Working Paper Series no. 907: The Stumbling Block in ‘the Race of our Lives’: Transition-Critical Materials, Financial Risks and the NGFS Climate Scenarios

Several ‘critical’ raw materials, including metals, minerals and Rare Earth Elements (REEs), play a central role in the low-carbon transition and are needed to expand the deployment of low-carbon technologies. The reliable and affordable supply of these resources is subject to supply-side risks and demand-induced pressures. This paper empirically estimates the material demand requirements for ‘Transition-Critical Materials’ (TCMs) implied under two NGFS Climate Scenarios, namely the ‘Net Zero by 2050’ and ‘Delayed Transition’ scenarios. We apply material intensity estimates to the underlying assumptions (e.g. with regard to technological innovation) on the deployment of low-carbon technologies to determine the implied material demand between 2021 and 2040 for nine TCMs. We find several materials to be subject to significant demand-induced pressures under both scenarios. Subsequently, the paper examines the possible emergence of material bottlenecks for three materials, namely copper, lithium and nickel. The results indicate possible substantial mismatches between supply (accounting for variables such as existing reserves, technological deployment and recycling rates) and demand, which would be further exacerbated if the transition is delayed rather than realised immediately. We discuss these findings in the context of different possible transmission channels through which these bottlenecks could affect financial and price stability, and propose avenues for future research.

Limiting global warming to well-below 2°C requires a fast-paced, large-scale economic transition to a net-zero economy. If the climate transition is ‘the race of our lives’, then transition-critical materials (TCMs) could be the stumbling block. Indeed, the necessary scaling-up of relevant technologies, including solar panels, batteries for electric vehicles (EVs) and supportive grid infrastructure, will cause significant demand for, and dependency on, a variety of materials such as copper, lithium, nickel and cobalt. These materials are set, mutatis mutandi to rival the role formerly played by fossil fuels. Recent research identifies that material bottlenecks could stem from TCMs supply-demand imbalances, which could then have consequential impacts in delaying the transition.

Against this backdrop, this paper offers three contributions. First, building on previous studies and on several databases, we develop a methodology to identify the criticality of materials in the context of the low-carbon transition. The identification of TCMs is based on an assessment of several demand-induced pressures and supply-side risks, including reserves and extraction geographical concentration, country risk profile and water stress. Nine TCMs are then selected for further assessment to explore the demand-related pressures arising from the climate transition.

Second, based on the data collected (including technological assumptions from sources such as the International Energy Agency), the paper investigates the demand for TCMs implied by the Climate Scenarios of the Network for Greening the Financial System (NGFS). Under the ‘Net Zero by 2050’ scenario, absolute annual demand for all focus materials increases from 4.7 million tonnes (Mt) in 2021 to 32.8Mt in 2040 (see figure 1). Under the ‘Delayed Transition’ scenario, total demand increases from 1.7Mt to 42.9Mt including EVs, and from 0.94Mt to 32.1Mt excluding EVs, between 2021 and 2040. Based on the findings, three materials (lithium, copper and nickel) are further investigated in the context of supply development projections to identify potential bottlenecks.

Third, the paper suggests some avenues for future research to better understand how TCMs could have macroeconomic and financial implications. Further firm- and sector-level assessments (accounting for factors such as price volatility, geopolitical tensions and national strategies aimed at strengthening strategic autonomy) will be needed to better understand how global value chains may become reorganised because of TCMs, and how such reorganisation could impact different countries’ trade balances.

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Working Paper Series no. 907: The Stumbling Block in ‘the Race of our Lives’: Transition-Critical Materials, Financial Risks and the NGFS Climate Scenarios
  • Published on 02/10/2023
  • 64 pages
  • EN
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Updated on: 02/10/2023 15:01