Derivatives Markets Fragilities and the Energy Transition

Abstract

It is common knowledge that climate change concerns have prompted countries around the world to plan for a reduction in their fossil fuel dependencies. Yet while much attention has been placed on new low-carbon sources of energy such as wind, solar, and nuclear, comparatively little focus has centered on the commodity inputs, critical metals, needed to create this clean energy. In this article, we argue that at the heart of the energy transition is a commodities transition representing an unprecedented international reliance on critical metals, traditionally capricious commodities traded in global markets. Indeed, nations around the world have begun to stockpile these geographically concentrated, geopolitically potent materials which are poised to take center stage. This critical commodities transition accompanying the energy transition is underappreciated in the legal scholarship despite its widespread implications for many areas, including financial regulation. We use the story of the London Metal Exchange's March 2022 nickel debacle to turn a spotlight on this development and to highlight several areas of existing regulatory frameworks in derivatives markets ripe for reexamination given this commodities evolution. In doing so, this article sets the stage for a research agenda that will examine how regulators and financial innovators can build strong metals markets to enable secure metals supply chains and provide the basis for a sustainable energy transition.

Keywords: commodities transition, climate change, derivatives markets, energy transition, metals markets, metals supply chains