What does the pathway to a net-zero economy look like for miners?
Wind, solar, electric vehicles, stationary storage and transmission are all central to achieving the Paris Agreement decarbonisation goals.
Miners are obligated to deliver supply growth to satisfy demand from the necessary energy transition needed to meet these goals. At the same time, the industry needs to decarbonise.
Global emissions must reach net-zero by the second half of the century to keep global temperature rises below 2°C. Emissions from metals production will need to halve over the next 20 years in order to hit this target, according to Wood Mackenzie.
Under Wood Mackenzie’s 2-degree scenario, the price of carbon dioxide per tonne must rise to US$110 everywhere by 2030. These taxes aim to spark massive technological change across emissive industries like metals production.
Carbon taxes levied under a 2-degree pathway also provide a good guide as to the budget needed for decarbonisation. “Take the steel sector, with a requirement to eliminate 1.7bn of direct and indirect emissions over the next 20 years. Should these emissions remain, $191bn each year in carbon taxes would be due. That’s 24% of annual global steel revenues of $800 billion in a good year,” said James Whiteside, Wood Mackenzie Global Head of Multi-Commodity Research.
So, what does the pathway to a net-zero economy look like for miners?
The solution for mining is consistent across all metals: electrification. This cannot happen overnight, however. “Mine designs need to adapt, and more renewable electricity is required. Whether from the grid or self-supplied, power supply arrangements will grow in prominence as miners become increasingly reliant on this single energy source,” added Whiteside.
Increasing investor pressures will accelerate change, too. “Miners are well equipped to access alternative sources of capital like green and ESG bonds through their role in low carbon technology. Development banks have ring-fenced funds to support energy efficiency and reduce emissions. But the cheapest forms of finance are typically the most stringent.
“Equity investors, currently most concerned with the impact of carbon pricing, will be forced by their own stakeholders to examine the ambiguous aspects of sustainability reports. The junior miner, seeking finance to develop its first operation, will increasingly find detailed environmental planning a differentiator in capital raising.
“Most of the diversified miners are mirroring the bold net-zero ambitions of their counterparts in oil and gas. For these companies, a path to eliminate operational Scope 1 and 2 greenhouse gas emissions by 2050 is feasible, if not attractive.
“Taking responsibility for Scope 3 emissions opens up some existential questions for coal, iron ore, and even bauxite and alumina producers. Transitioning these commodities to less scrupulous producers means downsizing or finding new high-margin production elsewhere. Carbon offsets aren’t the long-term solution investors will require though,” said Whiteside.
Where sufficient quantity and quality is available, scrap can play a role in the decarbonisation of metals supply. Production of aluminium from scrap takes only 5% of the energy required to smelt alumina, says Wood Mackenzie. Likewise, electric arc furnace production using scrap has only 30% of the Scope 1 and 2 emissions of blast furnace steel production.
Alongside increased recycling, the electrification of thermal processes powered by renewables is the path of least resistance to decarbonising downstream sectors.
“Carbon is intrinsic to the dominant production routes for aluminium and steel. But sustainable and scalable alternatives are emerging. Aluminium smelters’ carbon anodes now have inert alternatives. Coking coal can be replaced with hydrogen for iron ore reduction. Biomass and carbon capture can play a role in the right location.
“Increased deployment brings down the cost of emerging technologies over time. Signatories to the Paris Agreement hoped their carbon policies would get the ball rolling, yet CCS and green hydrogen have been slow to truly kick off. The learning curve in wind and solar costs will only be echoed in these technologies when their installation scales up,” added Whiteside.
Without a financial liability for Scope 3 emissions, will stakeholder pressure on miners offer enough incentive to reduce downstream emissions? “Counting on your customers to clean up is no kind of strategy. It is neither certain to happen in time nor sure to benefit the raw materials that miners produce if it does.
As for direct and indirect emissions, a lot can change in 30 years. The point is to outperform these targets and become the keystone of the energy transition,” said Whiteside.
A focus on lowering emissions will drive efficiencies in consumption. Reduced reliance on oil prices may mean a less volatile cost base and more reliable returns. The flip side is an increasing cost exposure to a single factor – electricity. Miners will have to work in partnership with the grid and other major consumers to ensure the economic benefit is balanced.
“This means building partnerships with consumers, as many have, and skewing their partners’ strategy towards the low-carbon technologies that secure a role for their products. It means all metals producers targeting increased recyclability. It means the entire aluminium industry working towards scaling up carbon anode replacement technology. It means metallurgical coal miners contributing to CCS research to boost efficiency and reduce construction costs. Miners must spend big on R&D now.
“Ultimately, each producer’s optimal pathway will depend on local electricity prices, renewables generation capability and CCS potential. The lead time to development of new technology and installation means this planning needs to start now,” added Whiteside.