Rare earth element extraction induces environmental damages and the balance problem. In this article, we show that recycling can challenge both problems in a two-period framework. We also find other results depending on the amount of scrap that can be recycled. If the recycling activity is not limited by available scrap, it does not change extraction in the first period. Environmental taxes on extracted quantities reduce extraction and favor recycling. But if the recycling is limited, the extractor reduces extraction in period one, adopting a foreclosure strategy, and environmental taxes can decrease recycling. In all cases, environmental taxes are never equal to the marginal damage from pollution, in order to take into account the recycling effect.
