sort that’s most likely to slow the decarbonization of our economies. Europe is following the US and China in returning to the failed dirigiste economic policies of the past, when it should be embracing the technology of the future.
* Based on the assumption that all gas is burned for an electrical turbine with 60% thermal efficiency. In practice, much of it is burned for heat in homes or factories.
BLOOMBERG OPINION
