The European energy crisis has fundamentally re-shaped global geopolitics. Runaway energy prices in Europe (which have devastating ripple effects on much of the rest of the world) are fundamentally a result of the West’s misguided reliance on a volatile and despotic regime – Vladimir Putin’s Russia. And now, the United States, Europe, and their key allies are reacting to that critical error by circling the wagons. It’s becoming increasingly clear that we are entering a new era of prioritizing protectionist energy and trade policies instead of following the ideals of free trade and the mandates of the World Trade Organization. When Russia invaded Ukraine in February of last year, the European Union relied on the Kremlin for nearly half of its natural gas supply. Imposing sanctions where it would hurt Russia the most – energy – would therefore cripple the European economy. And Russia was not afraid to use that leverage as a weapon, sometimes cutting off the flow of gas completely and without warning. As a result, the EU has spent the last year scrambling to lessen the bloc’s dependency on Russian natural gas and on energy imports in general.
Lessons were learned from the crisis – but not necessarily the right ones. While the European energy crisis has shown the need to diversify, diversify, diversify – both trade partners and forms of energy – nations in the global north are instead narrowing their choice of energy sources. Turning away from free trade, Western leaders are instead leaning toward the practice of “friend-shoring”, in which countries shift supply chains to “trusted countries” with similar values and political allegiances. “Staking out spheres of influence and assessing the reliability and trustworthiness of suppliers and countries is the order of the day,” read a recent analysis from Stiftung Wissenschaft und Politik, the German Institute of International and Security Affairs.
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What is more, protectionist policies have proliferated, prioritizing domestic production over free market trading. These policies include the Inflation Reduction Act (IRA) in the United States and the European Union’s Critical Raw Materials Act (CRMA). The CRMA is itself a reaction to the IRA, which the European Union saw as slightly antagonistic to US-EU diplomatic relations. “While many may be pleased to see the U.S. taking leading action in the fight against climate change, the [IRA] has sparked debate between EU officials [...] over how the trading bloc should respond to what some see as discriminatory elements of the IRA, designed to benefit U.S.-based climate tech manufacturers,” reports GreenBiz. The CRMA provides a similar framework for incentivizing local green energy supply chains, and a new proposed Net Zero Industry Act will double down by limiting imports from China.
Now, European solar companies are decrying this approach, saying that the EU’s proposal to place limits on Chinese imports will only serve to make the green energy transition more difficult and more expensive. The Net Zero Industry Act mandates governments to reduce funding for renewables projects if companies source products from any country accounting for more than 65% of the EU market share. This means that the Net Zero Act will essentially punish the solar industry for not having sufficiently diversified its supply – at present, China controls more than 80% of the European solar supply chain.
The European solar energy industry was instrumental in saving the EU from economic collapse in the last year by achieving a 24% surge in solar energy production. But now the industry stands to be punished for this growth, as this remarkable accomplishment was the result of a more-than two-fold increase in imports of Chinese solar panels. Simply, the industry is far from ready to wean itself off of cheap Chinese solar panels, and the new bill has been sharply criticized for de-incentivizing solar expansion right when the green energy transition is finally, necessarily taking off.
By Haley Zaremba for Oilprice.com
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