China's Dominance in The Green Transition and What This Means for the EU

The year is 2025 and the EU is ramping up its green energy production as it gears towards hitting its Paris Agreement targets. It is now apparent that a crucial aspect of the green energy transition is effective and reliable supply of clean energy technologies, which in turn means a need for critical raw materials fueling these technologies. These raw materials are critical for a broad range of green technologies. For example, lithium, cobalt, and nickel for producing batteries, gallium for semiconductors, and titanium and tungsten for defence and space applications. According to the International Energy Agency, demand for clean energy technologies will multiply between two and three times by 2030. In the EU alone, lithium demand is expected to increase twelve-fold by 2030 and twenty-one-fold by 2050 to meet its renewable energy transition goals.

The upshot is that the EU is going to need a substantial and reliable supply of critical raw materials if it wants to accelerate its green transition. There is, however, one big problem.

• Understanding the Critical Raw Materials Value Chain

The EU is heavily dependent on imports for critical raw materials and in particular, on China. China currently dominates green technology production, from solar panels, wind turbines, to lithium-ion batteries. To better understand China’s strategic dominance in this regard, it is first imperative to understand the critical raw material value chain.

Taking lithium as an example for illustration purposes, a typical raw material value chain is as follows. The upstream stage involves the mining and extraction of lithium at natural depositories. Presently, most of the natural lithium deposits are found in Australia, Chile, and Argentina. The midstream stage involves the processing of raw lithium into usable chemical compounds such as lithium carbonate and lithium hydroxide. This is an important step without which lithium is practically unusable. At the downstream stage, the processed or refined lithium is used to make components, batteries, and finished products. While China does do some extraction and mining domestically, where China dominates is at the production or processing (i.e., midstream) stage of the value chain.

• China’s Dominance of the Midstream Market

The charts below illustrate how China is clearly a global leader in raw material processing.

China’s dominance of the midstream market is an important factor in understanding the geopolitical dynamic in the green transition. As explained above, the processing of raw materials is a critical step in the value chain, on which many green technologies downstream depend. By dominating the midstream market, China has now placed itself in an excellent strategic position for three reasons.

First, China has captured the high-value segments of the value chain. Upstream activities such as mining and extraction produce raw materials, which are relatively low value compared to downstream products. In the example of lithium, midstream processing converts lithium into battery-grade chemicals which can then be used in end products. This step is technology and capital intensive, harder to replicate, and therefore far more profitable than selling raw lithium. By dominating midstream, China has the lion’s share of value, even if it imports raw materials from other countries.

Secondly, China has secured domestic supply for its own critical technologies for the green transition. Lithium refinement is critical for electronic vehicle (‘EV’) batteries, energy storage, and other electronics. By securing the midstream, China secures its own domestic EV and technology industries.

Thirdly, and perhaps most critically, China is gaining geopolitical leverage. Countries without midstream capacity are dependent on China for refined lithium and battery materials, which is exactly what is happening now in the EU and elsewhere. This means that China has strategic influence over global EV supply chains, similar to how the OPEC had influenced the oil markets in the fossil fuel era.

Arguably, China’s dominance of green technologies today is not a coincidence but a deliberate and strategic decision to leverage the growing green agenda of the West for its own economic and geopolitical advantage.

• Implications for the EU’s Green Transition

China’s dominance in the green transition has three key impacts on the EU’s green transition.

First, unless the EU does something to secure and diversify its supply of critical raw materials, the EU will face supply chain vulnerability. This means that any disruption in China, whether due to policy decisions, trade tensions, or geopolitical crises, can severely affect the EU’s access to essential materials. Coupled with the EU’s plans to increase its reliance on renewable energy, this is not a good position to be in.

Secondly, ensuring supply chain security may mean a slowdown of the EU’s green transition. In an ideal world, China’s rapid expansion of its clean energy sector should mean good news to all, from the perspective that China can now help to power the world’s green transition. However, we know the reality remains that countries would not hesitate to leverage on comparative advantages to protect their own interests at the expense of others. It would not be prudent for the EU to expose itself to such vulnerabilities in the name of accelerating the green transition at all costs. Thus, the EU needs to strategically diversify its global supply source and increase domestic production. It has already begun doing so, starting with its Critical Raw Materials Act. However, this will take time and may mean a potential deceleration of the green transition.

Thirdly, there will be an impact on the EU’s economic competitiveness. The EU’s share of the global production of most critical raw materials is lower than 7%. With other countries dominating the high-value segment of the supply chain, production costs for EVs, renewable energy technologies, and electronics will be higher for the EU. European companies will face higher input costs and reduced profitability, which can slow the adoption of green technologies and weaken the EU’s global industrial competitiveness.

• Fragmentation Within The EU

There is a further complication within the EU itself, which is the challenges implementing a unified strategy due to fragmentation within the EU member countries. One example is the dividing stance between France and Germany on nuclear power. France derives approximately 70% of its electricity from nuclear energy, based on a long-standing policy focused on energy security. Germany, on the other hand, completed its nuclear phase-out in April 2023. The role of nuclear power in the green transition had therefore been a major point of disagreement between the two states, holding back consensus on reforms regarding the EU’s electricity market.

Another example is the distinctive approach that the Nordic EU countries (in particular Finland and Sweden) take in relation to the green transition. These member states possess extensive natural forest resources and biofuel industries, which incentivizes them to create systems and policies that exploit forest fuels and forestry waste products in ways that are unfamiliar to much of the rest of Europe. This creates further disagreement when the EU attempts to reach a unified approach to the green transition. Notably, Finland was one of the countries that opposed the sustainability criteria for biofuels in the EU, citing concerns that such criteria fail to take into account the national characteristics of these countries and would unduly hinder their forest-based bioenergy model.

• Conclusion

The geopolitical dynamic of the green transition with China’s dominance in the critical raw material value chain, coupled with fragmentation within the EU member countries, are challenges that the EU will continue to face as it works towards achieving its Paris Agreement targets. Nevertheless, the EU should leverage its unique capacity for coordinated regulatory action across member states and the diverse strengths of its economies (from France’s nuclear expertise to Nordic forestry resources and Germany’s renewable technology) to forge a cohesive yet flexible framework that turns internal diversity from a source of friction into a strategic advantage in the global green transition.

References

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