The Critical Raw Materials Act: is the European Union challenging dependence and accelerating change?

As anticipated by Commission President Ursula von der Leyen herself during her State of the Union address, the European Commission published on March 16, 2023, the proposed regulation for the Critical Raw Materials Act. This proposal is consistent with the goals of the EU’s Net Zero Industry Act, which aims to increase the production of key zero-carbon technologies and ensure secure, sustainable and competitive clean energy supply chains. This approach is part of the broader European Green Deal, whose goal is to make Europe the first climate-neutral continent by 2050. The Critical Raw Materials Act is part of a framework for action to ensure functional access to critical raw materials, which are essential for achieving climate neutrality goals. These resources are crucial for a number of strategic sectors, including the digital industry, as part of the so-called “twin transition” (green transition and digital transition). In addition, critical raw materials also play a key role in a number of economic production sectors, such as the aerospace industry. Therefore, the Act aims to create a sound and sustainable basis for securing the supply of these key resources while ensuring environmental protection and technological progress. The document also responds to the objectives outlined in the Versailles Declaration adopted by the European Council now a year ago, which reiterated the need to free Europe from foreign dependencies and achieve a level of strategic independence in the energy sphere as well.

From a more strictly policy perspective, the Critical Raw Materials Act addresses two main issues. The first concerns China’s near-monopolistic production in critical materials processing. The central role played by China emerged, for example, in 2021, when China reduced exports of magnesium, an essential element for aluminium production. The decision was made because of rising energy costs, which led China itself to stop some production. This reduction caused disruptions in European processing chains, which were about 87 percent dependent on Chinese magnesium imports. In light of this, the goal is to reduce dependence on China by making the European Union a hub not only for extraction, but also and especially for processing critical raw materials. The second issue concerns the transatlantic front, where the Inflation Reduction Act marks a step forward for the United States in industrial policy, with possible repercussions for the European market. For example, following the points outlined in the IRA, only electric cars made in the U.S., or in allied countries, will receive tax credits, which has led to a number of domestic investment announcements in the United States. This carries the risk that companies will prefer the U.S. market over the European market. Ultimately, the Critical Raw Materials Act seeks to be part of the answer to the raw materials supply challenge.

The Act was created in light of these assumptions and on the consequent goal of creating a balance between environmental challenges and industrial needs. In fact, the EU aims to achieve at least 10 percent of annual needs in domestic extraction, 40 percent at the processing level, and 15 percent for recycling of critical raw materials. The Regulation also points the way toward diversification of sources of supply by stipulating that no more than 65 percent of the Union’s annual consumption of each strategic raw material, at any stage of processing, come from a single third country.

In addition to the percentages provided as a general guideline, a number of key pillars are presented: the establishment of domestic supply chains, the monitoring of them, environmental protection, and, last but not least, the diversification of raw materials.

First and foremost, the creation of resilient and localized supply chains for critical raw materials, particularly in the Union’s territories, is a crucial element in the long-term sustainable development and security strategy. In the face of a rapidly changing geopolitical environment and increasingly pressing global challenges, self-sufficiency and resilient supply chains are of increasing importance to the Union. On the other hand, ensuring localized supply chains contributes to economic security as it reduces dependence on external suppliers, particularly countries that may have divergent political or economic interests. This strategic independence allows the Union to maintain control over its resources and reduce the risks associated with disruptions or manipulation of external supply. Second, environmental sustainability is promoted. Locating the production and transportation of raw materials, in fact, reduces the environmental impact due to greenhouse gas emissions and pollution generated by long-distance transportation. It also encourages the adoption of more sustainable and responsible production practices, in line with the Union’s goals of protecting the environment and combating climate change. In order to achieve these goals, it is planned to ease administrative burdens and simplify permitting procedures for these projects. In this context, it is imperative to consider the role of so-called Strategic Projects. The latter represent a key contribution to capacity building related to strategic raw materials at all stages of the value chain, both within and outside the European Union. Projects will be selected taking into account their impact on the security of supply of strategic raw materials, technical feasibility, sustainability and social standards. Importantly, projects implemented within the EU must offer a European perspective, while those developed in non-EU countries must generate local added value. In particular, Strategic Projects will benefit from simplified permitting to speed up administrative procedures. Member states will be required to meet clear deadlines, coordinate relevant environmental assessments under a single procedure, and, where appropriate, apply emergency procedures in the event of legal proceedings. In terms of timelines, it currently takes about 10 years to obtain permits. Under the proposed new measures, the time would be reduced to 24 months for extraction permits and 12 months for processing and recycling permits. A dedicated group established under the Council will be tasked with coordinating support for each Strategic Project to advise promoters on the best ways to access funding and raise investment. In addition, the Act will facilitate off-take arrangements, connecting project promoters and downstream users. Given the high price volatility of many critical commodities, predictable prices in the coming years should facilitate project financing while providing downstream producers with a stable and secure supply of key inputs. For Strategic Projects outside the EU, high environmental and social requirements will continue to apply, and local value added should be brought to the third country.

In order to ensure the resilience of supply chains, the regulation provides for the monitoring of supply chains and coordination of strategic stocks among member states. For example, specific large companies will have to conduct an audit of their strategic raw material supply chains, including a company-wide stress test. The listed processes must not, however, follow a purely economic logic and strategic autonomy, for this reason, environmental protection remains an essential condition for the implementation of projects concerning critical raw materials. For this reason, the theme of circularity, linked to that of recycling, is recurring in the Act, and a series of national measures are envisaged to encourage the collection of waste rich in critical raw materials and ensure their recycling, as also desired by the percentages listed initially. Finally, and also in light of the war in Ukraine, the Union intends to strengthen its international efforts to diversify imports of critical raw materials by establishing a Critical Raw Materials Club and developing strategic partnerships with reliable and long-term partners. The focus is particularly on mutually beneficial partnerships with emerging markets and developing economies, especially under the Global Gateway strategy. The latter is an international infrastructure development plan launched by the European Commission in December 2021 and is part of a broader design to strengthen the Union’s strategic autonomy in its economic and political relations with the rest of the world, encompassing industry, defense, space, raw materials supply and, finally, infrastructure.

Considering the assessments made so far, it is good to report the critical issues raised by many actors in the industrial and non-industrial scene concerning the nature of the Act, always keeping in mind that industrial policy is not an exclusive competence of the Union. Given this, the targets of the Critical Raw Materials Act are not regulatory in nature and compliance with the targets is entirely voluntary for states, which generates doubts about their feasibility. European Commissioners Valdis Dombrovskis and Thierry Breton, who are in charge of the dossier, have acknowledged the voluntary nature of the targets, but at the same time believe that this may provide an incentive for economic actors and financial institutions to aim for them. However, it should be considered that the EU does not have the ability to subvert national legislation and that the Act will therefore not be legally binding. In addition to the criticisms and doubts arising from the division of competencies at the Union level, going more specifically, one of the pillars of the Critical Raw Materials Act concerns the drastic reduction of approval time for strategic projects, which currently takes about ten years for mines. The Commission envisions a maximum of two years for the completion of such projects, but several NGOs warn that such timelines are unlikely and inappropriate. For example, WWF has pointed out that the Commission is overlooking some fundamental aspects of the problem: the green transition will not happen without a robust governance framework that develops an integrated approach between decarbonization and innovation, nor without measures to reduce demand for raw materials through the adoption of sustainable and circular practices. Indeed, while a quick and efficient permitting process is desirable, this should still be achieved through proper planning and environmental impact assessments. The Commission’s proposals, however, risk weakening key environmental protection provisions , assuming, for example, that priority zero-impact projects and mining activities are in the “overriding public interest.”

In conclusion, of concern is the EU’s dependence on China and its near-monopolistic position in the global raw materials market. In the Critical Raw Materials Act, the Commission set a maximum threshold of 65 percent for imports of each strategic metal from a single country. However, reaching this target appears arduous, as evidenced by the case of graphite, a crucial component for electric vehicle batteries. Currently, about 60 to 80 percent of global demand for graphite is met by extraction in China, which dominates the entire value chain.

As a result, the target set by the Act of achieving 40 percent of annual requirements in refining located within the Union presents itself as a complex and unrealistic challenge. In order to achieve it, it would be necessary to limit imports of highly subsidized products from other parts of the world, while at the same time ensuring competitive prices and production that still meets established high European standards.