EU draft on battery rules a shock for Asia

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Battery manufacturers and businesses operating in Asia supply chains face stricter rules under proposed EU sustainability regulations as part of the European Green Deal objectives to be net zero by 2050.

The proposals are aimed at restricting access to the European market by imposing a set of three obligations for battery manufacturers to:

  • Measure and declare the carbon footprint of their production processes;
  • Declare the amount of recycled minerals used and ultimately comply with minimum requirements, and…
  • Establish supply chain due-diligence policies.
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Nick Merritt

Nick Merritt, a project finance partner at Norton Rose Fulbright in Singapore, said although the proposed regulation has not yet been made law, the preamble states: “efforts to decrease the carbon footprint in the manufacturing process will indirectly lead to the promotion of renewable energy generation”.

“I think what they mean by that is indirectly outside the EU,” said Merritt. “So, the EU is passing laws relating to decarbonisation that it knows will impact other countries.”

Merritt explained that thousands of amendments had been tabled in the European Parliament’s Environment Committee as the draft made its way, but a few broad areas remain. For example, car batteries and possibly almost every battery to enter the EU will need to have a “battery passport” – an online registry where the battery producer inputs product information.

“The battery itself will then have a QR code on it, which will detail a number of metrics relating to the battery,” said Merritt.

The EU would also require the manufacturer to disclose the battery’s carbon footprint verified by third parties. This carbon footprint will include carbon created or emitted across the entire value chain from extracting the raw materials, transporting or shipping, to manufacturing. This could be a big concern for Indonesia, the world’s largest producer of nickel, a core raw material for EV batteries.

“If the manufacturers use coal-fired power to generate electricity to process nickel, that will put them outside the EU threshold or cap on the carbon footprint at some point in the future,” said Merritt. “The EU has the data, and if there is a risk that the battery is on the wrong side of the carbon cap, the battery will not get a passport and will not be allowed into Europe.”

Merritt said the EU has adopted long timeframes as a signal that battery manufacturers should conduct research and development on achieving future targets.

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Timothy Goh

Timothy Goh, Singapore-based partner at Dechert, said while many countries would move towards similar legislation from an environmental perspective, the speed at which this happened could vary between each jurisdiction.

“Countries like Japan and Korea, which rely heavily on global export markets, will likely see a quicker shift toward increased regulation of the battery lifecycle,” said Goh. “Countries which are more coal and fossil fuel dependent will take a longer time to make this transition and ‘green’ the battery supply chain.”

Looking at Indonesia as one of the key players in the global battery market, Goh said the government would likely consolidate its position in the next few years, partly due to increased global demand and geopolitical pressures on other large nickel markets.

“In anticipation of the enhanced reporting and supply chain diligence requirements for EU-based EV manufacturers, Indonesian nickel miners and EV battery factories will need to urgently review and address the relevant aspects of their operations to be able to adapt to the [trend] towards greater sustainability – and maintain competitiveness, particularly in the EU markets,” said Goh.

Governments of economies with stakeholders in the global battery markets will need to keep their eyes on EU developments, and Merritt is beginning to see the consequences of the proposed regulations in Asia markets.

“We have heard anecdotally that some of the major future expansion plans in China are being moved within China to places where there is hydropower, instead of somewhere that relies on coal or gas-fired power for electricity,” said Merritt. “In Indonesia, both the private and public sectors are trying to find alternatives to coal for processing nickel.”

With more initiatives emerging to promote sustainable development, the EU’s plan to make it mandatory to recycle batteries, and require that new batteries include metals recycled from other batteries, would open new opportunities for a secondhand battery market.

“The batteries in today’s electric vehicles will degrade in approximately eight to 10 years and the old battery can be reconditioned and used for electricity storage solutions,” Merritt said. “There would be an entirely new industry built up around taking secondhand car batteries and using them as distributed storage.”