An introduction to the economics of rare earths

Eva Bartekova

#2014-043

The aim of this paper is to examine the supply risk of rare earths and its impact on low carbon technologies deployment. Bringing together seemingly disconnected strands of scientific literature, this multidisciplinary approach allows to provide an overarching overview of the economics of rare earths. In terms of supply risk, as opposed to the common belief, it is not China’s dominant position per se, but its industrial policies which distort the rare earths market. On the demand side, the results of this paper disprove the widespread allegation that availability risk impedes deployment of offshore wind. Contrary to this, a potential supply shortage of rare earths would disrupt the further development of the automotive industry and its electrification. Ultimately, uncertainty about volatile prices and threat of supply shortages induce manufacturers to shift away from technologies containing rare earths, and thus render innovation in these economically nonviable.

JEL Classification: L11, L72, O31, Q31, Q34, Q37, Q42, Q53

Keywords: rare earths, supply risk, wind turbines, advanced technology vehicles, innovation, social costs

  


UNU-MERIT