Safeguarding Critical Minerals for the Energy Transition
January 13, 2022
The transition from fossil fuels to low-carbon energy sources will depend on critical minerals. The consumption of these minerals could increase sixfold by 2050, according to one scenario by the International Energy Agency. In that world, the trade in energy-related resources will consist largely of critical minerals rather than oil and natural gas. By value, this market could top $400 billion, exceeding the value of all the coal extracted in 2020. Helping this system emerge, and safeguarding it, is a major objective for the United States, both to ensure an orderly energy transition and to limit the externalities that often come with extractive industries.
Yet the term “critical minerals” lumps together markets with disparate characteristics, which makes it harder to craft a strategy toward each commodity. The geography of critical minerals is also poorly understood: too often critical minerals is a code word for cobalt in the Democratic Republic of the Congo (DRC) or rare earths in China. The tendency to see critical minerals through the prism of U.S.-China competition is another problem, overlooking the fault lines that will define these minerals, especially the likely tensions between mining companies and the populations and sovereigns to which these resources ultimately belong. The United States needs a broader view of the challenges and opportunities involved with critical minerals—and a comprehensive strategy to deal with both.
Getting Minerals Right
A strategy to safeguard critical minerals should begin with a basic understanding of which minerals really matter and why, where they are mined today and where they could be mined in the future, what applications they might be used for, and whether they can be substituted by other minerals in specific applications.
To begin with, it is important to understand that two applications could drive three-fourths of the demand for critical minerals in 2050: electricity networks and batteries, chiefly for electric vehicles. Half of the total projected demand in 2050 is for copper and a quarter is split between nickel and graphite. Then come lithium, manganese, and cobalt. In terms of value, copper accounts for a third of the total in 2050, lithium and nickel each account for almost a quarter each, graphite 10 percent, and cobalt 7 percent.
Of course, these are just forecasts. But they reveal important trends and realities. Copper is by far the most valuable mineral. Copper, lithium, and nickel will account for over 80 percent of the market value in 2050. The production of each mineral is concentrated, but the major producers differ by commodity. The largest copper producer is Chile (40 percent of the total), Peru is second (11 percent), and China is third (9 percent). Australia produced half of the world’s lithium in 2020, Chile 22 percent, and China 17 percent. The top nickel producer is Indonesia (30 percent), followed by the Philippines (13 percent) and Russia (11 percent). Also on the list are countries such as Cuba (cobalt), Argentina and Brazil (lithium), and New Caledonia (nickel). This map is different than the impression one gets from headlines that overfocus on one or two countries and commodities.
This does not mean that other critical minerals—cobalt, manganese, graphite, or rare earths—are not important, only that context matters. Cobalt often dominates discussions about critical minerals, but in 2050, the value of cobalt could be lower than copper today and trivial relative to commodities like oil and gas today. Even the DRC earns more from copper exports today than from cobalt, despite being the world’s bigger cobalt producer. This is not a reason to ignore cobalt, but to ensure that conversations do not always devolve to cobalt and the DRC.
Even China’s role should be put in perspective. China is a major producer of rare earths and a few other minerals, but its key role comes from the processing part of the value chain. China’s advantage is not geology but industrial strategy—it has developed supply chains to extract the value of these minerals, in part by becoming a market for these products. This is something that the United States and its allies can replicate over time.
Finally, no discussion about critical minerals should be static. Technologies have different mineral requirements, and there are active innovation efforts to reduce the reliance on one mineral or another. And as markets grow, they will become more diversified, stable, and transparent, alleviating some of the concentration challenges the world faces today. This is especially so if there is a policy push to encourage diversification—which the United States can support.
What the United States Should Do
There is a gap between projected supply and projected demand for most critical minerals by the end of this decade (especially in cobalt and lithium). At home, the United States can produce more. A long overdue mapping exercise has received a boost by the Infrastructure Investment and Jobs Act, giving a clearer image of what exists and where. But extraction is still contentious given the lack of trust between mining companies and local communities, especially tribes. The federal government should create space for interlocutors to find common ground. It is hard to believe that the world’s largest oil and gas producer cannot also extract minerals safely and economically. Some balance among viewpoints is essential.
The effort to expand supply does not end at the border. The International Development Finance Corporation in 2020 supported a company that wanted to expand nickel and cobalt production in Brazil. The United States should make more such transactions, leveraging U.S. finance to expand and diversify supplies, all the while adhering to the highest environmental, social, and governance standards.
The quest for higher standards should not end with U.S.-financed projects. A major fault line in the energy transition will be the tension between sovereigns and mining companies. Resource-rich countries naturally want to capture the benefits of the resources they hold. This will lead to conflict, already visible in places like Serbia, Chile, Peru, and Indonesia. If hydrocarbons are any guide, these conflicts will be intense and transcend the narrow issues of how to divvy up the rents. They go to the core of a country’s identity and politics.
The United States can help lessen such conflicts by pushing for clear and high standards for extraction. It can help countries negotiate with foreign companies through capacity building, offsetting some of the information and expertise asymmetry that often characterizes mining transactions. And it can support transparency to reduce corruption and build confidence in markets. This work has been ongoing at the State Department for years, but it can grow and reach more countries and minerals.
Strengthening supply is one side of the equation; demand is another. Innovation can help find alternatives to some critical minerals. The Department of Energy (DOE), for example, has set a 2030 goal to “eliminate cobalt and nickel in lithium-ion batteries.” The timeframe is bold, and possibly unrealistic, but the ambition is right. In wind turbines, DOE has supported research and development efforts to reduce the consumption of critical minerals, including rare earths. More such efforts can produce cumulative results over time.
The United States should also use product specifications to nurture new technologies and nudge sectors to adopt different minerals. China has relied on such measures before, favoring local manufacturers over foreign firms. So far, Congress has looked at using tax credits that favor domestic manufacturers, especially those using union labor, a policy that likely violates trade rules. Connecting credits to specific technologies where the United States has an edge is more a reasonable approach and could apply to multiple end uses as well as recycling.
The United States has lost ground in critical minerals. China has built a commanding position, largely in cobalt and lithium, centered on its processing capabilities and its ability to nurture these industries for local use and exports. But the energy transition is just getting started. There is time for the United States to catch up and lead.
A U.S. strategy on critical minerals should craft approaches depending on each mineral and end use. It should focus on growing production to meet demand, relying on domestic resources and mining overseas backed by U.S. finance. It should be uncompromising on environmental, social and governance standards, encouraging transparency and fighting corruption. On the demand side, it should encourage technologies and processes that lessen reliance on the most problematic minerals, helping to grow out of some of the predicaments faced today.
Only with that holistic approach can the United States safeguard the critical minerals needed for the energy transition. Bold climate action without a sensible critical mineral strategy is bound to produce trouble. But the complexities presented by critical minerals cannot be an excuse to delay or shy away from the energy transition that the climate requires. Instead, the United States needs to step up and help shape this market—one of the most consequential over the next three decades.
Nikos Tsafos is the James R. Schlesinger Chair for Energy and Geopolitics with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
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