Integrating metals and minerals into climate-economic models: a review

Most climate-economy models ignore the role of scarce metals and minerals in the low-carbon transition. Moreover, even if they do not, existing models fail to acknowledge the dual role of metals as production inputs and financial assets. However, the recent financialization of the commodity markets has made metal assets vulnerable to bubbles and high price volatility, which can contribute to the transition risk. Against this background, we review three different strands of literature on modeling: energy, commodity, and financial markets. We systematically assess the mechanisms that may amplify the coupling between them. Based on our review, we conclude that three issues need urgent consideration in future climate-economy modeling: (1) the impact of metal prices on the costs of investment in renewable energy; (2) the impact of metal scarcity on supply chain risks and the feasibility of the low-carbon transition; and (3) the dual role of metals as production inputs and financial assets, which increases the risk of transmission of price shocks from financial markets to the real economy. We formulate suggestions on how to incorporate these mechanisms into climate policy assessment to quantify commodity-related transition risks.