Highlights

• Researchers from UMI SOURCE and Paris School of Business investigate the complex relationship between geopolitical instability, rare earth markets, and clean energy investments.
• Geopolitical events like the U.S.-China trade war and Russia-Ukraine conflict significantly increase volatility and correlation in clean energy and rare earth markets.
• The study suggests that geopolitical risks could potentially delay energy transition by discouraging investment and creating supply chain vulnerabilities.

Lisa Depraiter (opens in a new tab) and Stéphane Goutte (opens in a new tab) from UMI SOURCE, University Paris-Saclay, UVSQ, IRD (opens in a new tab), France, and the Paris School of Business (opens in a new tab) conducted a study examining the interplay between geopolitical risk, clean energy investments, and the rare earth market, particularly focusing on neodymium and praseodymium. Their hypothesis posits that geopolitical instability significantly impacts the performance of clean energy markets by influencing the availability and pricing of rare earth elements, which are critical for renewable technologies like wind turbines and electric vehicles. The study suggests that geopolitical risk could act as a deterrent to investment in clean energy due to heightened market volatility and supply chain vulnerabilities.

Employing a time-varying parameter vector autoregression (opens in a new tab) (TVP-VAR) model and a Wavelet Coherence analysis, a time-frequency domain method that measures the correlation between two signals, the study tracked interactions between four clean energy indices, the rare earth market, and the Geopolitical Risk Index (GPRD).

The findings confirmed that geopolitical risks—such as the U.S.-China trade war, the COVID-19 pandemic, and the Russia-Ukraine conflict—led to heightened volatility and increased correlation between rare earth prices and clean energy investments. The study also found that during geopolitical crises, clean energy markets became more susceptible to shocks transmitted through rare earth price fluctuations, reinforcing concerns that mineral dependencies could undermine renewable energy expansion.

One striking revelation was that geopolitical risk not only affected rare earth prices but also influenced investor sentiment, leading to declines in clean energy stock performance. Another troubling outcome was the study’s confirmation that rare earth market instability could delay the energy transition by discouraging capital inflows into renewable technologies.  Rare Earth Exchanges suggests raising a serious implication for the current, highly uneven distribution of rare earth element processing capability.

A key limitation of the research is its reliance on aggregated rare earth market data, which might obscure the distinct behaviors of individual rare earth elements. Moreover, while the study establishes a strong correlation between geopolitical risk and clean energy investment trends, it does not fully capture causality. The authors emphasize the need for diversified rare earth supply chains to mitigate geopolitical vulnerabilities and ensure a more resilient clean energy market.

The paper was published in the International Review of Financial Analysis (opens in a new tab).