EU Proposes Critical Raw Materials Act and Net Zero Industry Act

On March 16, 2023, the European Commission published its proposal for a Regulation establishing a framework for ensuring a secure and sustainable supply of critical raw materials ("Critical Raw Materials Act" or "CRMA"). The proposal sets out a number of actions aiming to ensure the EU's access to a secure, diversified and sustainable supply of critical raw materials, which are essential for the EU’s strategic sectors, including its green and digital industries, aerospace, and defense sectors.

Of note, the CRMA is yet another proposed EU measure that is likely to impact supply chain due diligence, such as, for instance, the proposed Corporate Sustainability Due Diligence Directive ("CSDDD"), or the proposed EU Forced Labour Regulation ("FLR")

The Critical Raw Materials initiative has been on the EU’s agenda for some time (at least since 2008), but gained prominence most recently with supply disruptions caused by the COVID-19 pandemic and the Russian invasion of Ukraine, chips scarcity, and the energy crisis following the war in Ukraine. As highlighted in the CRMA proposal, these developments, and the supply disruptions that resulted therefrom, have brought to the fore the EU’s structural supply dependencies and their potentially damaging effects in times of crisis. The EU currently relies almost exclusively on imports for many critical raw materials ("CRMs") – the supply of which is concentrated in a small number of third countries – thus exposing the EU to risks of supply shortages and related economic, social and security shocks.

The initiative is also triggered by the EU's green and digital transition goals and the aim to achieve climate neutrality by 2050, which are expected to lead to higher demand for critical raw materials in the EU. Of note, the CRMA was foreseen, together with other proposals, as part of the recently announced Green Deal Industrial Plan,¹the EU's new plan to promote green industries and clean-tech technologies in the EU. As such, the CRMA proposal was presented on March 16 jointly with the Net Zero Industry Act ("NZIA"), which aims to scale up industrial manufacturing of clean technologies in the EU, with a target to have at least 40% of these technologies manufactured in the EU by 2030.

In this alert, we will provide an analysis of the proposed CRMA, as well as a brief overview of the proposed NZIA.

The CRMA

Scope

The proposed CRMA would cover "critical" and "strategic" raw materials, identified by the Commission on the basis of their economic importance and supply risk. The list of "strategic" raw materials in Section 1 of Annex I to the CRMA currently consists of 16 raw materials, including silicon metal, copper, lithium, nickel, tungsten and rare earth elements for magnets. According to the Commission, "strategic" raw materials have been designated as such based on their importance for strategic sectors such as renewable energy, digital, space and defence technologies and given that demand for these materials is expect to increase significantly in the coming years, leading to potential supply risks. The Commission, therefore, considers that those materials merit particular attention and has for this purpose proposed measures specifically addressing strategic raw materials in the CRMA.

The list of "critical" raw materials is larger and can be found in Section 1 of Annex II to the proposed CRMA. It currently consists of 34 raw materials, including the strategic raw materials listed in Annex I. The two lists will be reviewed by the Commission on the basis of the criteria laid down in the proposed CRMA at least every 4 years.

Regulatory framework

The Commission’s proposal is built around four main objectives, namely:

• strengthening the EU’s critical raw materials capacities across all stages of the value chain;
• diversifying the EU’s imports of raw materials;
• improving monitoring and risk mitigation capacities; and
• ensuring a well-functioning single market while improving the sustainability and circularity of critical raw materials.

Accordingly, Chapters 3 to 6 of the proposed CRMA set out specific actions, outlined below, geared towards achieving each of these objectives.

The proposal also sets out concrete targets for increasing Union extraction, processing and recycling capacities for strategic raw materials so that these approach or reach the following benchmarks:

• Union extraction capacity is able to extract the ores, minerals or concentrates needed to produce at least 10% of the Union's annual consumption of strategic raw materials;
• Union processing capacity is able to produce at least 40% of the Union's annual consumption of strategic raw materials; and
• Union recycling capacity is able to produce at least 15% of the Union's annual consumption of strategic raw materials.

In addition, the proposed CRMA would also aim at ensuring that, by 2030, not more than 65% of the Union's annual consumption of each strategic raw material at any relevant stage of processing comes from a single third country.

1. Strengthening the EU’s CRM supply chain

The Commission proposes to increase EU’s capacities of CRMs by identifying and implementing so-called "Strategic Projects", which will be eligible for streamlined permitting processes, being recognized as having a priority status in domestic administrative and judicial processes. In addition, such projects would also benefit from easier access to financing opportunities, including existing Member State instruments and programs, as well as relevant EU funding and financing programs.

The proposal also emphasizes the importance of private investments by companies, financial investors, and off-takers. Public financing would include state aid in accordance with the relaxed state aid measures adopted by the Commission on March 9 to speed up green and digital transitions. Namely:

• the amendments to the General Block Exemption rules to further facilitate and speed up green and digital transition; and

• the new Temporary Crisis and Transition Framework to further support transition towards net-zero economy.

The measures on Strategic Projects focus specifically on strategic raw materials, listed in Annex I to the proposed CRMA. Strategic Projects are expected to make a meaningful contribution to the security of the EU’s supply of strategic raw materials. Moreover, the Strategic Projects will also have to fulfil certain other conditions, such as being implemented within a reasonable time frame, as well as sustainably – including, for instance, the monitoring, prevention and minimization of environmental impacts, and respect for human and labor rights.

Importantly, projects based outside the EU could be designated as Strategic Projects, provided that they would be "mutually beneficial" for the EU and the third country concerned.

2. Improving monitoring and risk mitigation

Chapter 4 of the proposed CRMA sets out a framework for coordinated monitoring of critical raw materials supply chains and provides measures to mitigate supply risks. Specifically, it is proposed that the Commission, in cooperation with national authorities, would have to monitor supply risk related to critical raw materials by tracking at least the evolution of the following parameters:

• trade flows;
• demand and supply;
• concentration of supply; and
• EU and global production and production capacities.

The proposed CRMA also includes information and reporting obligations for Member States, for instance on the activities of key market operators along the critical raw materials value chain, as well as on the state of their strategic stocks of strategic raw materials.

In addition, the proposed CRMA includes a requirement for large companies that manufacture strategic technologies using strategic raw materials, as identified by the EU Member States, to perform every two years an audit of their supply chain, including:

• a mapping of where the strategic raw materials they use are extracted, processed or recycled; and
• a stress test of their supply chain of strategic raw materials, consisting of an assessment of its vulnerability to supply disruptions.

The "strategic technologies" that would be covered under this provision shall include, but not be limited to: batteries for energy storage and e-mobility, equipment related to hydrogen production and utilization, equipment related to renewable energy generation, traction motors, heat pumps, data transmission and storage, mobile electronic devices, equipment related to additive manufacturing, robotics, drones, rocket launchers, satellites and advanced chips.

3. Measures on sustainability and circularity of CRMs

Chapter 5 contains provisions for improving the circularity and sustainability of critical raw materials, including obligations for both Member States and economic operators. For instance:

• EU Member States would be required to adopt three years from the entry into force of the CRMA measures on circularity, increasing the collection, treatment, and reuse of waste containing CRMs;
• extractive waste operators would be required to assess the potential to recover critical raw materials from extractive waste sites as well as from closed and abandoned mines across the EU;
• natural or legal persons placing on the market specified products would be required to produce information regarding permanent magnets incorporated in such products as well as on their recycled CRM content; and
• natural or legal persons placing on the market specific CRMs identified by the Commission would be required to declare the environmental footprint of these CRMs.

This Chapter also sets out rules for the recognition by the Commission of certification schemes related to the sustainability of critical raw materials, and provisions regarding the declaration of the environmental footprint or critical raw materials placed on the EU market.

4. Diversifying raw material supply sources

Finally, the Commission’s proposal seeks to promote the diversification of CRM supply through Strategic Partnerships, which are defined as (non-binding) agreements between the EU and a third country setting out concrete actions to increase cooperation related to the raw materials value chain. For instance, the EU has recently signed a Memorandum of Understanding establishing a strategic partnership between the EU and Namibia at the COP27 in Egypt to supply renewable hydrogen and critical raw materials like. A similar agreement on raw materials, batteries, and renewable hydrogen has also been signed with Kazakhstan.

Chapter 6 of the proposed CRMA provides a framework for identifying which third countries should be prioritized for the conclusion of Strategic Partnerships, based on the following criteria:

• the potential contribution to security of supply, taking into account the country's potential reserves, extraction, processing and recycling capacities related to critical raw materials;
• the third country’s practices in terms of the environment, human and labor rights, the rule of law etc;
• whether there are existing cooperation agreements in place; and
• for emerging markets and developing economies, whether and how a partnership could contribute to local value addition.

Of note, the proposed CRMA is also accompanied by a Communication in which the Commission sets out other measures it proposes to take to support the diversification of supply chains, such as:

• establishing a Critical Raw Materials Club with international "like-minded" partners, bringing together consuming and resource-rich countries to strengthen supply chains and diversify sourcing;
• making use of trade and investment agreements, including dedicated chapters on raw materials, such as the recently concluded EU-Chile agreement;
• assessing the impact of tariffs on the ability to import CRMs, and examine requests for duty suspensions;
• measures to facilitate access to trade finance for investment in CRM supply chains globally, including introducing an export credit strategy at EU level and setting up a possible EU Export Credit Facility; and
• using the EU’s trade defence instruments to tackle unfair trade practices in relation to CRMs and intensifying enforcement efforts, including through dispute settlement under the WTO and the EU’s trade agreements, with particular focus on measures that restrict access to CRMs (such as export restrictions).

Net-Zero Industry Act

On the same date that the CRMA proposal was published, the Commission put forward, also within the framework of the EU Green Deal Industrial Plan, its proposal for a regulation on establishing a framework of measures for strengthening Europe’s net-zero technology products manufacturing ecosystem ("Net-Zero Industry Act" or "NZIA").

The focus of the proposed NZIA is on scaling up manufacturing of net-zero technologies in the EU. The proposed NZIA is seen as the main instrument with which the EU intends to respond to the green subsidy package presented under the US’ Inflation Reduction Act ("IRA").

Scope

The measures set forth in the proposed NZIA are mostly directed towards "strategic net-zero technologies", which are those listed in the Annex to the proposed Regulation. For these technologies, the proposed NZIA expressly lays down a target to have at least 40% of these technologies manufactured in the EU by 2030. The listed technologies currently include:

• solar photovoltaic and solar thermal technologies;
• onshore wind and offshore renewable technologies;
• battery/storage technologies;
• heat pumps and geothermal energy technologies;
• electrolysers and fuel cells;
• sustainable biogas/biomethane technologies;
• carbon capture and storage ("CCS") technologies; and
• grid technologies.

Other net zero technologies, as defined in Article 3(1) of the proposed NZIA, are also supported by the measures in the Act, to a different degree.

Enabling conditions for net-zero technology manufacturing

With a view to promoting the manufacturing of these technologies in the EU, the key element of the proposed NZIA is that it sets out a simplified regulatory framework for net-zero technology manufacturing in Chapter II of the proposed Regulation. This consists of:

• provisions on streamlining administrative and permit-granting processes for net-zero technology manufacturing projects, including specified time limits in which these processes should be concluded (Articles 4-9 of the proposed Regulation); and
• provisions on the identification of ‘Net-Zero Strategic Projects’, for manufacturing projects corresponding to one of the technologies listed in the Annex. Such projects are meant to benefit from: even faster permit-granting procedures; a "priority status" in terms of acquiring various permits and authorizations in the Member States; financial and administrative support from Member States’ national authorities to facilitate their implementation (Articles 10-15 of the proposed Regulation).

Other provisions

In addition to the above, the proposed NZIA also includes provisions on:

• CO₂injection capacity: The proposed NZIA would set an objective to reach an annual 50Mt injection capacity in strategic CO2 storage sites in the EU by 2030, and would require oil and gas producers to contribute proportionally to this objective.
• Access to markets: The proposed NZIA would include measures aimed at accelerating access to markets for net-zero technologies, relating to public procurement procedures and auctions to deploy renewable energy sources, for which public authorities must take into account criteria related to sustainability and resilience when awarding the contracts or ranking the bids. Also, as regards other forms of public intervention, Member States should design them in a way so as to incentivize the purchase by beneficiaries of net-zero technology final products.
• Enhancing skills for quality job creation in net-zero technologies: The proposed NZIA would set up specialized European skills Academies, among other partnerships to assist the availability and deployment of people with skills needed in net-zero technologies.
• Innovation: The proposed NZIA foresees the possibility of establishing Net-zero regulatory sandboxes to promote innovation in the field of net zero technologies.
• Governance: The proposed NZIA proposes to set up a "Net-Zero Europe Platform", which would allow the Commission to coordinate the above actions jointly with Member States.
• Monitoring: Finally, the proposed NZIA also contains provisions on monitoring supply chains to track the progress with respect to the objectives of the NZIA, as well as progress towards reaching the CO₂storage target.

Looking ahead

Following the publication of the two proposals, these will now be assessed by the EU Parliament and the Council under the ordinary legislative procedure, and each will have to adopt their position on the text. Subsequently, the co-legislators enter into trilogue negotiations with the Commission to reach a common compromise on the proposals and adopt provisional agreements subject to formal adoption by the Parliament and the Council before they can pass into law. Both legislative initiatives are proposals for regulations that would be directly applicable in the EU, if adopted.

It remains to be seen how the CRMA obligations would interact with other EU legislative frameworks that also cover sustainability and reporting/tracking obligations, for example, the Corporate Sustainability Reporting Directive (CSRD), the proposal on a framework for setting ecodesign requirements for sustainable products, and the proposed CSDDD.

For instance, the Commission mentions in its proposal for the CRMA that it would complement the proposed CSDDD, by adding the requirement for companies covered under the CSDDD to produce information on the environmental footprint of CRMs. In addition, according to the Commission, the calculation of the environmental footprint of each material under the proposed CRMA could contribute to the effective implementation of a due diligence policy under the proposed CSDDD.

Another element of potential overlap is the requirement under the proposed CRMA for certain companies to map where the strategic raw materials they use are extracted, processed or recycled, in essence imposing a requirement on such companies to map their supply chains. Indeed, it is likely that companies having to comply with the proposed CSDDD, or even the proposed FLR, will, at least in certain cases, have to start mapping their supply chains and ensure traceability of their products. Such mapping and traceability requirements and their enforcement will have to respect antitrust rules, as well as commercial interests and sensitivities of different market players at different supply levels. Some guidance to address these issues could possibly be drawn from the existing Conflict Minerals Regulation.

What is certain is that the CRMA and the NZIA are likely to have a significant impact on EU and global supply chains, especially when taken together with measures such as the proposed CSDDD and the proposed FLR. This could have a significant impact on EU and third country businesses, through compliance costs and enforcement risks.

Steptoe & Johnson’s teams in Brussels are closely following these developments and are able to assist with a range of questions and issues. Contact us for legal advice and advocacy support during the adoption process on assessing the implications of new obligations, assessing adequate legal remedies, as well as on matters of overlapping legal provisions, legal interpretation, and respect of general principles of EU law.

Endnotes

¹See here: https://commission.europa.eu/document/41514677-9598-4d89-a572-abe21cb037f4_en