Trade restrictions on rare earths pose threat to green energy transition

Trade disruptions in rare earth minerals could impede the global transition to green energy sources, according to an International Monetary Fund (IMF) report.

Rare earth minerals are in high demand as they are vital components for clean energy technologies for the production of solar panels, wind turbines and electric vehicles (EVs).

However, as the global production of these rare earths is highly concentrated and cannot be easily substituted, they are extremely susceptible to trade disputes, as the IMF’s latest report, A Critical Matter, revealed.

The report finds that a race between competing powers to obtain these strategic minerals could worsen the world’s path to net zero by raising their costs, with the knock-on effect of making the energy transition more expensive.

Nonetheless, the cost of clean energy systems is expected to increase without any trade disruptions coming into play. The International Energy Agency forecasts a 1.5-fold increase in demand for copper, a doubling in demand for nickel and cobalt, and a six-fold rise in demand for lithium by 2030.

In the report’s scenario, in which rare earths are used, these elements are expected to become as vital as crude oil for the global economy over the next two decades.

– Multilateral efforts should prioritize ‘green corridor’

To prevent countries from using trade restrictions as a risk management tool, the report advocated for multilateral cooperation in the form of an agreement to enhance World Trade Organization rules for export restrictions and tariffs, as well as discriminatory subsidies.

If full cooperation is impossible, the report suggests prioritizing the establishment of a ‘green corridor,’ consisting of a minimum agreement to maintain the free flow of critical minerals and not to discriminate between firms from different countries.

An institution or platform, similar to the International Energy Agency or the Food and Agriculture Organization, focused solely on critical minerals could also reduce market uncertainty, according to the report.

Individual countries can take proactive steps as well. Strategies could include diversifying sources of commodity supplies, greater investment in mining, exploration, storage and critical mineral recycling.

According to the research, industrial policies should be carefully crafted to ensure equal treatment of firms across competitive markets to prevent adverse cross-country spillovers, minimize distortions and inefficiencies, and mitigate fiscal risks and harmful political economy outcomes.

– Rare earth conflicts inevitable

China, the world’s top processor of rare earths, banned the export of technology used to extract and separate critical minerals, according to reports by international media outlets last week.

The ban comes after the country’s restriction on exports of ‘highly sensitive’ graphite products, which are key elements for manufacturing batteries for EVs. It also follows the US decision to impose restrictions on exports of high-tech microchips in October.

China supplies over 61% of the world’s rare earth elements that are used in green energy conversion in high-tech products, the defense industry, laser guidance systems and electronic equipment, according to Statista, a German online data gathering and visualization platform.

The country also holds roughly two-thirds of global scarce metals and minerals and supplies 98% of the EU’s demand for rare earth minerals.

• Electric vehicles (EVs)
• International Monetary Fund (IMF)