Sustainable raw material extraction – paradox or possibility?
A look at setting market guidance and policy to navigate the energy transition's thirst for raw materials
It is clear that transition to a low-carbon economy requires both a dramatic shift away from fossil fuel use as well as a transition towards non-fossil alternatives like renewable energy, electric vehicles etc.
But there is a catch…
Non-fossil alternatives require resources, lots of them. This includes lithium and cobalt for batteries and copper for renewable energy components – which means the transition is, as much as anything else, a resource transition. It will require a shift from heavy dependence on fossil fuel resources to increased use and reliance on a diverse group of materials essential for producing renewable energy, electric vehicles, and other technologies that are key to mitigating climate change.
The bottom line is that huge quantities of Critical Raw Materials (CRMs) such as lithium, graphite, cobalt, and nickel, are going to be needed in mass to support this change. So how do we make this transition sustainable?
An immense growth ahead: demand for certain raw materials is projected to grow 20-40x by 2040.
The demand for lithium is projected to increase 40 times by 2040 in a Paris-aligned scenario. Graphite, cobalt, and nickel demand is also estimated to grow 20 to 25 times by 2040.
The huge demand for growth raises a number of issues for the transition:
- Availability - Current supply and investment plans for some CRMs are insufficient to meet growing demand, posing risks to their availability, reliability, and affordability.
- Concentration - Materials have complex supply chains, where both mining and processing are highly concentrated in a few countries. For instance, over 75% of lithium, cobalt and rare earths are produced in just three countries.
- Sustainability - The extraction and refining of raw materials are resource-intensive and associated with environmental, social and governance impacts. It is no secret that the mining industry has a poor reputation and has faced major opposition from communities around the world.
While the availability and concentration of resources are critical, the key immediate consideration for the growth of the market is the sustainability of extraction. The pressing imperative to decarbonise our economy and massively increase CRMs’ availability must be balanced with the need to ensure sustainable practices. This is also crucial to keep the confidence of stakeholders like governments and communities.
This also means that sustainable mining of CRMs needs to be embedded in policy and guidance together with strategies to reduce materials demand like looking at different technology routes, and circular economy strategies such as lifetime extension and recycling. This will allow the transition to happen without the high social and environmental costs of a business-as-usual approach and avoid running the risk of implementing controversial and potentially damaging technologies like deep-sea mining.
The urgent need for market guidance: Paris-aligned criteria can drive financing towards more sustainable mining.
There is no lack of standards and certifications in the mining industry. Rather, the panorama is such, that navigating the bulk of initiatives available can be daunting. A number of Standards exist such as IRMA and the Copper Mark but these tend to be voluntary, address different aspects of mining and there is no harmonisation among them. This, in turn, brings confusion to producers and investors in understanding and verifying the credentials of their investments.
There is increasing evidence to suggest that miners with poor ESG practices may face a higher cost of capital, which can be as much as 20-25%. This is broadly positive as it shows an increased focus of markets on sustainability factors. However, understanding what good looks like in the mining sector is a challenge for investors and there remain legitimate concerns of greenwashing – these may increase with the big focus on growing CRMs.
Sustainable finance can support the development of this sector, but there is still a gap in credible criteria to ensure the credibility of CRMs as investments that support the transition. At Climate Bonds we are embarking on the task of developing these criteria, having already worked on guidance for hard-to-abate sectors like basic chemicals and steel, which focus on the climate, adaptation, and resilience aspects of these activities.
For CRMs, however, current emissions from mining activities are relatively minor compared to other energy, transport, or other heavy industry and therefore climate is not the main but just one of the key focuses. The CRM criteria will need to go beyond climate issues to also address social aspects, ecosystem conservation, and other environmental impacts of mining activities. While this is not a first for Climate Bonds criteria (other criteria like Hydropower also address social issues), the level and depth of focus on other issues will be far deeper than previous criteria.
The criteria aim to address three key questions:
- Does the mineral have a critical role in the transition? A key starting point of the Climate Bonds criteria will be the role of each mineral in a Paris-aligned transition – in other words, what is the potential for each mineral to act as a solution/enabler to the transition? The intention is to focus on creating standards for these specific minerals rather than the entire mining sector.
- Are the emissions associated with extraction being mitigated? The IEA report “The Role of Critical Minerals in Clean Energy Transitions” provides a good picture of the potential massive repercussions of neglecting emissions in CRM extraction, yet there is a lack of publicly available data on emissions to support the development of benchmarks and roadmaps to underpin the criteria. Nevertheless, existing initiatives like TPI’s diversified mining methodology and the decarbonisation roadmap for nickel and copper developed by the IFC could serve as starting points.
- Are other material social and environmental issues being addressed? Existing standards are, as always, being used where possible to support the development of guidance in the mining sector to keep coherence and promote adoption of best practices.
Fabiana Contreras, Climate Bonds Senior Sustainability Analyst, says:
“Setting up ambitious CRM criteria covering CO2 emissions mitigation and other impacts on ecosystems and communities will send a needed signal to the market to favour investments that will be really part of the efforts to avoid the worst effects of climate change while minimising impact”
The essential role of policy in ensuring a sustainable supply of critical raw materials.
Policymakers have an essential role to play in ensuring a sustainable and resilient supply of critical raw materials. Over 100 new CRM-related policies have already been introduced globally in the last couple of years, reflecting a growing recognition of the importance of critical materials for the energy transition. Policy action is required to ensure a diverse, resilient, and sustainable supply.
An increasing amount of investment is being channelled into mining, particularly in response to policies and commitments to reach net zero by mid-century. Governments are creating frameworks to encourage private sector innovation and capital into diversifying and expanding these supply chains. This includes, among others, the US Inflation Reduction Act and Australia’s Critical Minerals Strategy. These frameworks seek to incentivise supply chains through tax credits, government investment, favourable regulation, project facilitation and strategic reserves.
In addition, in March 2023, the EU Commission published a proposal establishing a framework for ensuring a secure and sustainable supply of critical raw materials. This European Critical Raw Materials Act aims to set clear priorities for the EU and, among other objectives, specific benchmarks by 2030 for domestic capacities.
A global platform for international cooperation and policy coordination could strengthen environmental and social performance standards, develop strategies to reduce material demand and increase circularity, and provide reliable and transparent data.
Governments can utilise policy tools to address security, diversification and, critically, sustainability of supply by investing in local projects and providing development finance to support emerging market projects. Policymakers can reinforce sustainability standards by preferencing de-risking of projects, streamlining permitting and target setting.
Fabio Passaro, Climate Bonds Senior Transition Policy Analyst, says:
“Increasing investment is being channelled into the Critical Raw Materials sector, which is at the heart of the net-zero transition. Policymakers can ensure that both social and environmental aspects are not compromised”.
The Last Word
Climate Bonds sector criteria for critical raw materials will be instrumental in unlocking opportunities to finance sustainable practices and address social and environmental impacts. This goes in hand with the momentum of policy development around CRMs.
Policymakers should ensure transparency, traceability, and adherence to sustainable practices, providing credibility to investors in the sustainability credentials of these materials. Policymakers can also use standards and criteria such as those that we will develop to establish green taxonomies, lower tariffs for sustainable materials and encourage global improvements in mining practices.
Effectively tackling critical raw materials is a huge but needed task. Getting this right will be dependent on collaboration across many levels: we will be working with investors, governments, industry, and civil society to address these challenges and drive sustainable sourcing, production, and consumption of critical raw materials.
‘Til next time,
Climate Bonds
