Pending its ratification and implementation, the closing of the Mercosur-EU trade agreement offers great economic opportunities. Its potential extends to the energy sphere, including the opening up of the raw materials’ markets, necessary for energy transition, and biofuels. The EU-Mercosur agreement can also yield greater bi-regional integration of renewable energies and decarbonised industrial value chains. The agreement incorporates strict socio-environmental sustainability criteria and considers the Paris Agreement an essential element. At the same time, the Mercosur countries obtain a rebalancing mechanism that protects them from measures such as the EU’s Carbon Border Adjustment Mechanism (CBAM). In addition, the EU will support Argentina, Brazil, Uruguay and Paraguay’s green and digital transitions with €1.8 billion via the Global Gateway. Overall, the agreement provides an open competitive decarbonisation model that tends to balance the climate, energy and industrial values and interests of the parties.
‘’The agreement incorporates strict socio-environmental sustainability criteria and considers the Paris Agreement an essential element’’.
Starting with raw materials, the Mercosur countries have significant transition-mineral resources. Brazil and Argentina are already key EU suppliers of lithium, copper, platinum, nickel, manganese and other materials, and can help the EU diversify away from the Chinese and Russian critical mineral imports. According to the European Commission, the agreement with Mercosur will help ensure an ‘efficient, safe and sustainable’ flow of transition minerals by reducing or eliminating export taxes, restrictions and monopolies. Specifically, there will be no taxes on Brazilian exports to the EU of nickel, copper, aluminium, steel, germanium and gallium. Were Brazil to decide to impose them, exports to the EU should benefit from a minimum 50% tariff preference. Argentina will not apply taxes to its raw materials’ exports in exchange for additional export allowances for certain agricultural products.
Regarding the access of Mercosur biofuels to the European market, previous negotiations contemplated a total ethanol import quota of 650,000 tonnes: 450,000 tonnes tariff-free for use in the chemical industry; and a tariff quota of 200,000 tonnes for other uses, basically fuels, subject to a reduced tariff (one third of that of the most favoured nation-MFN). It is not clear whether these quotas and tariffs will change in the new agreement but, if they remain in place, their impacts would be limited and gradual. Key products are expected to remain subject to tariff quotas with elimination periods of up to 15 years. Brazil would have the largest participation in the assigned quotas, and Argentina and Paraguay would have smaller quotas. Overall, the degree of liberalisation is relatively modest and slow, which has not prevented opposition from the European sector and environmental groups.
From an energy perspective, perhaps the greatest strategic opportunity of the agreement lies in facilitating the bi-regional integration of the industrial sectors involved in the energy transition. This element is important because the resistance of Member States such as France not only refers to the agricultural sector, but also to the competitiveness of the industrial sector given Mercosur’s comparative advantages in the decarbonisation process. Uruguay and Paraguay both have an almost fully renewable electricity mix, while more than 80% of the Brazilian electricity mix is decarbonised; Argentina is further behind, with a third of its electricity generation decarbonised, but it has great wind and solar potential. The greatest bi-regional strategic energy opportunities lie in taking advantage of these comparative advantages to improve the sustainable competitiveness of decarbonised industries across the Mercosur and the EU.
Along with nearshoring and friendshoring, powershoring has been advocated for Latin America: an industrial relocation process towards countries in the region endowed with abundant and cheap renewable energy. Greenshoring goes a step further to an open competitive decarbonisation pathway adding other key elements for socio-environmental sustainability and the fight against climate change to the cost and decarbonisation criteria: advanced policies, dedicated institutions and high standards. The CBAM would be its practical embodiment by the EU, since it penalises the carbon footprint of imports. Greenshoring has been proposed as a script for Spanish and EU foreign action, especially applicable to Mercosur since its members are present in many decarbonised industrial chains, have a diversified portfolio of all renewable energies, and some of them tend to converge with the EU’s climate and sustainability preferences. The combination of mineral and renewable resources offers the Mercosur countries opportunities for socially and environmentally sustainable decarbonisation in green mining and refining, green fertilisers and green steel, among other energy-intensive sectors that can replace fossil sources with renewables.
Much of the renewable deployment in Mercosur has been carried out by European companies, which have contributed to developing local renewable industries to a greater extent than their Chinese or US competitors. The agreement guarantees tariff preferences for renewable technologies that will help developers boost their penetration, especially considering the currently high level of Mercosur tariffs on equipment (20%) and intermediate goods (18%), and the modest pace of tariff reductions achieved. For instance, the agreement includes faster reductions in Mercosur high tariffs on automobiles (35%) for electric and hybrid vehicles, with an immediate reduction of the tariff to 25% upon its entry into force. It will also simplify import and export processes and is expected to attract new European investments into its energy sector and the modernisation of the industrial sector. All these liberalising measures will favour renewable deployment and climate change mitigation, but also building safer, more resilient, competitive and sustainable value chains.
These integration patterns are more promising than the mere export of critical raw materials or uncertain exports of green hydrogen to the EU. For the latter, even if exports of green ammonia (produced from renewable hydrogen) are more realistic, it seems preferable to use these local renewable resources in the decarbonisation of Mercosur’s own fertiliser industry. Its members are agricultural powers greatly affected by the crisis of fertilisers caused by the war in Ukraine. These powers want to develop their own industry to gain strategic autonomy and food security and this should promote a more symmetrical economic and industrial integration pattern regarding value added, and thus better connected with the economic, social and human development needs of the Mercosur countries. The same argument can be applied to the decarbonisation of mining and processing, to transport (including maritime and aviation), to the replacement of hydrogen with CO2 emissions by green hydrogen in the refining and steel sectors, and to the electric vehicle value chain.
The agreement incorporates robust sustainability criteria, with chapters and annexes devoted to Trade and Sustainable Development and respect for the Paris Agreement. One of the new texts is titled ‘the Paris Agreement as an essential element’, and not by chance. The new climate text states that parties to the EU-Mercosur Agreement shall remain a Party to the Paris Agreement ‘in good faith’ and fulfil their obligations under the climate accord. Another novelty allows the trade agreement to be suspended, partially or totally, if one of the parties determines that another party has violated essential obligations for the Paris Agreement. This could limit Argentina’s appetite for withdrawing from the climate accord, even after pulling its negotiating team from COP29 and ahead of COP30 in Brazil.
On the part of Mercosur there were two previous concerns: the application of the CBAM; and the European regulations against imported deforestation (EUDR), which allow the restriction of imports of products grown on deforested lands. Both are part of what critics of these measures describe as new green protectionism. Precisely another of the biggest novelties of the agreement is a ‘rebalancing mechanism’ that allows compensation if one of the parties determines that new measures nullify or harm the benefits of the agreement itself. Although it is not clear how this mechanism could be used against the CBAM or the EUDR, its inclusion has been considered a victory for Mercosur.
From an energy and climate perspective, the new agreement is quite balanced and comprehensive, satisfying the minimum strategic needs of the parties on almost all key issues. The EU improves its access to transition minerals and Mercosur to the European biofuel market. Mercosur achieves a rebalancing mechanism to prevent or alleviate the potential negative impacts of CBAM and EUDR, and the EU introduces the Paris Agreement as an essential element of the agreement. Perhaps more importantly, it favours a new pattern of bi-regional commercial and energy interdependence that incorporates socio-environmental sustainability criteria and fighting climate change. Based on these values, Mercosur and the EU enjoy clear complementarities to gain shared competitiveness through the integration of their decarbonised and renewable energies’ industrial chains. Were the agreement to be ratified it could provide an open and sustainable competitiveness model for future negotiations with other trading partners.
