Geopolitical realities of the energy transition supply chain: energy security risks and opportunities

The market for electric vehicles (EVs) appears to be ‘unstoppable’, according to a recent article in The Economist.¹ Moreover, BloombergNEF is forecasting that sales of EVs may skyrocket to 40 per cent of all purchases in 2030 from today’s 10 per cent.² To meet that audacious number will require tens of millions of batteries that will in turn require enormous quantities of critical minerals.

However, a recent essay in Foreign Affairs identifies potentially troubling realities about the world’s rush towards a green energy future.³ One of the key realities involves the general absence of sufficient supply chains for critical minerals, particularly as they relate to the production of EVs. Consequently, it is imperative that policymakers begin to deal with this in a serious and considered manner now, since technologies involving clean energy may drive mineral demand for critical minerals up by 400 per cent by 2040.⁴

Two key critical minerals illustrate the challenge that lies ahead. In 2040, the demand for lithium, a key mineral for batteries, may be 13 times greater than in 2020.⁵ Similarly, Standard & Poor’s, a global market research firm, has predicted that between 2022 and 2035 the demand for copper will double.⁶ All EV types use ‘considerably more copper than traditional vehicles with internal combustion engines’.⁷ Not surprisingly, these minerals are rarely found exactly where they are needed for product production. Thus, the matter of energy security – often thought about in the context of oil and gas – arises again, but in a different scenario.

Historically, energy security ‘has been defined as the availability of sufficient supplies at affordable prices. But that simple definition no longer captures reality; the risks the world now faces are both more numerous and more complicated than in earlier eras’.⁸ In this editorial, the term ‘energy security’ involves the supply chains that are imperative for the manufacture of large numbers of EVs.

Looked at another way, ‘[D]ominance in a clean energy world will be control of the supply chain for minerals such as cobalt, copper, lithium, nickel, and rare earths, which are critical to various clean energy technologies’, not least of which are EVs.⁹ Resolving the lack of adequate supply chains to provide the minerals for EVs will be fundamental to reducing carbon emissions.

Adequate and reliable supply chains that must underpin the production of EVs (outside of China, which has few supply chain issues) often do not – and may not, for that matter, for some time – exist. As a result, big economies/governments including the European Union and the United States are searching feverishly for ways to promote the development of these supply chains within their geographic footprints and/or in cooperation with dependable country (ie outside the EU or US) suppliers.

The current situation: materials for EV production and critical mining processing limitations

In 2023 the production supply of critical minerals simply does not exist. Critical minerals production is clustered in only a few countries. For example, nearly one-third of the world’s nickel, a critical mineral, is produced in Indonesia, and about 70 per cent of the globe’s cobalt is supplied by the Democratic Republic of the Congo.¹⁰ Nearly one-half of the world’s lithium is mined in Australia.¹¹

Meanwhile, China is far and away the leader when it comes to critical mineral processing, refining nearly 60 per cent of the globe’s lithium and close to 80 per cent of most other critical minerals. In addition, about 75 per cent of the ‘world’s advance manufacturing capacity for electric vehicle batteries’ resides in the country.¹² This latter number is of particular concern outside of China. ‘It is one of the defining competitions of our age: The countries that can make batteries for electric cars will reap decades of economic and geopolitical advantages’, it has been observed.¹³ All of this troubles Western car makers.¹⁴

The reality is that despite US efforts to jump-start the production of clean energy at home, ‘[T]he United States and others will still depend on China for critical mineral and other clean energy components and technologies for year to come’.¹⁵

China’s long-term strategy has resulted in a profound ‘head start’ … 

Despite huge investments in the green energy transition in the EU and the US, China remains the unchallenged leader when it comes to green energy for EVs, for several reasons. First, China has implemented a long-term strategy to ‘buy its way into a cheap and steady supply’ of the essential minerals.¹⁶ Second, the refining process, which involves pulverising ore and then treating it with chemicals and heat to produce the needed final product minerals, often results in pollution. Refineries located in China generally benefit from environmental regulations that are less stringent than in places like the EU or US.¹⁷ Third, China has pioneered the means of making cathodes, a key battery component, more cheaply, thus capturing half the world’s cathode market.¹⁸ Fourth, the cost of building battery factories in China is nearly half of what a similar factory might cost in the EU or North America.¹⁹

Benchmark Materials, a minerals-related research firm, projects that China’s share of battery making may decline slightly over the next 10 years to just under 70 per cent.²⁰ At that point, the US would be home to about 12 per cent, with European countries combined accounting for most of the remaining capacity.²¹

As a result of this head start, China already dominates world markets for clean energy technology related to EVs.²² This is reflected, at least in part, by the fact that nearly 70 per cent of EVs operating in the world are registered in China.²³

However, Australia is attempting to quickly catch up

Currently, about half the world’s lithium is mined in Australia and most of the lithium is shipped to China for processing.²⁴ However, the Australian government is attempting to change that. In late June 2023, Madeleine King, Australian Minister for Resources, said, ‘Australia’s new Critical Minerals Strategy sets out a vision to grow our critical minerals wealth, … strengthen global supply chains, and support the world to achieve net zero emissions. The path to net zero runs through the resources sector’.²⁵ A key aspect is to produce the chemicals for batteries closer to where the mineral is mined and then to sell the processed chemicals to allies like South Korea and the US.²⁶

Hundreds of millions of dollars have already been invested by the Australian government in this effort based on the belief that lithium customers will buy from a country that has a strong rule-of-law tradition and is more environmentally conscious.²⁷ ‘If you have more of the supply chain in a country which has very strong governance, and has very, very safe and trustworthy business environment, then consumers can have more confidence in the products that they buy’, governmental agency Geoscience Australia director Allison Britt has said.²⁸

Australian Prime Minister Anthony Albanese hopes that batteries will eventually be built in Australia,²⁹ but that objective is more ‘admirable’ than likely to happen without enormous government support, Australian energy executives have said.³⁰ Similarly, Tribeca Investment Partners portfolio manager John Stover has said, ‘Historically, Australia has shipped unprocessed ore to other countries to process. That change in mind-set, I think, is going to be tricky’.³¹

Meanwhile, the race between the EU and the US hots up

The EU and the US are involved in a fierce competition when it comes to promoting domestically focused energy supply chains. The US State Department and various other countries have established the Mineral Security Partnership (MSP), which is described as ‘an ambitious new initiative to bolster critical mineral supply chains’. MSP partners include Australia, Canada, Finland, France, Germany, Japan, the Republic of Korea, Sweden, the United Kingdom, the US and the European Commission.³²

Concurrently, the EU has advocated for a ‘buyer’s club’, a centralised purchasing office for critical raw minerals, although the concept has been criticised as causing ‘free riding, [setting] up distributive conflicts within the European Union, and [having] adverse effects for just transitions in developing and middle-income economies’.³³

However, alongside all of this activity, there is growing concern in Europe that American green energy subsidies will lure new investments in battery factories and new cars to the US and potentially away from the EU.³⁴ Northvolt, one of a handful of European-based battery manufacturers, is drawing considerable interest from EU officials who are offering subsidies of millions of euros for building more plants in Europe at the same time the firm is looking at the American market.³⁵ ‘The tussle over Northvolt’s plans is an example of the intense and, some European officials say, a counterproductive competition between the United States and Europe as they try to acquire the building blocks of electric vehicle manufacturing to avoid becoming dependent on China, which dominates the battery supply chain’, The New York Times recently reported.³⁶

And yet, much of the world sees what the EU and US are doing as barely disguised protectionism. ‘Rather than praising Washington for finally passing meaningful climate change legislation … much of the world resented these moves as acts of US protectionism, stirring talk of climate-provoked trade wars’, two experts have observed.³⁷

The risk is that EU and US policies to jump-start energy supply chains in each jurisdiction may result in cancelling out each other’s efforts, according to Brussels-based Transport & Environment advocacy organization leader Julia Poliscanova, who has said, ‘Because everyone is scaling up at the same time, it’s a zero-sum game’.³⁸

The China–US relationship

Perhaps the key bilateral relationship in terms of making the global EV transition a success is the one between China and the US. The overall relationship between the two countries has been chilly if not downright cold during the past several years. Some China–US watchers had advocated for isolating climate within the bilateral relationship – that is to say, ‘protecting’ it from the numerous political spats between the two countries – but that has not happened least of which is the result of former House Speaker Nancy Pelosi’s vainglorious trip to Taiwan in August 2022. One observer commented about Pelosi’s visit, ‘From China’s perspective, a red line [had] been crossed and nothing – including climate change – was immune’.³⁹

However, it may be that the two countries will soon resume a normal relationship, at least as it involves climate change, because of the ‘looming possibility of a Republican in the White House come 2025 and what that would mean for the Paris climate agreement, given it is easy fodder for the conservative [Republican] base on the campaign trail’.⁴⁰ In effect, the fear is that a Republican administration taking office in January 2025 might be uninterested in the US working closely with China on any global issues including climate change.

On the other hand, it may be worth bearing in mind that the level of China–US cooperation on climate change relies less on global climate policy and more on domestic political concerns. Chinese auto makers, wishing to export EVs, and Texas renewable energy generators may demand more cooperation since it is in their personal business interests to do so.⁴¹

Within the US Congress there is a bipartisan group, the US–China Working Group, which was founded in 2005 to ‘build diplomatic relations with China and educate Members of Congress through meetings and briefing with business, academic, and political leaders from the US and China’.⁴² However, as of mid-2023 the group had no plans to engage their Chinese counterparts on any issues because of lawmakers’ reluctance based on the American public’s current negative perception about China.⁴³ On the other hand, US Senator Sheldon Whitehouse of Rhode Island has suggested that ‘The real [policy] nexus is between the executive branch and the administration in China’.⁴⁴

Concluding observations

The energy transition is likely to be ‘messy at best’.⁴⁵ Clean energy proponents ‘hope (and sometimes promise) that in addition to mitigating climate change, the energy transition will help make tensions over energy resources a thing of the past’ adding, however, that while ‘It is true that clean energy will transform geopolitics’, that transformation may not take place ‘In the ways many of its champions expect’.⁴⁶

In the US, there is worry among many officials that ‘a more accelerated energy transition will necessarily involve greater dependence on China, given its dominance of clean energy supply chains’.⁴⁷ However, a Washington, DC-based Peterson Institute for International Economics senior fellow, Cullen Hendrix, has said that the Biden administration strategy to develop more durable international supply chains outside of China has thus far been ‘a bit incoherent and not necessarily sufficient to achieve that goal’.⁴⁸

Integration of energy supply chains may well be the ‘insurance’ that the world needs looking ahead. ‘Proponents of the transition to a net-zero carbon system have long heralded the greater insulation from geopolitics that would likely result from the end of the fossil fuel era’, it has been written. ‘But at least for the next few decades, energy security will be advanced not through more autonomy but through more integration – just as it always has been’.⁴⁹

An unprecedented level of cooperation around the globe will likely be required as the world moves towards a net-zero global economy.⁵⁰ As one expert has observed, ‘governments can boost energy security … by reducing supply chain risks – but not in a way that would encourage protectionism. Officials shouldn’t chase the chimera of [energy supply chain] independence but instead try to build flexibility in a diversified and interconnected system’.⁵¹

Scott Kennedy, a Washington, DC-based Center for Strategy and International Studies senior adviser, puts it this way: ‘There is no way anybody is going to become successful in electric vehicles without having some type of cooperation with China, either directly or indirectly’.⁵²

Looked at broadly, addressing climate change may well represent the best and most effective way for China and the West to rebuild political relations that have unquestionably soured in the past few years. China and the US share a profound concern about climate change. Similarly, both have suffered and will continue to suffer from the enormous social and economic impacts of climate change. Of course, the two major powers will not in the near term negotiate a major treaty on nuclear disarmament, nor will they agree on exactly how to manage the global economy. But what they can do is promote a ‘political venue’ where shared climate change interests can be explored, and potential strategies implemented.

It will take global leadership and courage as well as humility and goodwill on all sides and a willingness to listen rather than the constant hectoring that so often colours discussions about contemporary challenges. Are Presidents Biden, Michel, von der Leyen, Xi and other world leaders up to it? The world’s citizens – and particularly the youngest among us – are waiting and watching.

Winning article for the 2022 Willoughby Prize

On an annual basis, the Energy, Petroleum, Mineral & Natural Resources Law and Policy Education Trust awards a prize, known as the Willoughby Prize, to the author(s) of an article of outstanding merit, published during that year in the Journal of Energy & Natural Resources Law. The prize is awarded in memory of Geoffrey Willoughby (1936–1989), one of the leading contributors to the development of UK energy law and a co-editor of Daintith and Willoughby, one of the leading textbooks on energy law.

The 2023 winner of the Willoughby Prize is ‘Indigenous co-ownership of mining projects: a preliminary framework for critical examination of equity participation’,⁵³ which was co-authored by a team from the Centre for Social Responsibility in Mining, Sustainable Minerals Institute at the University of Queensland, Australia. Members of the team are: Anthony Kung, Senior Research Fellow; Sarah Holcombe, Senior Research Fellow; Joel Hamago, PhD candidate; and Deanna Kemp, Director and Professorial Research Fellow.

In announcing the winning article, trustee Judith Aldersey-Williams said that the article ‘laid new foundations for this developing area of law and is already a firm favourite among readers. On behalf of the trustees, may I convey our warmest congratulations on this achievement’.

Notes

1 ‘Could the EV Boom Run out of Juice before It Really Gets Going?’ (The Economist, 14 August 2022)

2 Ibid

3 Jason Bordoff and Meghan L O’Sullivan, ‘The Age of Energy Insecurity: How the Fight for Resources Is Upending Geopolitics’ (Foreign Affairs, May/June 2023) 104, 105

4 International Energy Agency, ‘The Role of Critical Minerals in Clean Energy Transition: Mineral Requirements for Clean Energy Transitions’ (21 May 2021) <www.iea.org/reports/the-role-of-critical-minerals-in-clean-energy-transitions/mineral-requirements-for-clean-energy-transitions> accessed 25 June 2023

5 Ibid

6 S&P Global Market Intelligence, ‘Growing Appetite for Copper Threatens Energy Transition and Climate Goals’ (18 July 2022) <www.spglobal.com/marketintelligence/en/mi/research-analysis/growing-appetite-copper-threatens-energy-transition-climate.html> accessed 25 June 2023

7 International Copper Association, ‘The Electric Vehicle Market and Copper Demand’ ( June 2017) <https://copperalliance.org/wp-content/uploads/2017/06/2017.06-E-Mobility-Factsheet-1.pdf> accessed 25 June 2023

8 Bordoff and O’Sullivan, ‘The Age of Energy Insecurity’ (n 3)

9 Jason Bordfoff and Meghan L O’Sullivan, ‘Green Upheaval: The New Geopolitics of Energy’ (Foreign Affairs, January/February 2022)

10 Morgan D Bazilian and Gregory Brew, ‘The Missing Minerals: To Shift to Clean Energy, America Must Rethink Supply Chains’ (Foreign Affairs 6 January 2023) <www.foreignaffairs.com/united-states/missing-minerals-clean-energy-supply-chains> accessed 25 June 2023

11 Bordoff and O’Sullivan, ‘The Age of Energy Insecurity’ (n 3), 110

12 Bazilian and Brew (n 10)

13 Agnes Change and Keith Bradsher, ‘Can the World Make an Electric Car Battery Without China?’ (The New York Times, 16 May 2023) <www.nytimes.com/interactive/2023/05/16/business/china-ev-battery.html> accessed 25 June 2023

14 ‘Could the EV Boom Run out of Juice’ (n 1)

15 Bordoff and O’Sullivan, ‘The Age of Energy Insecurity’ (n 3)

16 Change and Bradsher (n 13)

17 Ibid

18 Ibid

19 Ibid

20 ‘Could the EV Boom Run out of Juice’ (n 1)

21 Ibid

22 David Ferris and Joshua Posaner, ‘Miles Apart: US and Europe Diverge on Chinese EVs’ (EnergyWire, 23 June 2023)

23 Ibid

24 Natasha Frost, ‘Australia Tries to Break Its Dependence on China for Lithium Mining’ (The New York Times, 23 May 2023)

25 Madeleine King, MP, ‘Seizing the Opportunities for Australia’s Critical Minerals’ (20 June 2023) <www.minister.industry.gov.au/ministers/king/media-releases/seizing-opportunities-australias-critical-minerals#:~:text=Australia%27s%20new%20Critical%20Minerals%20Strategy,runs%20through%20the%20resources%20sector> accessed 25 June 2023

26 Frost (n 24)

27 Ibid

28 Ibid

29 Brandon How, ‘PM Throws Support Behind Local Battery Manufacturing, InnovationAUS.com (22 February 2023) <www.innovationaus.com/pm-throws-support-behind-local-battery-manufacturing> accessed 25 June 2023

30 Peter Ker and Brad Thompson, ‘PM’s Battery Dream “Admirable” But Unlikely: CEOs’ (Financial Review, 2 March 2023) <www.afr.com/companies/mining/pm-s-battery-dream-admirable-but-unlikely-ceos-20230228-p5co8j> accessed 25 June 2023

31 Frost (n 24)

32 US Department of State, ‘Minerals Security Partnership’ (14 June 2022) <www.state.gov/minerals-security-partnership> accessed 25 June 2023

33 Cullen Hendrix, ‘Why the Proposed Brussels Buyers Club to Procure Critical Minerals Is a Bad Idea’ (Peterson Institute for International Economics, May 2023) <www.piie.com/sites/default/files/2023-05/pb23-6.pdf> accessed 25 June 2023

34 Jack Ewing and Melissa Eddy, ‘As US Races Ahead, Europe Frets About Battery Factory Subsidies’ (The New York Times, 31 May 2023)

35 Ibid

36 Ibid

37 Bordoff and O’Sullivan, ‘The Age of Energy Insecurity’ (n 3)

38 Ewing and Eddy (n 34)

39 Thom Woodroofe, senior fellow at the Asia Society Policy Institute and a former climate diplomate, ‘Argument: A Partnership to Save the Planet: Cooperating on Climate Change Could Be the Strategic Guardrail the United States and China Need to Stabilize Relations’ (Foreign Policy, 19 April 2023) <https://foreignpolicy.com/2023/04/19/china-united-states-climate-change-cooperation> accessed 25 June 2023

40 Ibid

41 Noah J Gordon, ‘Why US–China Rivalry Can Actually Help Fight Climate Change’ (Internationale Politik Quarterly, 24 March 2023) <https://ip-quarterly.com/en/why-us-china-rivalry-can-actually-help-fight-climate-change> accesssed 25 June 2023

42 Corbin Hiar, ‘US Lawmakers Stopped Visiting China. Is Climate Cooperation at Risk?’ (ClimateWire, 21 June 2023)

43 Ibid

44 Ibid

45 Bordfoff and O’Sullivan, ‘Green Upheaval’ (n 9)

46 Ibid

47 Bordoff and O’Sullivan, ‘The Age of Energy Insecurity’ (n 3), 107

48 Ana Swanson, ‘The US Needs Minerals for Electric Cars. Everyone Else Wants Them Too’ (The New York Time, 21 May 2023)

49 Bordoff and O’Sullivan, ‘The Age of Energy Insecurity’ (n 3), 117

50 Bordfoff and O’Sullivan, ‘Green Upheaval’ (n 9)

51 Ibid

52 Change and Bradsher (n 13)

53 ‘Indigenous Co-Ownership of Mining Projects: A Preliminary Framework for Critical Examination of Equity Participation’ (2022) 40(4) Journal of Energy & Natural Resources Law 413