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China cuts real earth exports
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Neodymium is one of 17 metals crucial to green technology. There’s only one snag – China produces 97% of the world’s supply. And they’re not selling A neodymium magnet, commonly used in motors, loudspeakers and other appliances. Neodymium is a rare earth element

Britain and other Western countries risk running out of supplies of certain highly sought-after rare metals that are vital to a host of green technologies, amid growing evidence that China, which has a monopoly on global production, is set to choke off exports of valuable compounds.

Failure to secure alternative long-term sources of rare earth elements (REEs) would affect the manufacturing and development of low-carbon technology, which relies on the unique properties of the 17 metals to mass-produce eco-friendly innovations such as wind turbines and low-energy lightbulbs.

China, whose mines account for 97 per cent of global supplies, is trying to ensure that all raw REE materials are processed within its borders. During the past seven years it has reduced by 40 per cent the amount of rare earths available for export.

Industry sources have said that China could halt shipments of at least two metals as early as next year, and that by 2012 it is likely to be producing only enough REE ore to satisfy its own booming domestic demand, creating a potential crisis as

Western countries rush to find alternative supplies, and companies open new mines in locations from South Africa to Greenland to satisfy international demand.Amid claims that Beijing is using its rare earths monopoly as a tool of foreign policy, the British Department of Business, Industry and Skills said it was "monitoring" the supply of REEs to ensure

China was observing international trade rules.Jack Lifton, an independent consultant and a world expert on REEs, said: "A real crunch is coming. In America, Britain and elsewhere we have not yet woken up to the fact that there is an urgent need to secure the supply of rare earths from sources outside China.

China has gone from exporting 75 per cent of the raw ore it produces to shipping just 25 per cent, and it does not consider itself to be under any obligation to ensure supplies of rare earths to anyone but itself.

There has been an effort in the West to set up new mines but these are five to 10 years away from significant production."After decades in which they were considered little more than geological oddities, rare earths have recently become a boom industry after the invention of a succession of devices, including iPhones and X-ray machines, which rely on their specific properties.

Global demand has tripled from 40,000 tonnes to 120,000 tonnes over the past 10 years, during which time China has steadily cut annual exports from 48,500 tonnes to 31,310 tonnes.Worldwide, the industries reliant on REEs, which produce anything from fibre-optic cables to missile guidance systems, are estimated to be worth £3 trillion, or 5 per cent of global GDP.

Beijing announced last month that it was setting exports at 35,000 tonnes for each of the next six years, barely enough to satisfy demand in Japan. From this year, Toyota alone will produce annually one million of its hybrid Prius cars, each of which contains 16kg of rare earths.

By 2014, global demand for rare earths is predicted to reach 200,000 tonnes a year as the green revolution takes hold.Nearly all of China's supply of rare earths comes from a single mine near the city of Baotou, in Inner Mongolia.

The remainder comes from small and sometimes illegal mines in the south of the country, leading to devastating pollution from the poisonous and sometimes radioactive ores.Environmentalists argue that this, coupled with widespread criticism of China's stance during the Copenhagen climate summit, adds to the need for a "plurality" of rare earth resources.

One campaigner said: "There are legitimate questions over Beijing's control of these resources. Copenhagen showed they are not above putting national interest ahead of global efforts to curtail global warming."Once extracted and refined, the rare earth metals can be put to a dizzying range of hi-tech uses. Neodymium, one of the most common rare earths, is a key part of neodymium-iron-boron magnets used in hyper-efficient motors and generators.

Around two tonnes of neodymium are needed for each wind turbine. Lanthanum, another REE, is a major ingredient for hybrid car batteries (each Prius uses up to 15kg), while terbium is vital for low-energy light bulbs and cerium is used in catalytic converters.In October, an internal report by China's Ministry of Industry and Information Technology disclosed proposals to ban the export of five rare earths and restrict supplies of the remaining metals.

Beijing strenuously denied that the document was an accurate reflection of its strategy, saying it had no desire to reduce trade in rare earths. But The Independent understands that the level of demand in China means that supplies of at least two crucial REEs – terbium and dysprosium – are likely to be curtailed by as early as next year.

Dr Ian Higgins, general manager of Birkenhead-based Less Common Metals, which specialises in rare earth products, said: "There is a threat that in the next 12 to 18 months, there might be some quite severe shortages of these rare earths.

That is certainly going to impact those hi-tech green industries outside China."Both Western countries and China are already dashing to secure new sources of rare earths. Last year, Australian regulators imposed restrictions on the purchase of one of the country's richest rare earth mines, causing a Chinese company to walk away from a £400m deal to buy its operator.

European and North American companies are meanwhile racing to open or re-open mines in Canada, South Africa and Greenland amid calls in the US for government-backed loans to secure supplies of some REEs which are used in the guidance systems of missiles and laser-guided munitions.

Toyota has effectively bought its own rare earth mine in Vietnam by signing an exclusive supply deal.

The Department for Business, Industry and Skills acknowledged the growing concern in Western capitals. A spokesman said: "We are monitoring the situation, particularly with regard to World Trade Organisation rules. We are working with UK industry to assess the long-term demand for strategically important resources, including rare earth elements."

 
Copenhagens sub-prime has started
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It is a building site, formerly a derelict car park, in a deprived part of West London, where the neon glow of curry houses and late-night grocery stores could not be further from the wealth and glamour of London's financial markets.

Described as a "consulting" business, this is the address of a UK company that has signed up to trade carbon permits under the European Emissions Trading Scheme in Copenhagen. But there is no trace of its existence on the Companies House database.  

At the newsagent next door, nobody has ever even heard of emissions trading – the system where companies buy and sell the right to emit carbon dioxide – and there has not been a building there for many years. It is not the only oddity to emerge from the Danish Carbon Registry.

All the expected big players are on the list – utilities, oil and heavy industry – the only sectors obliged by law to own permits to cover emissions. Quite a few investment banks are also signed up, on behalf of industry or trading to make a profit.

Outnumbering these familiar names, hundreds of UK companies selling anything from hair loss treatments to electronics have mysteriously registered to buy and sell carbon permits in the Scandinavian nation – mostly in the last 18 months.

Many give addresses in the regions such as Yorkshire, Lancashire, Essex and other places not known for their links to the world of finance. The appearance of these obscure British companies – among them businesses with unreachable addresses and Hotmail, Gmail or Yahoo email accounts for company representatives – has recently come to the attention of the Danish authorities.

While many are bound to be genuine individual private traders playing the carbon markets, investigators are examining the possibility that some of these unknown UK-based companies have used the system to commit "carousel" fraud linked to VAT.

As the Copenhagen summit on global warming began in December 2009, Denmark, the host nation, was bringing in an emergency ban to halt VAT on carbon. This followed similar suspensions in Britain, France, Spain and Holland.

According to sources, the Danish registry may be at the heart of Europe's problems with carbon trading fraud. Local media has repeatedly raised the fact that few, if any, checks are done on new traders and approval can be much quicker than in other countries.

Criminals profit by importing goods VAT-free, selling them through a series of companies, each liable to VAT, before exporting them again. Then, the first link in the chain often goes missing without accounting for the VAT and the final link reclaims the VAT it has paid from the state before disappearing.

It might sound like the tinpot scheme of local small-time crooks, but fleecing the tax man can bring in big money. Just a few weeks ago, Europol, the cross-border police force, said that carbon trading fraudsters may have accounted for up to 90pc of all market activity in some European countries, with criminals mainly from Britain, France, Spain, Denmark and Holland pocketing an estimated €5bn (£4.5bn).

"It is estimated that in some countries, up to 90pc of the whole market volume was caused by fraudulent activities," Europol said. Figures from New Energy Finance show the value of the global market falling from $38bn (£23bn) in the second quarter to $30bn in the three months to the end of September after several countries cracked down.

The London platform, the European Climate Exchange, where banks and energy companies tend to trade, is not affected by the fraud because it does not offer the spot contracts on which VAT was payable. But British traders can still defraud authorities by buying and selling permits on other European exchanges.

This organised criminal activity has even "endangered the credibility" of the current carbon trading system, according to Rob Wainwright, the director of Europol. So why have fraudsters particularly targeted carbon trading?

What is being done to iron out problems in Europe before other areas – such as the US – start to trade carbon in the next few years?

Carousel fraud has been a known scam for years among mobile commodities, such as phones, computer chips and cigarettes. But the attraction of carbon permits is their intangible nature, so there is no need physically to ship goods across borders.

All is done at the click of a mouse. It now looks like Europe will start a so-called "reverse charge" mechanism, which would remove the need for VAT to change hands between carbon traders every time permits are sold. But will this remove all problems from the system?

It should certainly eradicate VAT fraud, but the very nature of carbon credits makes them "an incredibly lucrative target for criminals", Rafael Rondelez, who was involved with the Europol investigation, has warned. His message is clear: other types of carbon fraud could soon spring up because there are "no strong regulations or checking principles as there is in banking to prevent such activities as money laundering."

 
The real cost of Copenhagen
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Copenhagen turned out to be a damp squib – derided by the Prime Minister as "at best flawed, at worst chaotic". But the failure to reach a global deal also left UK electricity generators calling for the Government to guarantee the carbon price, or face missing its ambitious green targets.

Few dispute that the key to cutting Britain's emissions by 34 per cent by 2020, and 80 per cent by 2050, is to clean up electricity generation. But the economics are tricky at best. And with little substance from Copenhagen, generators are warning the Government must intervene soon or the nuclear power and carbon capture and storage (CCS) technology the UK needs will not get built.

The problem is the carbon price. Off-shore wind farms are part-subsidised by the Renewables Obligation mechanism, which raises money from within the market to help offset the massive upfront costs.

Plans for four trial CCS plants are to be paid for by a levy of two per cent on customers' bills. But nuclear and widespread use of CCS, retrofitted to coal-fired plants, will rely on the income from carbon permits sold through the European Union Emission Trading Scheme (the EU ETS).

New nuclear facilities are eye-wateringly expensive – as much as five times the cost of gas plants and taking twice as long to build. CCS is so new and untried that there are not even any easy comparisons. In both cases, the business case is difficult to make and the commercially sensible decision is to throw up gas plants instead.Carbon trading was supposed to be the answer.

As the EU ETS progresses, setting electricity producers ever-lower carbon emissions caps, the cost gap between clean and dirty generation should be narrowed. But Copenhagen has floored hopes of a global market that would push up the price, passing the buck back to the UK Government.

Paul Golby, the chief executive of E.ON UK, said: "We cannot simply leave things as they are. We need changes to the market that mean it makes sense to build and operate lower carbon forms of generation."There are two problems. One is the actual price.

Carbon has proved surprisingly buoyant this year, holding up at a decent €14 per tonne. But electricity producers say the figure must be nearer €50 to make the economics of nuclear energy stack up. The International Energy Agency says it must be €33 in 2020 and €73 by 2030 to make low-carbon technologies economic. The other problem is uncertainty.

The price does not need to be high now, but investors need the assurance that it will be. Instead, the signs are tending the other way. In the aftermath of Copenhagen, carbon dropped to a six-month low. And the implications for the UK are even worse.

While Britain races for 34 per cent reductions by 2020, Europe's target is only 20 per cent – leaving the price-setting EU ETS out of synch with what UK generators need. Europe had pledged to raise the bar to 30 per cent in the event of a global agreement at Copenhagen – thus narrowing the gap – but that promise is now void.

A Centrica spokesman said: "The EU ETS should remain central, but in the shorter term it may be necessary to underpin carbon prices in this country until EU prices catch up with our objectives."There are plenty of levers the Government can pull to put a floor under the carbon price.

Alternatives listed by the independent Committee on Climate Change include setting an auction reserve price, or using either a carbon tax or contracts for difference to set a minimum price. A favourite with some generators is a low-carbon obligation similar to that in the renewables sector.

Such a scheme would act as an incentive for both nuclear and CCS investment by requiring electricity providers to supply a certain percentage of energy from low-carbon sources, or buy a permit from clean generators.In the post-Copenhagen confusion, the Government is reticent – acknowledging the need for a credible carbon price, but with no detail about how it might be achieved.

There is little time. For EDF to turn on its first new nuclear plant in 2017 as planned, the investment decision must be made in 2011. And discussions with industry will need to address such thorny questions as what constitutes a reasonable return. Either way, doing nothing is no longer an option. "The Government does not really have a choice, it is just which level they decide to pull," Alistair Scrimgeour, a partner at Deloitte, said.

 
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