Critical Minerals, Fiscal Design and the Value Gap

In 1931, Harold Hotelling established what has become a foundational rule in natural resource economics: non-renewable resources carry an opportunity cost for future generations. Every tonne extracted today is a tonne unavailable tomorrow, and rational pricing must reflect that scarcity. Nine decades later, as the world races to secure lithium, cobalt, copper, and rare earths for the energy transition, Hotelling’s insight has acquired a new dimension. These are minerals with no substitutes in a net-zero world and the countries sitting on top of them are being told this is their moment.

According to IEA’s Global Critical Minerals Outlook 2024, the combined market value of key energy transition minerals is projected to more than double, reaching USD 770 billion by 2040. The question is who captures them and the answer, so far, is rarely the country where the ore comes out of the ground.

The value chain problem

Most fiscal regimes governing critical minerals were designed for bulk commodities, for example, iron ore, thermal coal, in an era when the mine gate was where the story ended. They were not designed for minerals whose economic value is realized three or four steps downstream and in entirely different countries. This can be expressed simply:

Government Revenue ≈ Royalty Rate × Mine-Gate Price

But the actual value of a critical mineral is what it becomes. A tonne of cobalt ore mined in the DRC is worth a fraction of what it generates as refined cobalt, cathode material, battery cell, and finally a finished EV sold in California or Frankfurt. Governments are taxing the raw material, while the transformation, however, where the most value is created, happens elsewhere, taxed elsewhere and captured by others.

Oxfam calculated that the DRC retained just 14% of cobalt supply chain revenues, while foreign investors and downstream companies captured 86%. Meanwhile, Tesla earns roughly $3,150 in profit per car, each containing about 3kg of cobalt. The Congolese government receives less than $10 in royalties for that cobalt while a miner may see about $7. This is the architecture of the global supply chain.

According to IEA’s Global Critical Minerals Outlook 2025, the average market share of the top three refining nations, a group dominated in every case by China, rose from around 82% in 2020 to 86% in 2024. The trend is most pronounced for cobalt, graphite and rare earths, where China accounted for 97%, 98% and 96% of supply growth respectively. For nickel, Indonesia absorbed 91% of refining growth, though Chinese companies own approximately 65% of that Indonesian capacity through operators such as Tsingshan Group and Jiangsu Delong Nickel.

Geography and ownership tell different stories across the value chain. European companies – Aurubis, Glencore, Umicore, own around 20% of global refined copper and 15% of refined cobalt, much of it produced outside Europe. Japanese companies including ENEOS, Mitsubishi Materials and Sumitomo Metal Mining hold almost 15% of refined copper by ownership. The United States owns over 10% of refined copper and close to 15% of lithium chemical production through MP Materials and NP Materials, yet geographically only 1% of refined lithium production occurs on US soil. For resource-rich host countries, this gap between geography and ownership defines the value capture problem.

Chile, Bolivia, Kazakhstan: three approaches to the same problem

Governments are responding, but in different ways. Three cases illustrate how differently governments have responded to the same problem.

Chile’s 2023 Mining Royalty Act introduced a two-component system for copper: a 1% ad valorem charge on sales, plus a progressive rate of 8-26% on operating margins, capped at 46.5%. It is a sophisticated, market-oriented design that attempts to balance revenue capture with investment attractiveness. Lithium, however, is explicitly exempt, which is a telling omission for the country holding the world’s largest lithium reserves. The likely reason is that no established framework exists for taxing a mineral whose price can halve or double within 18 months depending on battery technology shifts and policy decisions elsewhere.

Bolivia built its fiscal system around state ownership. State-owned YLB partners with foreign firms who bear the investment risk, while the government captures an estimated 70% of profits through a combination of royalties, corporate tax, and YLB’s 51% profit share. The model maximizes state revenue on paper. In practice, it has constrained foreign investment and slowed technology transfer, which is a recurring tension in resource nationalism that the literature on fiscal design has long documented.

Kazakhstan offers a third model, applied to uranium, a mineral whose role in the energy transition is contested but increasingly relevant as nuclear re-enters low-carbon energy planning. Its Mineral Extraction Tax uses a double trigger: a base rate that rises with production volume from 4% to 18%, plus a price-linked surcharge of up to 2.5% when uranium exceeds $110 per pound. Price-linked and windfall instruments are not new, for example, Mongolia introduced a windfall profits tax on copper and gold in 2006, only to repeal it as mineral prices fell. Kazakhstan’s graduated trigger is an attempt to avoid that outcome.

What all three models share is a common constraint: each taxes what it can tax – extraction and production – while the value created downstream accrues elsewhere. James Otto, whose work on mining royalties remains a standard reference in fiscal design, observed that mineral prices fluctuate more than other commodities, and most governments react to cycles rather than designing systems that accommodate volatility. The three cases above illustrate exactly that pattern.

Work in progress

Classic mining fiscal frameworks tax at the mine gate, a rational design for bulk commodities where little value transformation occurs after extraction. Mining Royalties (Otto et al., World Bank, 2006) classifies systems by when governments collect revenue: royalties at production, CIT on profits, PSAs on output. For critical minerals, the question of when is secondary to where. The mine gate captures only the first and least valuable stage of a chain that creates most of its value in refining, processing and manufacturing, in jurisdictions and through companies entirely separate from the resource owner.

Closing that gap requires instruments that follow value rather than volume. Progressive royalty structures tied to downstream price indices attach government revenue to what the mineral actually becomes, not what it weighs at the pit head. Beyond fiscal design, mandatory value-addition requirements as a condition of licensing create incentives for processing to occur in the host country rather than abroad. Chile’s 2023 lithium royalty reform offers one precedent, linking rates to downstream product prices rather than raw ore values.

Progressive profit taxation of extractive resources, designed to capture rent that royalties leave on the table, is theoretically well-grounded in the fiscal design literature (Wen, IMF, 2018). Applying that logic to critical minerals, where battery-grade prices diverge sharply from raw ore values, remains largely uncharted policy territory.

None of this is straightforward. Taxing further down the value chain immediately encounters transfer pricing risks: multinationals structuring transactions between related entities to shift taxable income out of host countries. This is documented comprehensively in Transfer Pricing in Mining with a Focus on Africa by BoubacarBocoum and colleagues (World Bank, 2017). The institutional capacity to design, negotiate and administer these instruments is itself unevenly distributed and that gap, between what the frameworks prescribe and what governments can implement, is where reform most often stalls.

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