Pollution for Progress? The Dirty Trade-Off Behind the Clean Energy Boom

"The clean-energy transition relies on critical minerals whose extraction generates substantial local environmental damages, while their use enables global decarbonization. We develop a dynamic two-region model linking extraction-related pollution in exporting countries to global CO2 accumulation valued by importing countries. We analyze three regimes: the exporter’s first-best, importer leadership, and importer leadership with partial responsibility for local damages. When exporters internalize only local externalities, extraction is conservative and may leave resources in situ, with pollution following a hump-shaped path and eventually dissipating. By contrast, importer leadership without responsibility induces accelerated extraction, finite-time depletion, and sharply higher cumulative local damages, reflecting the overriding effect of demand-side commitments. Introducing partial importer responsibility moderates extraction and reduces local pollution, but delays mineral availability and increases global CO2, revealing a fundamental local–global trade-off. We derive the social planner’s solution and show that optimal extraction follows a cumulative threshold rule balancing local environmental damages against the global cost of delayed decarbonization. Relative to this benchmark, exporter-led equilibria under-extract, while importer-led regimes generate over-extraction. Bilateral Pigouvian transfers, compensating exporters for local damages and accounting for global climate benefits, decentralize the planner’s allocation. The analysis provides a tractable framework for evaluating emerging policy instruments in critical mineral supply chains, including sustainability, linked procurement, environmental provisions in trade agreements, and cross-border compensation mechanisms."