Oil companies made record profits this year: French group Total Energies, for example, increased its earnings by 69 percent in the first nine months of the year. Shell even multiplied its profits from just under €13 to €30 billion. As a result, the debate about an excess profits tax for oil and gas companies became an explosive subject again.
The EU decided on a solidarity contribution at the end of September, and the member states have room for maneuver. Germany, however, expects only low revenues, according to a paper published by the German government. Read more on this in Manuel Berkel’s Feature.
German Chancellor Olaf Scholz will travel to China tomorrow with a business delegation. Following the debate about the partial sale of the Hamburg port terminal, the chancellor’s first visit to China faces heavy criticism. EU Internal Market Commissioner Thierry Breton, for example, said he would have favored a more collaborative approach. It was important, he said, for the EU states to act in a more coordinated manner toward China so that Beijing could not play them off against each other. There is also growing concern in society about a growing dependence on Beijing, as my China.Table colleague Marcel Grzanna reports.
To become less dependent on China and secure supplies of critical raw materials, Morten Svendstorp, advisor to the Danish climate and energy minister, calls for an alliance of Western democracies – similar to NATO or the International Energy Agency. In today’s Opinion, he writes about what tasks such an international energy and resource alliance could fulfill.
Have a great start to the day!
US President Joe Biden threatened it earlier this week, and the new British Prime Minister Rishi Sunak is expected to extend it, according to former World Climate Conference President Alok Sharma. The excess profits tax for oil and gas companies has gained renewed explosiveness recently – also because of new record figures.
The French group Total Energies increased its earnings in the first nine months by 69 percent to over €17 billion, while Shell even multiplied its profits from just under €13 to €30 billion. In Germany, too, the oil multinationals are among the biggest players; their operating facilities are basically taxable here. But according to current figures from the German government, they will not have to fear an ambitious excess profits tax.
Berlin estimates the total revenue from the solidarity contribution, which the EU energy ministers agreed on at the end of September, at just €1 to €3 billion. The figures for Germany come from a paper published by the German government on Tuesday, which is available to Europe.Table.
In addition to the revenue cap for electricity, the Council of Ministers had also decided on a solidarity contribution for the production of oil, gas and coal as well as for refineries. The EU regulation defines excess profits as those revenues that are more than 20 percent above the average for the years 2018 to 2021. National governments can decide for themselves whether to levy the tax for the current year only, for the coming year only, or for both years. In addition, the regulation only stipulates a minimum rate of 33 percent.
“Anything above that is possible,” says Katharina Beck, financial policy spokeswoman for the Green Party’s parliamentary group in the Bundestag. She also said the federal government should levy the tax in both 2022 and 2023. The Finance Ministry’s draft bill is not yet available, but it can be deduced from the tax estimate that the federal government is unlikely to go beyond the minimum requirements of the EU regulation.
The Commission’s tax forecast provides an indication. For the member states as a whole, it had put the potential revenue at €25 billion for the current year alone – with Germany consuming more than a fifth of all the oil in the EU.
There is no shortage of calls for a tougher approach. The Federation of German Consumer Organizations has already called for a tax rate of 66 percent so that more revenue can be redistributed to consumers.
Beck, a Green Party member of parliament, wants to go even further: “According to the current plan, 90 percent of the windfall profits in the electricity market are supposed to be skimmed off. I think it’s a requirement of market fairness that this is also handled for fossil fuels like oil in line with the skimming in other energy sectors.”
But the bigger problem lies in tax law. “A significant proportion of excess profits are generated by intermediary trading companies in tax havens such as Singapore or Switzerland. These remain untaxed,” says Christoph Trautvetter of the Tax Justice Network. But to tax profits where they arise, the Greens would like to implement the excess profits tax in a similar way to Italy.
“A good tax base for national profits can be determined based on advance sales tax returns,” Beck explains. “The Italian sales-based model actually solves the problem that the excess profits tax is circumvented by shifting profits abroad,” confirms financial scientist Dominika Langenmayr of the University of Eichstätt. “However, the question arises as to whether the tax can then be passed on to prices and thus in the end no longer be borne by companies or their shareholders, but by German consumers,” says the professor, who is also a member of the scientific advisory board of the German Federal Ministry of Finance.
In preventing tax avoidance, the Greens in the EU Parliament see the Commission as having a duty. “We are also in favor of political talks with Switzerland, so that it joins our model for skimming off excess profits or adopts similar steps,” says MEP Rasmus Andresen.
The petroleum industry, on the other hand, already considers the existing EU regulation to be harmful. “We are particularly critical of the fact that years with, in some cases, considerable Covid-related losses are used to determine the reference profit,” says a spokesman for the German industry association en2x. “For companies, this can presumably lead to an additional levy being due for this year already, starting with the first euro of income. And that’s before losses from previous years have been offset. However, this could seriously jeopardize urgently needed investments in the transformation towards more climate protection.”
Therefore, in the opinion of the German petroleum industry, national implementation should not go beyond the minimum envisaged by the EU. The BVEG association is not yet in a position to judge whether the oil and gas production business in Germany will also be affected. However, it advocates a uniform approach throughout the EU.
Yesterday, the Dutch government also stated that it is aiming for a tax rate of 33 percent. For the current year, it expects revenues of €3.2 billion.
Germany’s only major oil and gas producer Wintershall Dea argues that capital is needed to expand its traditional business. “In the case of gas and oil, there is also – at least in Europe – the political mantra that these energy sources will no longer be needed in the near future,” the group informs. “Under these circumstances, important and necessary investments have not been made in either production or infrastructure. Solving this problem – rather than siphoning off investment funds from energy companies – will be the key to greater security of supply.”
In the statement, Wintershall Dea emphasizes, on the one hand, that it is important to secure the cohesion of our societies. The consequences of the new global situation – triggered by Russia’s war against Ukraine and the urgent need for energy independence – are also being felt in the wallets of many. But the Group stoops to an idiosyncratic interpretation of the energy crisis: “The gap between ‘wanting to afford something’ and ‘being able to afford something’ is widening.”
Environment, data protection, social justice – and now China. The German citizens’ movement Campact broke new ground at the end of October with its signature campaign against Chinese influence. For the first time in its 18-year history, the leaders of the non-governmental organization mobilized a protest that specifically accused German politics of economically cozying up to the “despots” in Beijing.
Campact took advantage of the media attention the matter received in recent weeks to generate a strong response from the public. Only a handful of people had indeed gathered in front of the German Chancellor’s Office to protest against the partial sale of a port terminal in Hamburg and to ask Olaf Scholz with a poster whether he was still aware of anything at all. But within 36 hours, 251,000 people signed the Internet petition.
Campact dedicates itself to many topics and goes “in where there is fire,” a spokeswoman explained. The port deal apparently had produced enough smoke to let the appeal reach effective dimensions. “Instead of making Germany even more susceptible to extortion in the future, Scholz must specifically protect central infrastructure, especially from the grip of autocratic states,” the organization warned.
While the petition was unsuccessful. The partial acquisition by Cosco of the operator of the Tollerort port terminal is a done deal, albeit on conditions that give China less power. But the growing concern in Germany about China’s influence is something the social-democratic Chancellor Scholz will have to take with him as extra baggage on his short trip to Beijing on Thursday.
Scholz faces heavy criticism for his concessions to China, including from other EU states. Even from the ranks of the liberal coalition partner FDP come words of warning. “The chancellor’s dealings with China show that he has not learned any lessons from the failed Russia policy of recent years. The Zeitenwende cannot be limited to one country, but requires that we reduce our dependence on all autocratic states,” said Renata Alt, Chair of the Human Rights Committee in the German Bundestag.
That the tide will turn in the short term seems rather unlikely. “I’m repeatedly struck by the sheer scale of the skepticism towards China among the German public and business world,” is how Oliver Moody, the Berlin correspondent of the British Times, describes the trend on Twitter. But as yet, the growing awareness of the problem is not reflected in trade data, he wrote. “It’s interesting to see that (A) there is very widespread recognition in Germany of the strategic trap yawning in front of it; and (B) most of the economic data seem to suggest it’s headed into that trap regardless.”
At the head of the movement – at least in the public perception – is Scholz with the port deal. But it is not just the Chancellor himself who further drives dependency. Many companies, institutions from research and science, but also state or local politicians keep turning the wheel for their own benefit. A sponsorship for a professor at a German university or research cooperation here, some big investment promises worth millions there, these tempt those in charge at many levels of society to move closer together with the regime.
Regardless of how detailed the broad mass of signatories to the Campact petition actually looked into the core issue of the sale of critical infrastructure to the People’s Republic, the high number of signatories is evidence of a development that has been unfolding in Germany for several years. The perception of China’s strategic acquisitions in Europe and especially in Germany – and the associated political risks – reached the emotional mainstream of the population.
People who have never before seriously thought about how and where China already is embedded in Germany’s critical infrastructure are suddenly starting to take at least a superficial interest in the topic and think about possible consequences. Also because the German media landscape extensively covered the partial sale of the Tollerort terminal.
Given the sheer flood of news every day, this is a remarkable process. Because for many people, China is still just very far away – not only in Germany, but also in many other Western countries. Now, however, the People’s Republic seems to have come a significant bit closer to everyday life in Germany.
Although this is not the first time that takeovers by Chinese investors have sparked an uproar. In 2016, the matter came to a head when a bidder from the People’s Republic acquired the German robotics market leader Kuka. In response, the German Ministry for Economic Affairs and Energy tightened the Foreign Trade and Payments Act and reserved the right to stricter scrutiny of foreign investments. But the smoke soon cleared, and the big picture of China’s industrial policy strategy faded back into the shadows. Now, however, concerns about growing dependence are reaching segments of the population for whom Beijing’s industrial policy previously meant nothing more than boring news in the business section.
The situation in 2022 is different than it was six years ago. Public opinion toward China has become drastically more critical. The German Marshall Fund’s latest Transatlantic Trends Report states that of 14 countries surveyed, only a larger proportion of the population in the US and Canada considers China a rival than in Germany. And only in the United Kingdom is the number of those who consider China a partner as small as in Germany (12 percent). The Berlin Pulse Report of the Körber Stiftung also found that two-thirds of Germans are willing to reduce their economic dependence on China, even if this means economic sacrifices.
The ongoing de-democratization of Hong Kong since 2019, the evidence of systematic and extensive human rights crimes in Xinjiang and Tibet, the aggressive posturing of Wolf Warrior diplomats in foreign countries, or the threats against Taiwan all left their mark on Germany. However, the magnitude of these events was only amplified by the realization of Germany’s dependence on Russian raw materials. If Putin had not attacked Ukraine, the partial sale of the Hamburg terminal might have received little attention. Now it is something of a tipping point for the perception of China’s strategies in Germany.
The old line that “history does not repeat itself, but often rhymes,” is an apt description of the evolving relationship between the West and its rivals. During the Cold War, the Soviet Union was a global superpower, owing to its military prowess. Today, Russia’s armed forces appear to be in a dismal state, but the country has become an energy superpower that can use its vast natural-gas reserves as a weapon. Similarly, today’s standoff between the West and Russia over Ukraine echoes the Cold War confrontation between authoritarianism and democracy.
With winter looming, the Kremlin’s shutdown of gas flows to the European Union could have severe consequences, triggering the biggest energy crisis in 50 years. Though increasing deliveries of gas from the United States, the United Kingdom, and Norway will help mitigate the EU’s dependence on Russian supplies in the short run, it is not a long-term solution.
The weaponization of energy resources underscores the need for a new kind of alliance among the world’s democracies. At the Baltic Sea Energy Security Summit in Denmark two months ago, Germany, Poland, Lithuania, Latvia, Estonia, Finland, Sweden, and the European Commission offered a preliminary blueprint for what closer energy coordination might look like. All the countries in attendance signed a declaration committing them to increase their combined offshore wind-energy capacity by almost sevenfold over the next eight years. By 2030, offshore windfarms in the Baltic Sea region alone should be capable of producing 19.6 gigawatts per year, enough to meet the electricity demands of 28.5 million European homes (roughly equivalent to the combined number of households in all the Baltic Sea countries except Germany and Russia).
The summit was a historic political step, demonstrating that the geopolitics of energy is on the cusp of a major shift. Over the last decade, the costs of wind and solar energy have fallen below that of fossil fuels in most countries. The rapid growth of renewable energy will have two profound consequences. First, fuel-exporting countries’ ability to wield energy resources as a weapon will be weakened. Second, as the geopolitical importance of fuel resources diminishes, the importance of critical raw materials such as rare-earth elements, minerals, and metals will increase.
Over the last two decades, China has secured global dominance over the extraction and refining of minerals and metals. Today, China mines 58 percent and processes 85 percent of global rare-earth elements, giving it control over key parts of the supply chains needed to build wind turbines, solar panels, and electric vehicles. To put this position in perspective, Saudi Arabia’s share of global oil production stands at a mere 11 percent.
China’s dominance is a concern in and of itself; but to make matters worse, it has a track record of weaponizing its resources. In 2010, after a Chinese trawler collided with a Japanese coastguard vessel in the waters around the disputed Senkaku Islands, China halted its exports of rare-earth elements to Japan. In response, Japan took steps to reduce its dependence on China, including by working with mining companies to find new sources of the same materials, and by building its domestic refining capacity.
Europe, the US, and other democracies should heed the lessons of the 2010 Senkaku Islands incident and begin forging a new alliance to secure the supply of energy and critical raw materials. We already know that such mission-oriented alliances work: NATO has been an effective bulwark of democracy, free trade, and security for many decades; and the International Energy Agency – created by OECD members following the 1973 oil shock – has offered a potent defense against OPEC’s weaponization of oil.
A new energy and raw materials alliance could start by including Japan, Australia, New Zealand, South Korea, and those Latin American democracies that support a rules-based global order. Following the IEA model, it would develop a joint analytical capacity to produce regular forecasts of critical raw-material supplies and demand for them. And just as IEA members hold emergency oil reserves equivalent to at least 90 days of net oil imports, members of the new alliance would keep stockpiles of strategically important raw materials.
The alliance would also set standards for the quality of refined critical raw materials and for sustainable, ethical mining practices. Such standards are the most effective way to reform resource extraction in developing countries, where operations are often marred by environmental degradation and inhumane labor conditions.
Finally, members of the alliance would insist on a market-based international trading system for critical raw materials through the G7, the G20, and at the World Trade Organization. They would coordinate and promote research aimed at diversifying demand for minerals. And they would create new public-private partnerships to build a pipeline of forthcoming extraction and refining projects.
In addition to powering the green transition, critical raw materials and energy resources could become a source of peace, cooperation, and stability. By building on the lessons from the 1973 oil shock, we can ensure that history doesn’t repeat itself. That outcome would be another tragedy, not a farce, as Karl Marx believed. Avoiding it is possible only if the world’s democracies come together to do what is needed to prevent further weaponization of essential economic goods.
Copyright: Project Syndicate, 2022.
www.project-syndicate.org
Oil companies made record profits this year: French group Total Energies, for example, increased its earnings by 69 percent in the first nine months of the year. Shell even multiplied its profits from just under €13 to €30 billion. As a result, the debate about an excess profits tax for oil and gas companies became an explosive subject again.
The EU decided on a solidarity contribution at the end of September, and the member states have room for maneuver. Germany, however, expects only low revenues, according to a paper published by the German government. Read more on this in Manuel Berkel’s Feature.
German Chancellor Olaf Scholz will travel to China tomorrow with a business delegation. Following the debate about the partial sale of the Hamburg port terminal, the chancellor’s first visit to China faces heavy criticism. EU Internal Market Commissioner Thierry Breton, for example, said he would have favored a more collaborative approach. It was important, he said, for the EU states to act in a more coordinated manner toward China so that Beijing could not play them off against each other. There is also growing concern in society about a growing dependence on Beijing, as my China.Table colleague Marcel Grzanna reports.
To become less dependent on China and secure supplies of critical raw materials, Morten Svendstorp, advisor to the Danish climate and energy minister, calls for an alliance of Western democracies – similar to NATO or the International Energy Agency. In today’s Opinion, he writes about what tasks such an international energy and resource alliance could fulfill.
Have a great start to the day!
US President Joe Biden threatened it earlier this week, and the new British Prime Minister Rishi Sunak is expected to extend it, according to former World Climate Conference President Alok Sharma. The excess profits tax for oil and gas companies has gained renewed explosiveness recently – also because of new record figures.
The French group Total Energies increased its earnings in the first nine months by 69 percent to over €17 billion, while Shell even multiplied its profits from just under €13 to €30 billion. In Germany, too, the oil multinationals are among the biggest players; their operating facilities are basically taxable here. But according to current figures from the German government, they will not have to fear an ambitious excess profits tax.
Berlin estimates the total revenue from the solidarity contribution, which the EU energy ministers agreed on at the end of September, at just €1 to €3 billion. The figures for Germany come from a paper published by the German government on Tuesday, which is available to Europe.Table.
In addition to the revenue cap for electricity, the Council of Ministers had also decided on a solidarity contribution for the production of oil, gas and coal as well as for refineries. The EU regulation defines excess profits as those revenues that are more than 20 percent above the average for the years 2018 to 2021. National governments can decide for themselves whether to levy the tax for the current year only, for the coming year only, or for both years. In addition, the regulation only stipulates a minimum rate of 33 percent.
“Anything above that is possible,” says Katharina Beck, financial policy spokeswoman for the Green Party’s parliamentary group in the Bundestag. She also said the federal government should levy the tax in both 2022 and 2023. The Finance Ministry’s draft bill is not yet available, but it can be deduced from the tax estimate that the federal government is unlikely to go beyond the minimum requirements of the EU regulation.
The Commission’s tax forecast provides an indication. For the member states as a whole, it had put the potential revenue at €25 billion for the current year alone – with Germany consuming more than a fifth of all the oil in the EU.
There is no shortage of calls for a tougher approach. The Federation of German Consumer Organizations has already called for a tax rate of 66 percent so that more revenue can be redistributed to consumers.
Beck, a Green Party member of parliament, wants to go even further: “According to the current plan, 90 percent of the windfall profits in the electricity market are supposed to be skimmed off. I think it’s a requirement of market fairness that this is also handled for fossil fuels like oil in line with the skimming in other energy sectors.”
But the bigger problem lies in tax law. “A significant proportion of excess profits are generated by intermediary trading companies in tax havens such as Singapore or Switzerland. These remain untaxed,” says Christoph Trautvetter of the Tax Justice Network. But to tax profits where they arise, the Greens would like to implement the excess profits tax in a similar way to Italy.
“A good tax base for national profits can be determined based on advance sales tax returns,” Beck explains. “The Italian sales-based model actually solves the problem that the excess profits tax is circumvented by shifting profits abroad,” confirms financial scientist Dominika Langenmayr of the University of Eichstätt. “However, the question arises as to whether the tax can then be passed on to prices and thus in the end no longer be borne by companies or their shareholders, but by German consumers,” says the professor, who is also a member of the scientific advisory board of the German Federal Ministry of Finance.
In preventing tax avoidance, the Greens in the EU Parliament see the Commission as having a duty. “We are also in favor of political talks with Switzerland, so that it joins our model for skimming off excess profits or adopts similar steps,” says MEP Rasmus Andresen.
The petroleum industry, on the other hand, already considers the existing EU regulation to be harmful. “We are particularly critical of the fact that years with, in some cases, considerable Covid-related losses are used to determine the reference profit,” says a spokesman for the German industry association en2x. “For companies, this can presumably lead to an additional levy being due for this year already, starting with the first euro of income. And that’s before losses from previous years have been offset. However, this could seriously jeopardize urgently needed investments in the transformation towards more climate protection.”
Therefore, in the opinion of the German petroleum industry, national implementation should not go beyond the minimum envisaged by the EU. The BVEG association is not yet in a position to judge whether the oil and gas production business in Germany will also be affected. However, it advocates a uniform approach throughout the EU.
Yesterday, the Dutch government also stated that it is aiming for a tax rate of 33 percent. For the current year, it expects revenues of €3.2 billion.
Germany’s only major oil and gas producer Wintershall Dea argues that capital is needed to expand its traditional business. “In the case of gas and oil, there is also – at least in Europe – the political mantra that these energy sources will no longer be needed in the near future,” the group informs. “Under these circumstances, important and necessary investments have not been made in either production or infrastructure. Solving this problem – rather than siphoning off investment funds from energy companies – will be the key to greater security of supply.”
In the statement, Wintershall Dea emphasizes, on the one hand, that it is important to secure the cohesion of our societies. The consequences of the new global situation – triggered by Russia’s war against Ukraine and the urgent need for energy independence – are also being felt in the wallets of many. But the Group stoops to an idiosyncratic interpretation of the energy crisis: “The gap between ‘wanting to afford something’ and ‘being able to afford something’ is widening.”
Environment, data protection, social justice – and now China. The German citizens’ movement Campact broke new ground at the end of October with its signature campaign against Chinese influence. For the first time in its 18-year history, the leaders of the non-governmental organization mobilized a protest that specifically accused German politics of economically cozying up to the “despots” in Beijing.
Campact took advantage of the media attention the matter received in recent weeks to generate a strong response from the public. Only a handful of people had indeed gathered in front of the German Chancellor’s Office to protest against the partial sale of a port terminal in Hamburg and to ask Olaf Scholz with a poster whether he was still aware of anything at all. But within 36 hours, 251,000 people signed the Internet petition.
Campact dedicates itself to many topics and goes “in where there is fire,” a spokeswoman explained. The port deal apparently had produced enough smoke to let the appeal reach effective dimensions. “Instead of making Germany even more susceptible to extortion in the future, Scholz must specifically protect central infrastructure, especially from the grip of autocratic states,” the organization warned.
While the petition was unsuccessful. The partial acquisition by Cosco of the operator of the Tollerort port terminal is a done deal, albeit on conditions that give China less power. But the growing concern in Germany about China’s influence is something the social-democratic Chancellor Scholz will have to take with him as extra baggage on his short trip to Beijing on Thursday.
Scholz faces heavy criticism for his concessions to China, including from other EU states. Even from the ranks of the liberal coalition partner FDP come words of warning. “The chancellor’s dealings with China show that he has not learned any lessons from the failed Russia policy of recent years. The Zeitenwende cannot be limited to one country, but requires that we reduce our dependence on all autocratic states,” said Renata Alt, Chair of the Human Rights Committee in the German Bundestag.
That the tide will turn in the short term seems rather unlikely. “I’m repeatedly struck by the sheer scale of the skepticism towards China among the German public and business world,” is how Oliver Moody, the Berlin correspondent of the British Times, describes the trend on Twitter. But as yet, the growing awareness of the problem is not reflected in trade data, he wrote. “It’s interesting to see that (A) there is very widespread recognition in Germany of the strategic trap yawning in front of it; and (B) most of the economic data seem to suggest it’s headed into that trap regardless.”
At the head of the movement – at least in the public perception – is Scholz with the port deal. But it is not just the Chancellor himself who further drives dependency. Many companies, institutions from research and science, but also state or local politicians keep turning the wheel for their own benefit. A sponsorship for a professor at a German university or research cooperation here, some big investment promises worth millions there, these tempt those in charge at many levels of society to move closer together with the regime.
Regardless of how detailed the broad mass of signatories to the Campact petition actually looked into the core issue of the sale of critical infrastructure to the People’s Republic, the high number of signatories is evidence of a development that has been unfolding in Germany for several years. The perception of China’s strategic acquisitions in Europe and especially in Germany – and the associated political risks – reached the emotional mainstream of the population.
People who have never before seriously thought about how and where China already is embedded in Germany’s critical infrastructure are suddenly starting to take at least a superficial interest in the topic and think about possible consequences. Also because the German media landscape extensively covered the partial sale of the Tollerort terminal.
Given the sheer flood of news every day, this is a remarkable process. Because for many people, China is still just very far away – not only in Germany, but also in many other Western countries. Now, however, the People’s Republic seems to have come a significant bit closer to everyday life in Germany.
Although this is not the first time that takeovers by Chinese investors have sparked an uproar. In 2016, the matter came to a head when a bidder from the People’s Republic acquired the German robotics market leader Kuka. In response, the German Ministry for Economic Affairs and Energy tightened the Foreign Trade and Payments Act and reserved the right to stricter scrutiny of foreign investments. But the smoke soon cleared, and the big picture of China’s industrial policy strategy faded back into the shadows. Now, however, concerns about growing dependence are reaching segments of the population for whom Beijing’s industrial policy previously meant nothing more than boring news in the business section.
The situation in 2022 is different than it was six years ago. Public opinion toward China has become drastically more critical. The German Marshall Fund’s latest Transatlantic Trends Report states that of 14 countries surveyed, only a larger proportion of the population in the US and Canada considers China a rival than in Germany. And only in the United Kingdom is the number of those who consider China a partner as small as in Germany (12 percent). The Berlin Pulse Report of the Körber Stiftung also found that two-thirds of Germans are willing to reduce their economic dependence on China, even if this means economic sacrifices.
The ongoing de-democratization of Hong Kong since 2019, the evidence of systematic and extensive human rights crimes in Xinjiang and Tibet, the aggressive posturing of Wolf Warrior diplomats in foreign countries, or the threats against Taiwan all left their mark on Germany. However, the magnitude of these events was only amplified by the realization of Germany’s dependence on Russian raw materials. If Putin had not attacked Ukraine, the partial sale of the Hamburg terminal might have received little attention. Now it is something of a tipping point for the perception of China’s strategies in Germany.
The old line that “history does not repeat itself, but often rhymes,” is an apt description of the evolving relationship between the West and its rivals. During the Cold War, the Soviet Union was a global superpower, owing to its military prowess. Today, Russia’s armed forces appear to be in a dismal state, but the country has become an energy superpower that can use its vast natural-gas reserves as a weapon. Similarly, today’s standoff between the West and Russia over Ukraine echoes the Cold War confrontation between authoritarianism and democracy.
With winter looming, the Kremlin’s shutdown of gas flows to the European Union could have severe consequences, triggering the biggest energy crisis in 50 years. Though increasing deliveries of gas from the United States, the United Kingdom, and Norway will help mitigate the EU’s dependence on Russian supplies in the short run, it is not a long-term solution.
The weaponization of energy resources underscores the need for a new kind of alliance among the world’s democracies. At the Baltic Sea Energy Security Summit in Denmark two months ago, Germany, Poland, Lithuania, Latvia, Estonia, Finland, Sweden, and the European Commission offered a preliminary blueprint for what closer energy coordination might look like. All the countries in attendance signed a declaration committing them to increase their combined offshore wind-energy capacity by almost sevenfold over the next eight years. By 2030, offshore windfarms in the Baltic Sea region alone should be capable of producing 19.6 gigawatts per year, enough to meet the electricity demands of 28.5 million European homes (roughly equivalent to the combined number of households in all the Baltic Sea countries except Germany and Russia).
The summit was a historic political step, demonstrating that the geopolitics of energy is on the cusp of a major shift. Over the last decade, the costs of wind and solar energy have fallen below that of fossil fuels in most countries. The rapid growth of renewable energy will have two profound consequences. First, fuel-exporting countries’ ability to wield energy resources as a weapon will be weakened. Second, as the geopolitical importance of fuel resources diminishes, the importance of critical raw materials such as rare-earth elements, minerals, and metals will increase.
Over the last two decades, China has secured global dominance over the extraction and refining of minerals and metals. Today, China mines 58 percent and processes 85 percent of global rare-earth elements, giving it control over key parts of the supply chains needed to build wind turbines, solar panels, and electric vehicles. To put this position in perspective, Saudi Arabia’s share of global oil production stands at a mere 11 percent.
China’s dominance is a concern in and of itself; but to make matters worse, it has a track record of weaponizing its resources. In 2010, after a Chinese trawler collided with a Japanese coastguard vessel in the waters around the disputed Senkaku Islands, China halted its exports of rare-earth elements to Japan. In response, Japan took steps to reduce its dependence on China, including by working with mining companies to find new sources of the same materials, and by building its domestic refining capacity.
Europe, the US, and other democracies should heed the lessons of the 2010 Senkaku Islands incident and begin forging a new alliance to secure the supply of energy and critical raw materials. We already know that such mission-oriented alliances work: NATO has been an effective bulwark of democracy, free trade, and security for many decades; and the International Energy Agency – created by OECD members following the 1973 oil shock – has offered a potent defense against OPEC’s weaponization of oil.
A new energy and raw materials alliance could start by including Japan, Australia, New Zealand, South Korea, and those Latin American democracies that support a rules-based global order. Following the IEA model, it would develop a joint analytical capacity to produce regular forecasts of critical raw-material supplies and demand for them. And just as IEA members hold emergency oil reserves equivalent to at least 90 days of net oil imports, members of the new alliance would keep stockpiles of strategically important raw materials.
The alliance would also set standards for the quality of refined critical raw materials and for sustainable, ethical mining practices. Such standards are the most effective way to reform resource extraction in developing countries, where operations are often marred by environmental degradation and inhumane labor conditions.
Finally, members of the alliance would insist on a market-based international trading system for critical raw materials through the G7, the G20, and at the World Trade Organization. They would coordinate and promote research aimed at diversifying demand for minerals. And they would create new public-private partnerships to build a pipeline of forthcoming extraction and refining projects.
In addition to powering the green transition, critical raw materials and energy resources could become a source of peace, cooperation, and stability. By building on the lessons from the 1973 oil shock, we can ensure that history doesn’t repeat itself. That outcome would be another tragedy, not a farce, as Karl Marx believed. Avoiding it is possible only if the world’s democracies come together to do what is needed to prevent further weaponization of essential economic goods.
Copyright: Project Syndicate, 2022.
www.project-syndicate.org
