Extreme vulnerability in Europe
Already on 11 December 2019 the European Commission presented The European Green Deal, an ambitious programme to turn Europe in 2050 into the first completely climatological neutral continent in the world, with an important focus on energy independence and reindustrialization (https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en).
Very soon after three events would rocket the whole world causing social, political and financial turmoil of biblical proportions: the covid pandemic, the war in Ukraine and recently the Israeli invasion in Gaza. The first mentioned would disrupt, though only temporarily, the supply chain for industrial goods from China. The second one would cut off permanently the supply of natural gas from Russia. Natural gas is an essential fuel for Europe without which their economies may come to a complete stand still. The last one in the series may cause severe problems with the supply of crude oil if the countries on the Persian Gulf get involved in the conflict. Also the supply of industrial goods from China may get disrupted again if finally ship transit through the Red Sea is blocked.
In the light of these events it is logical that the European Commission decided to accelerate and intensify the European Green Deal. In May 2022 REPowerEU (https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/repowereu-affordable-secure-and-sustainable-energy-europe_en) was launched, a plan provided with funding to save energy, generate renewable energy and diversify the sources of our energy. In February 2023 the Green Deal Industrial Plan was launched (https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/green-deal-industrial-plan_en), also well provided with European funding (InvestEU, https://investeu.europa.eu/index_en), with the purpose to reindustrialize the whole of Europe, focusing on key industries to achieve complete energy independence as well as climatological neutrality.
Perspectives for new industrial
projects
It is not a surprise that the diligence displayed by the European Commission has motivated many investors and business people to initiate industrial projects to be carried out in Europe, especially related to the energy transition: solar photovoltaic cells and modules, batteries of all types, electrolizers for hydrogen production, polysilicon wafers for microchips, solar cells, electromagnetic components and a lot more. To limit myself to my core business, which is the development of solar energy projects, as an economist I can confirm that each and every project developed and launched thus far could be perfectly profitable if the prices paid for energy and industrial goods stayed at the levels of 2022 when the solar photovoltaic module price increased to 0.40 €/Wp, after a long period of constant decreases until 2020 when it fell to only 0.17 €/Wp (https://www.pvxchange.com/Price-Index).
However, in 2023 the photovoltaic module price initiated a spectacular fall again to hardly 0.15 €/Wp, basically due to two factors: the measures taken in the United States against industrial products from China, accused of dumping, and the overproduction in that country causing an excess supply in Europe.
There is now an increasing number of analyses and studies that forecast even more spectacular photovoltaic module price falls as from now, leaving it at no more than 0.09 €/Wp in 2030 (https://rethinkresearch.biz/articles/rethink-energys-solar-module-price-forecast-to-2040/). I must admit however that the technological progress expected especially in manufacturing processes for sure will contribute to mentioned price falls. Such technological progress includes, but is not limited to the application of hetero instead of homo junction in photovoltaic cell manufacturing (nothing to do with couple formation between human beings), the application of new superconducting materials like perovskite, the substitution of silver for copper or the use of laser technologies instead of diamond wire in polysilicon wafer cutting.
However, technological changes like mentioned
cannot be the only explanation for such spectacular price falls, as all manufacturing
processes of high technology products have two inevitable components of
invariable nature establishing a floor under the unit costs, below which the
price cannot fall without putting project profitability at risk, regardless of the
place the product is manufactured. These components are:
- Investment earn back;
- Labour costs;
- Energy and other supplies;
- Raw materials;
The clothing industry is another notorious example
of labour exploitation, especially of women. It is mainly found in Asian
countries like China, Indonesia, Cambodia, India, Bangladesh and Sri Lanka, as
well as Central American countries like Nicaragua, Guatemala, El Salvador and
Honduras (https://www.oxfam.org/es/263000-mujeres-explotadas-en-las-maquilas-de-centroamerica). The cause is the market in
clothing importing countries, which is highly consumerist with frequently
changing preferences driven by the fashion business. The market therefore
demands low prices, which in turn leads
to the use of cheap synthetic fabrics which are hard to recycle and therefore
end up in enormous landfills for used clothes in Africa and South America,
causing severe environmental problems in these regions (https://www.eleconomista.net/actualidad/El-pais-que-se-convirtio-en-vertedero-de-ropa-usada-de-los-paises-ricos-20211015-0014.html).
International trade is a good thing that creates wealth for all nations, but the least one should demand from any imported good is that it is produced with the same social and environmental standards we apply to goods produced in our own Europe. The outstanding way of preventing any socially or environmentally “contaminated” product from entering European markets is demanding that any product sold in Europe, regardless of being manufactured inside or outside Europe, gets a certificate that proves that it meets certain social and environmental standards; this certificate could be called the “European Social Environmental Certificated (ESEC)”.
Standards for each product
As each production process is different, one should determine which social and environmental standards are appropriate for each product and for each sector, applying them to the whole value chain of that product.
In the particular case of photovoltaic modules we have seen that energy supply and raw materials mining and processing are the critical elements. In the case of batteries for electric vehicles it is coltan mining, in the case of clothing manufacturing it is the manufacturing process itself, while in the case of agricultural products the use of plant-protection products forbidden in Europe for environmental and health reasons will certainly be one of these elements.
Company certificates
As one and the same company usually has a whole catalogue of products, the ESEC could be issued to companies. The company that gets such an ESEC will be able to demonstrate its products are produced according to the social and environmental standards applicable to each product in its catalogue.
Due diligence
Obviously all manufacturing companies in producing countries (European countries included) will have to allow due diligences done by experts designated by the European Union for that purpose. Such due diligences will be done periodically without any previous notification or after receiving complaints of non-compliance to which sufficient proof must be added or in its absence, a thorough motivation, for being taken in consideration.
Transitional arrangements
Given the situation of absolute dependence on imports from China in which we have moved ourselves into for the last 20 years, we cannot do without them immediately applying the certificate. There must be a transition period before the ESEC can be applied in full. During this period we should build up sufficient manufacturing capacity to substitute maybe not all, but yet a significant part of the imports from outside Europe.
Obviously unit costs in this transition period will be higher than the price that is paid for the products imported and the companies that manufacture them in Europe unavoidably will need financial support in order to be minimally profitable.
Guaranteed prices with correction mechanisms
Raising tariff walls against products imported from certain countries is not going to work, as penalized countries can always use third countries to redirect their exports. However, a method that does work with proven efficiency is the guaranteed prices system. It was used in the European Union (at that time called the European Community) from 1957 to 1992 for the whole of the agricultural sector (https://www.consilium.europa.eu/en/policies/cap-introduction/timeline-history/).
Achieving independency in food supply was the great obsession in the European Community after the devastation suffered during the second world war. It was decided that farmers would receive guaranteed prices for their products to compensate higher production costs with respect to non-European competitors. The success turned out to be complete: not only did one achieve the desired independency in food supply, but also we ended up with “butter mountains”, “milk pools” and “wine lakes” some decades later, i.e. unsustainable surpluses of perishable goods which were impossible to sell.
The problem was not so much the guaranteed prices system, but its implementation by not including corrective mechanisms, like for example production caps or time limits; it was not until 1984 when a systems of quota was introduced in an attempt to limit these excess supplies. In 1992 the guaranteed prices system was abandoned. The error not to include corrective mechanisms would be repeated again in Spain in the first decade of this millennium with the unlimited feed-in tariffs scheme for new renewable energy power plants (https://elperiodicodelaenergia.com/una-nueva-oportunidad-para-la-energia-solar-en-espana/).
Therefore, an eventual new system of guaranteed prices for products that are eligible to receive an ESEC unavoidably must contain the following corrective mechanisms if we do not wish to end up with production surpluses or budget deficits again:
- An EU wide maximum on guaranteed production;
- A gradual decrease of the guaranteed price in line with foreseen cost saving technological progresses, if there are any;
- A maximum validity term, only extendible in case of extreme necessity.
The SDE+ system of guaranteed prices for power generated by renewable energy installations used in the Netherlands (https://nl.wikipedia.org/wiki/Stimuleringsregeling_Duurzame_Energieproductie_en_Klimaattransitie) includes mentioned corrective mechanisms; it has always performed satisfactorily in the sense of guaranteeing effectively a certain price, but without generating production surpluses or budgetary problems.
The guaranteed prices system will be abolished when:
- A critical mass of production capacity has been achieved in Europe sufficient to substitute, if not all, then still at least a considerable part of the imports;
- The ESEC has been totally implemented for the products considered.
Once the ESEC is fully functional European industry can compete on equal terms with manufacturers from third countries, as these have to respect the environment and labour rights in a verifiable way. This way their production costs sooner or later will approach European cost figures. Also, European suppliers may gain reliability and offer a better after sales service because of shorter supply chains compared to competitors abroad, which is an undeniable competitive advantage which may compensate for eventually slightly higher costs.
Obviously, trade wars can never be avoided completely, but in general they are very short lived, as they tend to end up in the bankruptcy of the party who started them. Nevertheless, given the current conditions of commercial disadvantage artificially created by tolerating violations of workers’ rights and pollution of the environment, the ESEC will be an essential tool to recover our industrial Independence, maintain our agricultural independence and gain our energy independence.
Sources
-https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en
-https://investeu.europa.eu/index_en
-https://www.pvxchange.com/Price-Index
-https://rethinkresearch.biz/articles/rethink-energys-solar-module-price-forecast-to-2040/
-https://www.gem.wiki/China_and_coal
-https://en.wikipedia.org/wiki/Polycrystalline_silicon
-https://www.ft.com/content/009d8434-9c12-48fd-8c93-d06d0b86779e
-https://www.oxfam.org/es/263000-mujeres-explotadas-en-las-maquilas-de-centroamerica
-https://www.consilium.europa.eu/en/policies/cap-introduction/timeline-history/
-https://elperiodicodelaenergia.com/una-nueva-oportunidad-para-la-energia-solar-en-espana/
-https://nl.wikipedia.org/wiki/Stimuleringsregeling_Duurzame_Energieproductie_en_Klimaattransitie
