Assessing the fiscal implications of changes in critical minerals’ demand in the low-carbon energy transition
Paola D’Orazio
Abstract
This study introduces the Fiscal Revenue Risk Index (FRRI), a novel metric designed to assess the impact of market fluctuations in critical minerals due to the materialization of climate-related transition risks on countries highly dependent on these resources. Focusing on minerals essential for renewable energy technologies, such as lithium, cobalt, nickel, and rare earth elements, our analysis evaluates how shifts in global demand might influence government revenues, providing crucial insights for policymakers. The FRRI methodology involves several key steps, including assessing fiscal revenue dependency, estimating price volatility, computing minerals’ production changes for future transition scenarios, and integrating these factors into a weighted risk model. This approach allows the computation of aggregate risk scores across various minerals and scenarios, reflecting a country’s exposure to fiscal risks. The study findings indicate that the demand for critical minerals could grow up to sevenfold over the coming decades, significantly impacting fiscal revenues in emerging markets and developing economies (EMDEs). While these countries stand to benefit from increased exports, they also face challenges related to supply reliability and price volatility. Overall, the FRRI is essential for identifying economic risks and opportunities related to the low-carbon transition in EMDEs. • The study introduces a novel Fiscal Revenue Risk Index (FRRI). • FRRI assesses fiscal impacts of market fluctuations in critical minerals. • Key minerals analyzed include lithium, cobalt, nickel, and rare earth elements. • The index offers insights for policy strategies in EMDEs. • FRRI reveals significant regional variations in fiscal risk exposure.