China's Holding on the Clean Energy Supply Chain
Climate change is no longer just a looming possibility, it is a stark reality that we are currently facing. In order to prevent more catastrophic consequences such as extreme weather patterns, famine, loss of biodiversity, and displacement, we must rapidly transition to clean and reliable energy sources. The August 2022 announcement of the Inflation Reduction Act (IRA) and the allocation of $370 billion in tax credits towards shifting away from fossil fuels is a promising step in the right direction. However, this transition is not without its own set of risks and challenges. One such challenge lies in the global supply chain for critical minerals and manufacturing, which could potentially hinder our efforts to decarbonize our electric generation. With our current reliance on China, it is imperative that we address these supply chain risks and find alternative solutions to ensure a successful transition towards a low-carbon energy future.
China currently dominates the supply chain for renewable energy and battery production. According to The Brookings Institution, China refines 68% of nickel, 40% of copper, 59% of lithium, and 73% of cobalt, yet extracts less than 10% of the global market for copper and lithium. This means that minerals are being extracted from various regions worldwide and shipped to China for refining and other late-stage processes before being shipped back across the world. For instance, lithium, which is necessary for electric vehicles and batteries to address intermittency issues faced by wind and solar energy, is mainly extracted from Australia and Chile, which have the largest resource reserves. It seems quite counterproductive for the clean energy transition to involve digging up minerals on one side of the planet, refining them on the other, and then shipping them back across the world.
It is worth noting that China has established a dominating position in the battery manufacturing market, not only through its mineral refining capabilities but also in the production of critical components for battery cells. For instance, China currently accounts for 70% of cathode production, which is the most crucial component of the battery and can make up to 50% of the total manufacturing cost. In addition, China produces 85% of anodes, 66% of separators, and 62% of electrolytes, making it responsible for 78% of the world's manufacturing capacity for EV batteries according to the The Brookings Institution. Furthermore, China is the largest producer and refiner of rare earth elements (REEs), with a 60% share in their production and a staggering 90% share in refining and processing, according to the Center for Strategic and International Studies.
It is well-established that over-reliance on a single source in the supply chain can be disruptive and leave a nation vulnerable to supply issues. As we have witnessed during the Covid-19 pandemic, several sectors have been impacted due to supply chain disruptions. Furthermore, the European Union has experienced problems with relying on Russian oil and gas, highlighting how dependence on non-allies can be weaponized. Moreover, the issue of supply chain disruptions is particularly acute in the case of China, which we’ve established holds a near-monopoly status in the production of critical minerals and manufacturing. This monopoly status raises concerns about potential supply chain disruptions, as witnessed in 2010 when China halted exports to Japan due to a dispute over a detained fisherman. These incidents underscore the need for diversification in supply chains, particularly for critical minerals and manufacturing, to mitigate the risk of supply disruptions and ensure stability in the global economy.
The IRA's initiative to decrease dependency on China and encourage domestic and geopolitical allies' production, as outlined in their plan including Australia, Canada, the European Union (EU), Finland, France, Germany, Japan, South Korea, Sweden, and the UK via free trade agreements. It is noteworthy, however, that Germany, Finland, and France were singled out, despite being EU members. As highlighted by professor Dr. Vlado Vivoda in a recent publication in the journal Energy Research & Social Science, this approach of "friend-shoring" could create an exclusive, elitist supply chain scenario, leading to more "winners" and "losers" in the global climate. Moreover, it may result in a supply chain bottleneck, potentially triggering a Cold War-era economic block.
Given the complexity of this geopolitical issue, it's important to stay informed and engaged in ongoing conversations around the clean energy transition. While the IRA is undoubtedly a positive development, it's not a comprehensive solution to the risks and challenges associated with the supply chain for clean energy. Recycling initiatives and other efforts to reduce waste and dependence on critical minerals must also be a part of the equation. Ultimately, a diversified and resilient supply chain that promotes domestic production while also engaging in partnerships with sustainable practices is the key to a successful clean energy transition.
Stay informed on new trade developments through the International Energy Agency:
https://www.linkedin.com/company/international-energy-agency/
Citations
Castillo, Rodrigo, and Caitlin Purdy. "China’s role in supplying critical minerals for the global energy transition: what could the future hold? The Brookings Institution." (2022).
Ladislaw, Sarah, et al. "Industrial policy, trade, and clean energy supply chains." Center for Strategic and International Studies. https://www. csis. org/analysis/industrial-policy-trade-and-cleanenergy-supply-chains (2021).
Vivoda, Vlado. "Friend-shoring and critical minerals: Exploring the role of the Minerals Security Partnership." Energy Research & Social Science 100 (2023): 103085.
