Clean Energy Transition, Scarcity and Urban Mining (Revision 3 )

Problem definition: The low-carbon economy relies on critical raw materials for the production of clean energy technologies.The finite and geographically concentrated supply of these critical raw materials may struggle to meet the surging demand, potentially slowing or derailing ambitious clean energy targets. The authors study two practical strategies that clean energy technology producers can implement to mitigate the impact of material scarcity on their production: (i) Material Reduction, i.e., redesigning products to use less critical material; (ii) Urban Mining, i.e., recovering critical materials from end-of-life products. Methodology/results:The authors build an analytical model to study the strategic investment and production decisions of clean energy producers depending on a scarce raw material, and evaluate them from the perspective of a regulator with clean energy transition goals.They endogenize material scarcity through a capacity constraint on virgin supply for which clean energy producers compete with other industries, and show that a long-term focus on clean energy production favors Urban Mining (Material Reduction) when material scarcity is high (low). Using a social welfare framework that balances clean energy generation, virgin material conservation, and firm profitability, we show that producer incentives to implement material scarcity mitigation strategies need not align with broader clean energy transition policy objectives. Managerial/Policy implications: An urban mining strategy typically maintains the profitability of the industry with a higher probability. Efficiency improvements in material reduction can lead to a scarcity rebound effect that increase total resource consumption. To align industry incentives with sustainability goals, policymakers should prioritize reducing systemic leakage in circular systems, using investment subsidies as a complementary lever, while exercising caution with material reduction strategies to avoid accelerating virgin material depletion through the scarcity rebound effect.