The global transition to a low-carbon energy system is progressing at pace, with the world set to add as much ‘clean’ renewable power between now and 2030 as it has over the past two decades.
However, investments in the most widespread clean energy technologies such as wind turbines, solar panels and battery storage (for electric vehicles) are materially different from those based on fossil fuels (hydrocarbons like oil, gas and coal) in that they depend to a greater extent on so-called ‘critical minerals’ such as copper, lithium, nickel, cobalt and rare earth elements for their manufacture. A typical electric car for example needs six times the critical mineral input of a conventional vehicle, while an onshore wind power plant requires nine times the amount of one based on natural gas. Demand for critical minerals is swiftly increasing to meet the pace of the energy transition and the legal landscape is responding to this.
An overarching theme of COP28 is technology and innovation, with December 5th allocated to discussing “the role of technology in enabling the just energy transition and overcoming challenges such as decarbonizing high emitting sectors, and ensuring inclusive energy access.” This creates an opportunity to focus not only on the dependence of renewable technologies on critical minerals (and hence the equitable governance of those resources), but also the environmental and social impacts of the extraction of these resources in the countries where they are located.
Critical minerals supply chain instability
Demand for critical materials is creating a new global energy economy. Yet the topic is noticeably absent from the main items for discussion in Dubai. This contrasts with warnings from the International Energy Agency (the IEA) and the International Renewable Energy Agency (IRENA) that with demand soaring, COP28 should focus on the vulnerability of the critical minerals supply chain.
If the complex challenges facing the critical minerals supply chain were to be summed up in a key issue, it would be a lack of diversification. While there is no global shortage of critical minerals, mining and processing is highly concentrated in specific geographical locations. Dominant players include Australia (lithium), China (graphite, rare earths), Chile (copper and lithium), Democratic Republic of Congo (cobalt), Indonesia (nickel) and South Africa (platinum, iridium). China accounts for more than half of the world’s refined supply of (natural) graphite, dysprosium (a rare earth element), cobalt, lithium, and manganese, making processing even more geographically concentrated. Lastly, the mining sector is dominated by a few major companies, with the top five controlling 61% of lithium output and 56% of cobalt output. This leaves the supply chain vulnerable to external shocks, resource nationalism, export restrictions, mineral cartels, instability, and market manipulation – all factors which create a material risk of supply shortages.
A report issued by IRENA: Geopolitics of the Energy Transition: Critical Materials considers the geopolitical risks and opportunities linked to a growing need for critical materials to service the energy transition, prescribing an holistic approach to diversify supply chains. IRENA’s Director-General Francesco La Camera was forthright: “The energy transition will become a main driver of demand for critical minerals… the risk of supply chain disruptions is less about energy security and more about the potential slowdown of the transition, which must be avoided. On the road to COP28, my message is to urgently strengthen collaboration on critical materials to minimise the geopolitical risks of concentrated supply chains and accelerate the deployment of renewables to limit rising temperatures to 1.5°C.” Addressing critical minerals risk is clearly crucial to successful energy transition, and hence to a successful COP28.
The way forward
In addition to diversifying supply, the environmental, social and governance (ESG) performance of critical minerals supply chains, notably in the mining sector, must be scrutinised to ensure new clean energy infrastructure does not inadvertently contribute to environmental pollution, loss of nature, carbon emissions or human rights and labour violations, particularly in jurisdictions with low capacity to manage these issues. Failure to do this puts the critical minerals supply chain further at risk, eroding confidence in the potential of the underlying technologies – and hence investment.
The mining sector should be prepared for an increase in government action to address these risks, with many states introducing legislation to address critical minerals production, processing and manufacturing. In May 2023, the European Commission put forward the Critical Raw Materials Act aimed at diversifying the EU’s critical raw materials supply, strengthening circularity (including recycling) and supporting resource efficiency research. This comes against a background of government activity, with several countries, including the UK, updating their critical minerals strategies. Industry actors should consider how potential objectives around consumption of raw materials may impact them and prepare for stricter monitoring obligations concerning production, processing and the movement of raw materials. There are opportunities in this landscape too. For example, as part of its focus on critical materials, the US has vastly increased the amount of public capital available for related investments under the Inflation Reduction Act and we may see actors restructuring their processes and financing to capitalise on this.
It is crucial that business, government and financial institutions cooperate to develop considered policies to develop critical materials supply chains in a responsible and equitable manner for the benefit of global energy transition. Transparent markets should be developed with consistent standards reflecting the principles of human rights, environmental protection and benefit sharing with affected communities. Like fossil energy in the 20th century, the current energy transition creates an opportunity for lower-income countries to convert mineral wealth into economic and social value provided this can be achieved in a socially just manner with minimum environmental impact.
In summary, critical minerals are of key importance to COP28’s focus on economic opportunity and just transition across the global energy system. They should not be thought of as a side issue in net zero planning: they are core to its success, capable of blowing net zero plans off course and, if they are developed well, can offer a global example of both north-south financial flows and equitable, environmentally sound development.