Geopolitical risk and clean energy investments: Exploring the role of rare earths

Abstract

The energy transition from fossil fuel to renewable energy relies upon developing clean energy technologies that are mineral intensive. Critical minerals for the energy transition are subject to geopolitical risk due to increased competition over access to minerals supply. Thus, geopolitical risk may hinder the performance of clean energy markets. This study investigates the interplay between clean energy markets and geopolitical risk by focusing on rare earth elements that are key components of clean technologies, including wind turbines and electric vehicles. Using the TVP - VAR model, we study the connectedness between four clean energy indices, the rare earth market and the Geopolitical risk index from Caldara and Iacoviello (2022). We then conduct a Wavelet Coherence analysis for complementary results. Overall, the results show that geopolitical risk has a significant negative impact on the four clean energy markets during periods of increased geopolitical tensions. The magnitude of connectedness between clean energy markets, rare earth markets and geopolitical risk also increases during these periods. As a result, geopolitical risk impacts on the rare earths market and clean technology markets might hinder investment in clean energy.