16 October 2023

Joëlle Noailly presents “Critical Minerals for the Clean Energy Transition”

Future clean energy systems will rely on a few essential minerals, vital to the production of batteries, wind turbines, solar cells and electric motors. Today, the production, reserves and processing of these minerals are concentrated in a small number of countries. In their new research project funded by the Swiss National Science Foundation (SNSF), Joëlle Noailly, Steven Poelhekke and Gerard van der Meijden will examine policy solutions to mitigate supply disruptions of these essential components.

Your new SNSF research project, “Critical Minerals for the Clean Energy Transition”, has just started. Can you briefly present its institutional context and objectives?

There are increasing concerns about the future availability of specific critical materials – i.e., raw minerals such as lithium, cobalt, nickel, rare earths but also processed materials and components – to produce electric vehicles and solar and wind technologies. The bottleneck is not caused by physical scarcity but rather by geopolitical aspects as the extraction and processing of these minerals tend to be concentrated in a small number of countries, with a particular dominance of China and Russia in many markets. Countries with a large demand for critical minerals to feed their clean energy industry, such as the US, the EU and Japan, are thus largely dependent from a small group of suppliers and this dependency led to several trade disputes over the last decade.

Our new SNSF research project aims to explore solutions to mitigate critical minerals supply risks, which can threaten the feasibility and affordability of the clean energy transition. Our first objective is to investigate the consequences of market power in mineral markets on climate policy as well as the role of technological innovation in finding substitutes or fostering recycling of minerals. Our second objective is to explore how technological innovation and foreign direct investment in mineral-rich countries can help aligning the extraction of minerals with climate goals, for instance by reducing the adverse impacts of mining on the local environment.

Regarding the amazing tension that now exists around a certain number of natural resources while the energy transition is just beginning, can you present the major issues the world is facing?

In a global scenario that meets the Paris Agreement goals, the deployment of renewable energy and sales of electric cars are expected to raise respectively 3-fold and 25-fold by 2040. This comes along with a surge in demand for transmission lines in electricity networks and for batteries to store energy. Just last year, the demand for lithium-ion batteries already increased by 65% compared to 2021. This creates some tension about the supply of minerals, such as lithium, cobalt or rare earths, as clean technologies are much more mineral-intensive than fossil- based technologies. The production of an electric car requires for instance more than 200 kg of minerals per vehicle compared to 35 kg for a conventional car. Yet, the EU produces only 2% of raw minerals and 4% of processed materials for lithium-ion batteries and is 100% reliant on imports for rare earths, in particular from China.

China’s key market power in critical materials is the result of strategic efforts over the last decades to capture the entire supply chain, using industrial policies and investments in mining projects abroad. Today, China controls a third of the total market of lithium via its state-owned
companies and dominates most of the supply chain of rare earths. Hence, achieving the energy transition in Europe will require diversifying the sources of supply of minerals, either by opening new mines or by making trade agreements with new partners. In any case, this will have
implications for the costs of achieving climate goals.

What are your first hypotheses (if you already have any) for policy solutions to mitigate disruptions in the supply of critical minerals for the clean energy transition?

There is a vast literature in environmental economics studying markets for non-renewable resources. Recent models link resource extraction to global carbon emissions externalities and examine the role of climate policy. Market power in resource markets is not new – think of OPEC – but the case of critical minerals is more complex with potential monopolistic strategic behaviour at multiple stages of production, namely upstream, downstream and in recycling markets. China for instance will need to feed massive amounts of minerals into its own downstream clean energy industries. This will have important implications for addressing climate change at the global level, which we will investigate in our theoretical work.

Regarding implications for resource-rich countries, our major hypothesis is that there is currently a lack of incentives to develop “sustainable mining” in resource-rich countries. First, because extraction often takes place in developing countries where institutions and environmental
regulations are typically weaker than in other economies. Second, the mining industry has been traditionally pictured as conservative and not particularly innovative in developing clean mining technologies, although this might change with the advent of automation and increasing demand for disclosure and transparency. We will also test whether the adoption of cleaner practices and technologies could also occur via foreign direct investments.

How does this new project relate to the NRP 73 project funded by the SNSF “Financing Investments in Clean Technologies”?

The NRP 73 project, which ended last year, looked at the challenges to raise capital and finance for cleantech start-ups. Compared to other sectors, such as IT, biotech or fossil fuels, clean technologies cumulate many difficulties to attract investors, namely they tend to be more capital-intensive and rely extensively on stable government support over long horizons to reach maturity. Our research confirmed that environmental and climate policy uncertainty has adverse effects on investments for the low-carbon economy. A strong commitment on future climate policy is thus essential.

The EU is today clearly engaged into the energy transition but our new research project focuses on an additional bottleneck, namely the supply of a key input – critical minerals – for the production of clean technologies. In addition, we now also add the perspective of emerging and developing countries, which we did not consider in the previous project.

In terms of methodology, do you have any particular tools?

We will develop theoretical models linking resource extraction to global carbon emissions, using tools from international trade theory and differential game theory to model strategic behaviour. Solving these complex models requires advanced numerical methods.

In addition, a large part of the research will also be empirical and we will use large datasets on trade flows, supply chain linkages, foreign direct investment, as well as patents to measure technological change. We also aim to develop an extensive dataset on the location, extraction
and ownership of mines. Our empirical methods will be based on econometric techniques, as well as more advanced techniques such as machine learning for data and text analysis.

A word about the work plan and the team…

This project is part of a Co-Investigator Scheme between Switzerland and the Netherlands, and the research team will be based across the Geneva Graduate Institute and the Vrije Universiteit Amsterdam. The team is composed of Gerard van der Meijden, Steven Poelhekke and myself
and comprises two postdoctoral researchers and two PhD students.

Our research expertise is very complementary. Gerard van der Meijden is an expert in theoretical models on the intersection of non-renewable resources, climate change and technological change. Steven Poelhekke has worked a lot on international trade and investment, in particular on the impact of mining on local, national and international economies. And for me, I have extensive experience in empirical work related to
technological change for the energy transition.

Additional partners include Carolyn Fischer (World Bank, Vrije Universiteit Amsterdam and Resources for the Future), Julien Daubanes (DTU) and Masako Ikefuji (Osaka University) among others. The team will also collaborate with policymakers at the World Bank, the World Intellectual Property Organization and the Green Growth Knowledge Platform.

We have now hired our first PhD students on the project, and we’re very happy to welcome Ayse Nihal Yilmiz, PhD student in the International Economics Department and CIES Research Assistant here at the Institute, and Antonia Kurz, PhD student in the Department of Spatial
Economics at Vrije Universiteit Amsterdam.

We very much look forward to exciting work for the years to come!

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Visit the project’s page