A COMPLEX GLOBAL ENERGY LANDSCAPE, CHINA'S ROLE, AND EU ENERGY SECURITY
As the world’s second-largest economy, China plays an important role in global energy affairs: Its economic trajectory profoundly affects fuel markets, while state-controlled companies have emerged as indispensable players in industries that provide vital inputs for the climate-neutral, electrified economy. At the same time, China has been coping with an economic crisis for years. Dependence on a dominant supplier with growing economic problems and a legacy of disregarding environmental concerns cast doubt on the premises of the EU’s transition to climate neutrality. How do shifts in the global energy system challenge the imagination of EU energy and climate policies?
The global energy system is expanding. Demand for energy is growing, while an increasing diversity of sources and technologies is used to generate energy. In addition, ever more end uses rely on electricity. The International Energy Agency (IEA) expects that the demand for electricity will continue to grow until 2050. Depending on the scope of low-carbon measures in the coming years, the IEA forecasts a doubling or even a 2.5-times increase of global electricity demand (WEO 2024, pp. 122–3).
However, more varied inputs for the generation of energy and the growing reliance on electricity complicate how energy security is imagined in the course of reducing greenhouse gas emissions. Two trends are shaping the global energy landscape and deserve more attention. First, from 2013 to 2023, the consumption of oil, natural gas, and coal for all energy uses rose steadily (Energy Institute, 2024 Statistical Review of World Energy, pp. 25, 39, 51). Thus, despite the proclaimed transition to an era of low-carbon energy generation, both the consumption of fossil fuels and energy-related greenhouse gas emissions keep growing.
Second, the addition of renewable generation capacity does not yet satisfy the growing global demand for electricity. In advanced economies, the increase in the use of low-emission sources to produce electricity will outpace the growth in electricity demand by 2030. Yet by then unabated fossil fuel use will still be at current levels in emerging market and developing economies, which hold an ever larger share in global electricity generation. In 2023, electricity production reached about 11,000 terawatt-hours (TWh) in advanced economies and 18,000 TWh in emerging and developing economies. By 2030 coal use will slightly decline, while gas-fired generation will increase (Energy Institute, p. 16; IEA, pp. 45, 48). Thus, fossil fuels will continue to dominate global electricity generation.
Today, the electricity sector is the largest emitting component of the global energy system. Electricity generation contributes 40% to global energy-related CO2 emissions. Between 2022 and 2023, the sector’s CO2 emissions rose from 14.9 Gigatonnes (Gt) to 15.3 Gt (IEA, p. 131). An increased reliance on electricity for heating and transport might facilitate the integration of low-carbon energy supplies in the future. Yet for the time being fossil fuels are central to global energy generation.
Nevertheless, the sources, infrastructures, and supply chains that enable today’s energy generation re-contextualise the energy security debate. In this regard China’s emerging role is poorly understood. Despite recent economic difficulties, China’s trajectory exerts great influence on global climate and energy affairs for three reasons. First, the country emits by far the most greenhouse gases of all economies. In 2023, China’s energy-related CO2 emissions reached 11,218 million tonnes. Over the same period, processes to generate energy in the EU emitted 2,517 million tonnes CO2 (Energy Institute, p. 16).
Second, China has become the world’s largest importer of coal, crude oil, and liquified natural gas. It is also an increasingly relevant importer of piped natural gas (Energy Institute, pp. 49, 34, 44–5). Therefore, the development of its demand for fossil fuels has great impact on these international markets. Third, Chinese companies have emerged as indispensable producers of solar panels, wind turbines, electric vehicles, and technical components that are used to modernise electric grids. Chinese companies also dominate the chain of rare-earth mining and processing. These raw materials are essential for the production of appliances to utilise renewable energy sources. China’s position in this compound sector of mining and clean tech illustrates why the debate about the energy transition in the EU needs to undergo a reality check.
Text box: The political ecology of China’s rare-earth industry
Leshan Giant Buddha (乐山大佛) in Sichuan Province, a 71-metre statue carved into red sandstone, overlooking the dangerous confluence of the Min, Qingyi, and Dadu Rivers. During floods in August 2020, muddy water reached the statue’s feet for the first time since 1949.
In August 2020, parts of Sichuan Province were affected by unusually severe floods along the Yangzi River system. Sichuan is the country’s second-largest centre of mining and processing of light rare-earth ores. Reportedly, in Leshan District two facilities of a rare-earth processing company were flooded. Luckily, staff members were able to leave the premises in time. However, the adjacent rivers swamped the factories’ inventories that most likely contained toxic or radioactive materials, causing losses of up to U.S.$48 million according to initial estimates (Reuters, 19 August 2020).
Generally, light rare-earth ores that are mined in Sichuan are bastnäsites. The processing of bastnäsites involves roasting under a temperature of about 500⁰C and hydrochloric acid leaching. Thorium (Th), a radioactive material, remains in the leach residue in the form of Thorium dioxide. In fact, Thorium content is often found in the waste water of processing facilities. The proper management of separating Thorium from the rare earths remains a serious concern in this industry (Zhu et al, 2015, pp. 187–8).
To varying degrees, all regions where rare earths are extracted—light rare earths in Inner Mongolia and Sichuan as well as heavy rare earths at numerous sites in southeastern China—are coping with legacies of decade-long environmental degradation. Inadequate safety measures and malign practices by illegal operations are mainly responsible for this situation. The environmental costs considerably outweigh economic benefits. Despite increasing domestic demand, a large part of the production is exported, often via the black market. China’s official export numbers significantly diverge from customs reports of importing countries. Production and export quotas that the central government issued are to no avail (Zhang et al, 2022, p. 7; Liu Hongqiao, 2016, p. 28).
Illegal companies usually have close ties with powerful leaders in places where they operate, while companies that are run legally are either owned by local governments or influential local elites. In a highly negotiated network of power and business relations, officials at lower administrative levels are often unwilling to implement national environmental standards and monitor the compliance of the companies in their jurisdictions. Their career and well-being depend on the local economy for three reasons. First, achieving economic targets is a major benchmark for assessing their performance. Second, key officials usually see themselves as both government administrators and entrepreneurs. Third, in a system of devolved fiscal responsibilities, funds for local administrations, including the environmental protection offices, are generated by local companies (Yeh, Emily T., 2015, p. 625; Lieberthal, Kenneth, 1997, p. 5). Hence, authorities are reluctant to interfere with the political and socio-economic fabric of local society.
The rare-earth industry followed the wasteful path of China’s economic rise in which industries endure by bringing domestic price wars to global markets at the cost of the environment and health of local communities. Companies, especially state-owned enter-prises, use overproduction to seize export markets. Governments that own these companies regularly compensate accumulating losses (Smith, Richard, 2020, pp. 21–2, 100–1).
For decades, the central government has been trying to adjust the industry’s structural chaos and stabilise prices. During the 1990s, it restricted foreign investment and made efforts to ban private enterprises. Between 1999 and 2009, export and production quotas were introduced. From 2007 onwards, it levied a 10% tax on exports. Despite these measures, illegal producers continued to operate, keeping prices relatively low. Illegal operations also undermined the export restrictions that China imposed in 2010 (Shen et al, 2020, pp. 131–3, 135–6).
After losing a WTO dispute and subsequently rescinding the export restrictions in 2015, the Chinese government sought to consolidate the domestic rare-earth mining and processing sector. It created six large state-owned enterprises in 2017. Yet hundreds of privately-owned companies remained in operation (Shen et al, p. 140). During the latest consolidation round in 2021, three central state-owned enterprises were merged to form the China Rare Earth Group. However, the publication of the 2024 Rare Earth Guidelines (稀土管理条列) highlights the central government’s persisting concerns about the lawful development of the rare-earth industry and price stability. The Guidelines show that the central government still seeks to tighten the grip on the structure of the industry (Article 8) and size of its output (Article 10). Thus far, state-led consolidation has not yet led to more control and price stability.
Accordingly, countries that rely on Chinese rare-earth imports need to be cognisant of the industry’s characteristics. The problematic legacy of China’s rare-earth sector would require constant monitoring, related to the strict adherence to environmental and safety standards as well as the production processes’ carbon footprints. In fact, the political ecology of the precious materials is dubious. Their origin is marred by environmental pollution, local-state interference with all companies, and the outward-facing securitisation of the entire sector by the Chinese state. Proponents of climate neutrality cannot disregard these downsides.
Actually, it is time to reassess the foundations of the energy transition. By now, the intellectual framework of the energy transition has come to its limits, mainly because its implementation weakens economic performance and energy security (Haass & Kissane, 2024). Indeed, the transition of the EU economy to climate neutrality was by no means imagined as a process that worsens environmental degradation and increases the bloc’s dependence on foreign supplies. The Energy Roadmap 2050, an early energy transition strategy that was published in 2011, promised that “investments will pay off, in terms of growth, employment, greater energy security and lower fuel costs” (European Commission, 2011, p. 19). A new, revised approach needs to take into account the geoeconomic shifts that the initial phase of the energy transition has unleashed.
To address the dependence on Chinese exports of rare earths, the EU adopted the European Critical Raw Materials Act (Regulation (EU) 2024/1252). It aims to establish “a framework for ensuring a secure and sustainable supply of critical raw materials,” setting benchmarks for extracting, processing, and recycling a regularly updated list of raw materials, including rare earths, in Europe (Article 5). No doubt, this is a significant step to take the bloc’s import dependence seriously. Nevertheless, European policymakers and scholars need to engage in a broader discussion about energy security on the path to climate neutrality.
In their current conceptualisation, EU policies insufficiently address the threat that the transition poses to the bloc’s economic and energy security. When re-imagining its energy future, the EU needs to understand China’s multifaceted role in the global energy system. Clean tech from China has created a transition quagmire. For the time being, all supplies that contain rare earths from China carry a hefty price tag. Environmental and security externalities render these imports as well as the transition project unsustainable.