The global energy transition is well underway, with record amounts of renewable energy added annually. Fossil fuels will peak by 2030, according to the International Energy Agency.21 The main driver is the need to avert the ever-more obvious and severe effects of climate change – but economic self-interest is another, increasingly powerful force behind the transition. Most countries now recognize that geo-economic power in the 21st century will be closely tied to leadership in clean energy and the technologies that enable it. This is spurring a revival of industrial strategy and an intense race to secure a slice of rapidly expanding green industries. Green industrialization is central to the US-China rivalry. China holds a significant lead, producing over 80% of global solar panels, 70% of batteries and a growing share of electric vehicles (EVs). It also dominates the processing of critical raw materials (CRMs) such as cobalt and lithium. The US Inflation Reduction Act has allocated over $370 billion to boost domestic production and reduce dependence on China, framing green tech leadership as a matter of economic and national security. And Europe? Thanks to world-leading programmes like the European Green Deal,22 the EU is further ahead in decarbonizing its economy than any other region. However, this success belies significant, interlocking vulnerabilities. The EU is heavily reliant on external suppliers for crucial green technologies. Recent disruptions, such as its export controls on gallium (where China accounts for 98% of global production), highlight its dependency. Meanwhile Beijing’s dominance and the US’s muscular response are feeding broader anxiety about Europe’s economic competitiveness. This in turn is stoking concern among policy- makers about the political viability of overtly prioritizing the green transition at a moment when European voters are feeling insecure. The EU particularly fears its large automotive sector falling behind in the shift to electric vehicles; hence its recent, much-debated move to impose tariffs on Chinese EVs.23 In a world where green industrialization and geopolitical power are mutually inextricable, Europe seems to be on the back foot. A material world Yet Europe should not be fatalistic. With the right combination of openness and partnerships on one hand and smart management of dependencies on the other — strategic interdependence at its best — Europe can plot a path to abundant renewable energy that overcomes its vulnerabilities. The continent has made significant progress in reducing its emissions to date, by prioritizing efficiency over interventions dictating the origin or supply chains of the technologies in question. But in today’s fractious geopolitical context, policy-makers are rightly concerned about the risk of simply replacing one set of dependencies (linked to fossil fuels) with another (linked to green energy). The EU’s Net-Zero Industry Act rightly aims to meet 40% of its annual net-zero technology needs through domestic production by 2030. The union needs to accelerate progress towards this goal while ensuring that it has maximum leverage over the supply of net-zero technologies from abroad. In practice, this means Europe establishing itself as a more central player in green industrial supply chains. However, in this new, more geo-economic approach, Europe should tread carefully in the area of tariffs. When targeted, these can be justified in cases of unfair competition or carbon-intensive imports (the aim of the EU’s forthcoming Carbon Border Adjustment Mechanism). However, over- reliance on protectionist measures could raise the cost of Europe’s transition, complicate political and economic challenges, and provoke retaliatory actions. The EU’s 2013 tariffs on Chinese solar panels, for example, backfired as increased costs led to job losses in the installation sector and made it harder for European manufacturers to scale-up. Ultimately, the tariffs did little to protect domestic industry, while making clean energy more expensive for consumers and businesses.24 Instead of trying to reclaim leadership in sectors like solar power, where China’s dominance was decided a decade ago, Europe should prioritize emerging green technologies that are still in contention. The battery market, projected to grow by 25-30% annually, is one such area. While China has a head start, with vertically integrated supply chains and advanced expertise, the technology is still evolving. That leaves room for Europe to catch up and secure a significant role. Poland is already the world’s second-largest lithium-ion battery producer, showing that EU states can be major players in this sector.25 Doing so means marshalling resources on the scale required. As Mario Draghi’s report on competitiveness made painfully clear: unlike China and the US, Europe lacks a truly unified internal market.26 Fragmentation makes it harder for fledgling green technology businesses to scale-up and access affordable European finance. Policy- makers must confront this with ambition and urgency. That will require a subsidy framework balancing intervention with openness, greater involvement from the European Investment Bank (EIB), a capital increase to the EU Innovation Fund and EU-wide tax convergence. Every euro spent on clean technology R&D should be tax-deductible (subject to carefully calibrated constraints on technology transfer outside of Europe). The forthcoming EU Clean Industrial Deal is the perfect pan-European framework to tackle these challenges, by reconciling industrial modernization Thanks to the Green Deal, Europe is further ahead in decarbonizing its economy than any other region. However, this success belies significant, interlocking vulnerabilities. The EU’s 2013 tariffs on Chinese solar panels did little to protect domestic industry, while making clean energy more expensive for consumers and businesses. Open but Secure: Europe’s Path to Strategic Interdependence 12

Open but Secure Europe%E2%80%99s Path to Strategic Interdependence 2025