Toyota breakthrough on magnets illustrates need for EU state aid reform

A breakthrough for next generation motors, with far-reaching implications for sustainability. Toyota´s press release this week regarding “the world’s first neodymium-reduced, heat-resistant magnet” will facilitate the mass introduction of electric vehicles and new applications in for example robotics. The magnet does not use terbium or dysprosium, and the amount of neodymium needed has been substantially reduced. All these three rare earth elements have been designated as critical materials with only a few suppliers world-wide.

Japan is a world leader in material science. The government has since many years funded research into new types of magnets. When China restricted the export of heavy rare-earths in 2010, decision-makers in Tokyo increased funding for research and innovation aiming at reduced dependency of substances such as neodymium, dysprosium and terbium. This included both basic science at universities and applied research in institutes and companies.

Toyota is an impressive company with massive R&D investments. The governmental agency NEDO has also played an important role for the present breakthrough. As in other fields, NEDO has promoted new types of magnets by coordinating and partly financing efforts by the private sector. In this case, the program “Development of Magnetic Material Technology for High-efficiency Motors for Next-Generation Automobiles” has had a significant effect. The foundation in 2012 of the Motor and Magnetic Materials R&D Center (MagHEM), with the participation of government funded research institute AIST, has also been important.

The breakthrough illustrates a wider point. Japan allows for a greater amount of state aid to applied research and demonstration projects in companies than the European Union. NEDO plays an important role in this regard and has historically contributed to the commercialisation of green innovations such as the blue LED lights. The same applies to South Korea, not to mention China.

European researchers have pointed out the restrictive EU state aid rules as an obstacle to green innovations. For example, Måns Nilsson at the Stockholm Environment Institute together with co-writers makes this point in an excellent article on electric vehicles.

Reforming the EU state aid rules could be an important factor in making Europe greener and at the same time promoting competitiveness.

A carbon tax might be better for China than emission trading

“I was responsible for milk quotas in my previous Commission position. Emission trading for carbon dioxide is not something I believe in.”

The director in DG Environment was sceptical when a guest asked about emission trading as a policy option back in 1992. Later, the successful Swedish green tax reform was one of the inspiration sources behind the Commission proposal for a European energy and carbon tax. The first choice for the climate experts in Brussels was a tax, not emission trading.

However, it was not possible to achieve consensus around the European Commission proposal due to objections from in particular the United Kingdom. The European emission trading system (ETS) emerged as an alternative. Now, the ETS is well established, but still has problems after many years of low prices for the certificates.

Against this backdrop, the enthusiastic statements from Brussels policy-makers on the new Chinese emissions trading system seem oversimplified.

During recent years, there has been problems in the Chinese pilot markets with inter alia too many emission permits issued and a lack of tough sanctions towards companies not paying for emission certificates.

The national system will to start with only cover power production. Experts have questioned the lack of a ”hard cap” for total carbon dioxide emissions from the sector. Instead, emission certificates will be allocated to power plants according to their electricity production.

There are a number of other question marks. In addition to the lack of a cap for total emissions, the crucial issue of effective verification is not convincingly addressed and it is unclear how transparent the system will be to the public.

An upstream carbon tax on coal and oil has been identified by the OECD and others as easier to implement than emission trading permits. Even when China has now decided to try a national ETS, there is still the opportunity to apply a carbon tax in the non-ETS sectors. Such proposals have been developed, and even if there are recent negative statements from Chinese policy-makers regarding a carbon tax, the idea should not be abandoned.

The European Commission is investing heavily in promoting emission trading in China. A few weeks ago, ICF was awarded a ten-million-euro contract to support cooperation between the European Union and China in this area.

To help China avoid the mistakes in Europe is certainly a worthy task. However, the Commission’s approach is unbalanced, strongly promoting one of the possible economic instruments. Maybe one reason is perceived economic benefits from a future linking between the European and the Chinese ETS systems, but such a linking is unlikely to happen.

A strategy to promote effective policies against climate change in other countries should take a wider view and for example devote more resources to advise on the introduction of carbon taxes. In the case of China, such a broader approach seems well-motivated.