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Some claim local content rules would be impossible because there is insufficient supply in Europe. This ignores the fact that there are dozens of European companies planning to produce battery components and minerals locally.
The EU is finally seeing the writing on the wall when it comes to local preference.
The term “local content requirements”, or when a share of a product is required to be manufactured locally, had been akin to a swear word among European policymakers for decades. It was thought to bring nothing but higher costs and retaliation from Europe’s trade partners.
But China’s success as the hub for green tech manufacturing, and the pouring of billions in green investment into the US in the aftermath of the Inflation Reduction Act (IRA), are causing the EU to rethink its decades’ old dogma. The Clean Industrial Deal unveiled earlier this year talks about setting “EU content requirements" for the first time.
It’s about time. And nowhere is this more urgent than in the faltering battery sector.
The “Made in China 2025” strategy prioritised building local electric vehicle (EV) and battery industries, alongside subsidising its mineral and battery component sectors. The result is the most competitive and vertically integrated EV ecosystem in the world. Chinese lithium-ion batteries represent 80% of global supply and are around a third cheaper than in the EU.
The 2022 US IRA stipulated that only electric cars with components and minerals sourced locally or from friendly nations can qualify for tax credits. This is coupled with generous production finance to make these in the US. As a result this year the US is forecast to overtake the EU as the world’s second largest battery producer.
Limits of EU’s sustainability approach
Instead, the EU has focused on sustainability to reward local manufacturing. The new battery regulation, for instance, is setting strict carbon and circularity rules that it hopes will reward local (ie, cleaner) companies.
While this can work in theory, defining those rules effectively has proven tricky in practice.
Take carbon footprint for example. While the EU's average grid is at least a fifth cleaner than China’s, there are large differences among EU countries, such as Sweden and Poland. In addition, a complex system of guarantees of origin allows companies operating in fossil-heavy grids to purchase renewable certificates and claim lower emissions.
Instead of simply taking the region's average grid, this internal complexity has resulted in years’ long squabbling on how to design the rules with no solution in sight.
How to implement local preference
If the goal is to onshore critical sectors, the policy should say so. This is how the EU can do this.
First, focus and prioritisation are key. The EU must choose a select group of sectors strategic to its decarbonisation and digitalisation agenda – such as batteries, green hydrogen or quantum computing – rather than attempting to please every industrial constituency from apparel to chemicals.
Second, such EU content rules must be simple and attached to concrete policy measures. While public procurement rules are a no-brainer and an easy place to start, they won’t do much in the case of batteries.
Here the EU has two major leverage points: access to its large single market, and the billions in national subsidies – or state aid – that governments disperse each year.
The EU should require batteries and their components such as cathodes to be made locally to benefit from those subsidies, or the EU Innovation Fund’s grants. For example, a minimum subsidy could be given to locally-made battery cells, with additional top-ups for making cathodes or anodes locally, or sourcing and recycling local materials.
Similarly, foreign direct investment rules should clarify that foreign-owned battery factories should meet similar local value requirements to operate in the EU or avoid potential tariffs.
Finally, some claim that such rules would be impossible because there is insufficient local supply in Europe. This ignores the fact that there are dozens of local companies planning to produce battery components and minerals, from lithium to graphite, locally.
These struggle to secure offtake from carmakers as, in the absence of policy, it is easier and cheaper to source from China. EU content requirements are needed to break this deadlock, and can be scaled gradually as local capacity grows. With scale, costs will also come down.
Every major market from Brazil to South Africa to India has some local preference rules in place to secure local jobs and growth alongside the green transition. It’s time the EU does the same.
