5.1 Initial situation

announced an investment fund with a volume of 400 million euros for sustainable battery materials. This could be used for participations in mines outside of Europe. In the opinion of German industry, it would be important to link up the various financing activities and structure the fund by market principles. In the discussed EU taxonomy system, mining must not be categorised as not sustainable as this would encumber access to investment for exploration and mining projects. The adopted EU principles for sustainable raw materials illustrate the understanding of the member states of sustainable raw materials extraction (from exploration to post-closure) and processing operations. Criteria used should take account of the significant contribution of environmentally friendly mining, processing and recycling activities to meeting the EU Green Deal targets.

Strategic raw materials partnerships: Lastly, the EU is working on strategic raw materials partnerships. These have so far been concluded with Canada and Ukraine. Others are planned for Serbia, interested countries in Africa and the EU’s neighbourhood. The decisive step is to secure access to different markets in third countries. The EU should very swiftly forge sustainable raw materials alliances with African partners, give political support to private sector operations and use development cooperation instruments to support local government authorities and enterprises and financing tools such as guarantees to support European companies. Diversification in relevant third markets should be fostered through the dismantling of trade policy barriers. European raw materials interests should also be reflected in EU trade policy and (energy and industrial) foreign policy, especially with likeminded partners such as the United States, Japan and others.

At the political level, enterprises can be supported in particular with diversification, raw materials monitoring to identify critical raw materials, and storage (e.g., through tax incentives), and by setting marketbased incentives to increase resource efficiency and expand the circular economy.

5. Energy supply

5.1 Initial situation

Changing times for Europe’s energy security

Energy has become a geopolitical and security issue at the European level. Since the Russian attack on Ukraine, Europe´s energy security has been severely tested and past misconceptions about the geopolitical and ideological motivation of Russia brought to light. In the last few years, not less but more energy has been imported from Russia and too few alternatives established. This has led to a considerable dependence on Russia, particularly for the supply of gas. Market interdependencies and the so-called ‘peace dividend’ were long considered sufficient mechanisms to ensure Europe´s supply security (‘Handel durch Wandel’). While historically the EU has used its trade relations and diplomacy as a successful foreign policy tool and continues to do so, a geopolitical shift towards more realpolitik is inevitable and will require a change of perspective in its energy policy.

Russia’s market share in Europe’s energy supply over recent years is an expression of the asymmetry developed between the two partners. In 2021, Russian supplies accounted for 39 percent of total European gas imports, 29 percent of oil imports and over half of its coal imports. Other countries supplying Europe with gas include Norway (21 percent), Algeria (eight percent) and Qatar (five percent). Due to a higher flexibility in the international oil market, European countries can purchase oil from distant regions such as the United States (nine percent), Norway (eight percent), Saudi Arabia (seven percent), the United Kingdom (seven percent), Kazakhstan and Nigeria (six

percent each).20 Yet there are major differences in the degree of dependence among individual EU member states. Germany, with its significant industrial sector, is the largest off-taker of Russian gas and is therefore exposed to higher economic and geopolitical risks than France, for example. Thus, it should be in the mutual interest of all member states to act in a coordinated and united manner.

Growing energy demand and lasting high prices

The military instrumentalization of energy supplies is not the only reason why Europe needs to increase its energy security. Since the second half of 2021, energy prices have risen dramatically both in the EU and globally. Already before the outbreak of the war in Ukraine, high prices were a major challenge for the European industry. Multiple concordant factors are responsible for the soaring prices, including a higher gas consumption in Asia following the Covid-19 pandemic (with a particularly steep increase LNG demand), a cold winter in 2020/21, compounded by geopolitical tensions with Russia and the associated oil and coal embargos. High forward prices for the next few years indicate that the energy crisis is not going away any time soon. The European industry and energy-intensive companies are particularly hard hit as production costs have increased by almost 50 percent in some sectors.21 Furthermore, the dire energy price outlook is not only a problem for German industry but jeopardizes entire European and global supply chains. The disruption of production in one industry can have a negative effect all the way to a production standstill in upstream and downstream industries. This cascade effect could be triggered, for instance, by a production crisis in the chemical industry, whose products are needed in 90 percent of all production processes across the industrial sector. 22 Robust supply chains are particularly important for the renewable energy transition. 22 Access to critical raw materials is a decisive factor for the successful expansion of a sustainable energy supply and must be reflected in European trade policy and raw materials strategies.

System change on the energy market

The EU and Germany are currently facing a triple challenge: the geopolitical crisis with Russia which led to the energy crisis, the Covid 19 pandemic and the growing global climate emergency. 23 In these times of crisis, a smoothly functioning and resilient energy sector is vital to ensure the day-to-day activities of critical infrastructures and help delivering a rapid economic recovery. However, the market liberalization and the integration of renewable energies has made this task increasingly complex. The decarbonization of the economy through the use of renewable energy sources such as wind and solar requires a fundamental transformation of the entire energy system. The impending electrification of entire sectors, such as transportation, will increase the exposure to shocks and complexity of the European energy system. 24 Hence it is of paramount importance to rapidly advance the digitalisation and decentralisation of the energy system and establish a stable, cross-border electricity grid in Europe. The transition away from natural gas towards renewable energies requires the expansion of a high-voltage grid in Germany and Europe able to cope with high demand during the winter season and

20 Eurostat (2020). From where do we import energy? Brussels. 21 Eurostat (2021). Energy statistics - an overview. Brussels. 22 Ntv.de (2022). Chemical association criticises putting private households first | Debate on gas distribution. 11 July. Cologne. 23 Heffron, R. J., Körner, M. F., Schöpf, M., Wagner, J., & Weibelzahl, M. (2021). The role of flexibility in the light of the COVID-19 pandemic and beyond: Contributing to a sustainable and resilient energy future in Europe. Renewable and Sustainable Energy Reviews, 140, 110743. 24 Nolting L. (2021). Die Versorgungssicherheit mit Elektrizität im Kontext von Liberalisierung und Energiewende (Supply Security with Electricity in the Context of Liberalisation and the Transition to Renewable Energy), Institute for Future Energy Consumer Needs and Behavior, RWTH Aachen University.