Critical mineral shortages impact euro area green transition
A Banca d'Italia working paper analyzes the macroeconomic impact of critical mineral shortages on the euro area. It finds that supply disruptions can offset green energy benefits, with mitigation possible through supply diversification.
Mineral bottlenecks hinder green progress
The Banca d'Italia working paper reveals that a surge in international critical mineral prices, particularly stemming from supply reductions by China, can significantly counteract the positive economic effects of EU subsidies designed to boost domestic green energy production.
This adverse impact occurs as elevated mineral prices offset the activity boost and the decline in energy inflation that green energy initiatives typically provide.
Crucially, these negative macroeconomic effects are mitigated if other countries expand their supply of critical minerals, allowing the euro area to diversify its imports away from concentrated sources like China.
Additionally, in the short run, the impact is lessened if the installed capacity of green energy, such as solar panels and wind turbines, is already sufficiently large.
While the current macroeconomic impact of critical mineral price shocks is deemed smaller than that of fossil fuel price shocks, this assessment is expected to evolve.
As the green transition accelerates and the demand for these essential minerals for energy and manufactured goods rises, their macroeconomic significance could eventually exceed that of fossil fuels, presenting a growing strategic vulnerability for advanced economies.
Modeling global mineral dependencies
The study utilizes a New Keynesian model calibrated for the euro area, China, and the rest of the world to examine the macroeconomic impact of critical mineral supply disruptions.
Critical minerals are modeled with a dual economic role, serving as essential inputs for both green energy production and manufacturing goods like electric vehicle batteries.
The model also includes a brown energy sector reliant on fossil fuels.
The euro area is depicted as a net importer of these minerals, with China being the dominant global supplier, creating a dependency akin to that on fossil fuels.
These minerals are internationally traded, priced in the Rest of the World's currency, and treated as imperfect substitutes.
This framework enables the assessment of various counterfactual scenarios, including the effects of green subsidies and the potential benefits of supply diversification.