If China were simply limiting the amount of rare earths permitted to be dug out of the ground, there would be no WTO issue. The problem is that this is an export cap which has the potential to create different pricing for rare-earths between domestic and foreign purchasers of these materials.
Now if you look at mentions of today's prices of rare earths (by googling for "rare earth prices"), as yet, there is no such disparity. The linked WTO article also doesn't directly talk about price disparities between domestic and foreign purchasers. It turns out that global demand for rare earths went down quite a bit last year, and as a result, only about 60% of the export quota was used up (according to this FT article).
The concern is that as the global economy recovers, if demand is seen to exceed the quota, then a huge price difference between what domestic companies and foreign companies pay will emerge. This would amount to a kind of state subsidy (making prices for domestic producers artificially cheap) and would violate WTO rules.
The two metrics to watch to determine whether or not the claim of environmental protection vs. economic protectionism would be:
(1) Domestic rare earth production volume (e.g. in tons) - If slope of this curve continues unchanged, then there really is no environmental effect. If the slope flattens out, then it could be argued that the quota did slow down the pace of mining and did have an environmental consequence
(2) Domestic (China buyer) vs. Foreign (non-China Buyer) price (e.g. difference $/ton) - If this disparity is big, then there's a stronger case that there is some kind of domestic subsidy occurring, if the disparity is small, then the case that there is a subsidy is weaker.
This is not really a matter of sovereignty since China is a willing party to the WTO and has volunteered to play by those rules.