No. 1531 - Macroeconomic effects of the green transition in the euro area and critical mineral bottlenecks
Critical minerals are one of the essential inputs for producing renewable energy and manufactured goods. This paper assesses the macroeconomic impact in the euro area of subsidies for the energy transition in the presence of global supply shocks to critical minerals, using a dynamic general equilibrium model calibrated for the euro area, China, and the rest of the world. In the model, energy production is obtained from both fossil and renewable sources.
Subsidies to the production of energy from renewable sources have expansionary effects on the euro area economy. The magnitude of these effects is smaller when the supply of critical minerals from China declines and is not offset by an increase in supply from the rest of the world. The negative macroeconomic impact of an increase in critical mineral prices stemming from lower supply is limited in the short run, especially if the installation of new renewable energy production capacity can be spread over time.
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