Market impacts of environmental regulations on the production of rare earths: A computable general equilibrium analysis for China

Abstract

Rare earths are important strategic mineral resources, but their production causes serious environmental pollution. As the largest producer of rare earths in the world, China is particularly susceptible to ecological destruction, water pollution, and soil erosion. In order to promote the green development of its rare earth industry, the Chinese government will implement more stringent environmental regulations. In this study, we construct a computable general equilibrium (CGE) model to investigate the market impacts of environmental regulation on the production of rare earths in China. Three scenarios are used to simulate the different environmental regulatory intensities that the Chinese government may adopt in the near future. The results show that an increase in the environmental regulation of the production of rare earths would have a negative impact on the macro-economy. Regarding the rare earths market, due to an increase in the environmental cost, producer prices and domestic consumer prices would increase by 1.59%–5.78% and 0.55%–1.96%, respectively. Under the stimulation of a price increase, the total demand and sectoral demand for rare earths both decrease. Specifically, the demand for rare earths in the mining and processing of rare earths sector decreases by 18.17%–43.59%. The reduction in the demand for rare earths would lead to a decrease in rare earths production of −4.79% to −13.49%. Therefore, the supply to the domestic market would decrease by 3.02%–7.72% and to the foreign market by 5.43%–15.61%. Based on the analysis, the Chinese government could adopt a relatively loose regulatory policy with the intensity of 20% or 10% currently, and then upgrade to a complete environmental compensation level for rare earths production in the next stage.