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Carbon prices for meeting the Paris agreement and their impact on key metals
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Original article
Carbon prices for meeting the Paris agreement and their impact on key metals Michael Tosta,*, Michael Hitchb, Stephan Lutterc, Susanne Feiela, Peter Mosera a
Chair of Mining Engineering and Mineral Economics, Montanuniversitaet Leoben, Austria School of Science, Department of Geology, Mining Division, Tallinn University of Technology, Estonia c Institute for Ecological Economics, Vienna University of Economics and Business (WU), Austria b
A R T I C LE I N FO
A B S T R A C T
Keywords: Carbon pricing Paris agreement Climate change Metal mining Aluminium Copper Gold Steel
Under the Paris Agreement, nations of this world aim to limit temperature increase to well below 2 °C above preindustrial levels and to pursue efforts to further limit the increase to 1.5 °C. Putting a price on CO2 emissions has been suggested as one approach to tackling global warming. This paper uses the results of suggested carbon pricing systems in the context of the Paris Agreement that consider biophysical boundary conditions for CO2 emissions. The impact of such carbon pricing is estimated statically for two ores – iron ore and bauxite – and four metals/ alloys – steel, aluminium, copper and gold – at a commodity level and a company level for some of the largest mining companies in the world. The authors conclude that at the commodity level the upper-bound impact of carbon pricing on metal prices would still be within the market driven price variations of recent years for copper and gold. The situation however looks different for steel and aluminium and for the companies, where prices and profitability would be significantly impacted, in some cases even by the minimum carbon prices used in this study, which would make mining unprofitable.
1. Introduction The United Nations (UN) lists global warming – amongst other issues such as health, food, oceans or water – as one of the greatest challenges the world is facing. Impacts range from shifting weather patterns that threaten food production to rising sea levels that increase the risk of catastrophic flooding, being global in scope and unprecedented in scale (United Nations, 2020). Yet humankind has so far failed to find solutions to seriously address the issue (e.g. (IPCC, 2018; The World Bank, 2018a). In 2015, representatives of almost 200 nations came once again together in Paris to find such a solution. One outcome of the Paris Agreement is to limit “the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C” (UNFCCC, 2018). However, given the current political situation, i.e. the withdrawal of the US from the agreement and the currently submitted insufficient nationally determined contributions (NDCs), the window for reaching the ambitious landmark agreement is closing, with 1.5 °C warming to be reached at the current rate of temperature rise between 2030 and 2052 (IPCC, 2018). Putting a price on released (or avoided, respectively) CO2 equivalent emissions, or ‘carbon pricing’, as it is commonly known, has been
⁎
suggested for many years as a market-based solution for tackling global warming, and is also understood as representing a proxy for the level of effort needed in mitigation (The World Bank, 2018a). It may be done in the form of a carbon tax like applied in Finland and the other Northern European countries for almost 20 years. Another form of implementation are emission permits like the European emissions trading scheme (ETS), which is the largest market so far and has been running for more than 10 years (IPCC, 2018). The standard economic solution for setting the price is called the social cost of carbon (SCC), based in principle on Pigou (1920), which sets the cost based on the net present value of aggregate climate damages from one more tonne of CO2 emitted (IPCC, 2018, p. 558). Well known examples of SCC estimates include Nordhaus’ “To slow or not to slow: The economics of the greenhouse effect” (Nordhaus, 1991) and the Stern Review (Stern, 2006). In contrast to the SCC, target-consistent approaches set the price based on estimates of the abatement costs for reductions needed to meet certain emissions reduction targets. For example, this approach has been used by the UK government since 2009 (Department of Energy and Climate Change, 2009). A good summary explanation of the two approaches can be found in (IPCC, 2018, p. 150). In 2019, the World Bank stated that the adaptation of carbon pricing is accelerating: 57 initiatives were or are being implemented around the
Corresponding author. E-mail address: [email protected] (M. Tost).
https://doi.org/10.1016/j.exis.2020.01.012 Received 29 August 2019; Received in revised form 27 January 2020; Accepted 27 January 2020 2214-790X/ © 2020 Elsevier Ltd. All rights reserved.
Please cite this article as: Michael Tost, et al., The Extractive Industries and Society, https://doi.org/10.1016/j.exis.2020.01.012
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2. Literature, materials and methods
world, covering around 20 % (up from 15 % in 2018) of global greenhouse gas (GHG) emissions. However, less than 5 % of them have carbon prices in the range needed to reach the Paris Agreement (World Bank, 2019). Research focusing on global carbon pricing is also picking up (e.g. (Weitzman, 2014; Carattini et al., 2019; Nordhaus, 2015). As is use in business, with 1400 companies reporting their practices or plans regarding internal carbon pricing in their 2017 CDP carbon disclosure. These include 10 of the 19 companies analysed in this paper. However, as the CDP report notes, it remains unclear if companies are prepared for higher prices in the medium to long term, as 85 % of the companies reporting a carbon price assume a static price and only very few disclose price assumptions past 2025 (CDP, 2017). Metal mining generates emissions through its specific unit operations, including drilling, blasting, loading, hauling and particularly crushing, grinding and processing ores into metals. Diesel is largely used as a power-generating fuel in places where electrified infrastructure is not available or for mobile equipment. Most of the in situ mining infrastructure (e.g. process plants, smelters and refineries) rely on fossil fuels or electricity as their primary source of energy. Tost et al. (2018a) estimate the CO2 emissions for 2016 from iron ore, bauxite, copper and gold mining (including smelting for the latter two, which is often done at integrated production sites) in the range of 150 Mt to 233 Mt, with an average of 190 Mt, indicating that mining these four commodities contributes between 0.4 and 0.7 percent of the global emissions. This number changes significantly to 4.3 Gt, or 12 percent of global emissions, when considering also steel production and aluminium refining (which is mainly done at different locations than the mine sites), which also includes the process related CO2 equivalents from other GHGs. The mining sector’s response to global warming has been to acknowledge the problem years ago, but it has since taken a ‘wait and see’ position (Buxton, 2012). The largest mining companies like Anglo American, Glencore or Rio Tinto have mainly reduction targets based on improving carbon intensity and in comparison, their climate change position is behind that of companies from other industrial sectors such as BMW, LG or Philips (Tost et al., 2018b). The objective of this paper is to examine the global implications of target-consistent carbon prices which consider limiting global warming to 1.5 °C or 2 °C as the target, on the production of two ores – iron ore and bauxite – and four metal products – steel, aluminium, copper and gold –, analyse, using a static framework, the impact of the resulting costs on metal prices and the largest metal companies and compare to the carbon prices these companies are currently using. The four metals1 are chosen as they represent over 96 percent of all metals mined globally in terms of bulk tonnage and possess over 68 percent of industrial value (Tost et al., 2018b). This paper contributes to the scientific literature by providing a first estimate of the impact of a wide range of Paris Agreement-consistent carbon prices on these four metals and the largest companies mining them. In Section 2 the authors review the literature for the application of carbon pricing in the mining industry and for Paris Agreement targetconsistent carbon prices. They list the global CO2 emissions for the selected two ores and four metal products overall and the largest companies globally producing them. In Section 3, a range of carbon prices (minimum, median and maximum price) is applied to the estimated emissions at an aggregate level, and for the selected companies. The impact of carbon pricing on revenues, profits, as well as ore and metal prices is calculated and a comparison with internal carbon prices of the companies is done. The results are discussed in Section 4 and conclusions are presented in Section 5.
1
2.1. Literature review Concerning carbon pricing and its implications on the mining and metals industry, an often referenced study was done in 2013 by the International Council on Mining and Metals (ICMM). It analysed the impact from existing pricing initiatives in key mining regions on various commodities using prices ranging from USD 15/tCO2 to USD 24/ tCO2 as well as a global carbon price of USD 25/tCO2. ICMM concluded that the electricity sector, its carbon intensity and ability to pass through carbon costs could have a significant impact on mining, i.e. on energy intensive copper refining and aluminium smelting (ICMM, 2013). Other studies from “mining countries” confirm these findings. Whilst mainly looking at the trade implications of national or regional carbon prices on manufacturing or the broader economy, they use a similar range of carbon prices and find the mining and metals industry to be one of the most impacted industry sectors due to its energy intensity and trade exposure (e.g. Ho et al. 2008; National Round Table on the Environment and the Economy, 2008; Clarke and Waschik, 2011). Lanz et al. (2013) simulated trade and carbon leakage aspects in the copper industry using USD 50/tCO2 finding that consumers and producers were price inelastic. They also found that over a timeframe of 10–20 years due to its capital intensity carbon emissions were insensitive to carbon policy and that about 30 % of reductions would be compensated due to leakage to countries without carbon pricing policies. Rootzen and Johnsson (2016) analysed the impact of carbon pricing on the steel industry, concluding that the 2016 prices of the European ETS were too low to unlock investments in low carbon production processes. They also analysed the impact of a EUR 100/tCO2 carbon price on steel on cars, which would lead to a price increase for a mid-size car of less than 0.5 %. No studies were found looking at the implications of target-consistent carbon prices. 2.2. Materials and methods The basis of the calculations carried out in this paper is a review of studies on global carbon prices that consider a biophysical boundary for GHG emissions. The boundary conditions of 350 and 430 ppm stated in Steffen et al. (2015) and the temperature goals of the Paris Agreement, i.e. 2 °C and 1.5 °C, were considered in the review. However, the focus of the present analysis is set on 1.5 °C/430 ppm and 2 °C. No literature could be found for 350 ppm, since the world has already passed this point. The purpose of the review is not to find the right price, but a range of prices to be applied to the selection of metals and independently from their current or potential political application. Hence, peer reviewed and non-peer reviewed studies are considered and differences between the underlying models (e.g. integrated assessment models (IAM) such as DICE or WITCH) and methods (e.g. costeffectiveness analysis vs. cost-benefit analysis vs. social cost of carbon with temperature limit), or differences in the probabilities, i.e. 50 % vs. 66 %, of reaching the set temperature limit, have not been considered. All possible scenarios (e.g. ‘below 1.5 °C’, ‘low overshoot’ and ‘high overshoot’ in (IPCC, 2018) discussed in the studies are considered.2 Carbon taxes as shown in (World Bank, 2019) are not considered, since their policy goals are either national (e.g. to have net zero emissions of greenhouse gases in 2045 in the case of Sweden (Government Offices of Sweden, 2017) or unknown concerning boundary conditions. Since the analysed studies use different currencies and years as the base for the time value of money and carbon prices, both are adjusted to 2016 as follows: If the year for the time value is not stated, the same year as for 2 For readers interested in further details on integrated assessment models, economic modelling, probabilities and overshoot scenarios, the authors refer to (IPCC, 2018) and (IPCC, 2014).
The authors acknowledge that technically steel is an iron based alloy. 2
3
Scenarios towards limiting global mean temperature increase below 1.5 °C (Rogelj et al., 2018)
2030 2010
USD2010/t CO2 USD2010/t CO2
15– 6050 50–165 (NPV)
Global Warming of 1.5 °C (IPCC, 2018)
2030
USD2010/t CO2
15–1050
Global Warming of 1.5 °C (IPCC, 2018)
2030
USD2005/t CO2
40–1080
Carbon price variations in 2 °C scenarios explored (Guivarch and Rogelj, 2017)
Paris Agreement, 1.5 °C Paris Agreement, 1.5 °C
Paris Agreement, 1.5 °C Paris Agreement, 2 °C
Paris Agreement, 2 °C
2030
USD2005/t CO2
20–360
Paris Agreement, 2 °C
2020
USD/t CO2
40
Paris Agreement, 2 °C
2020
EUR/t CO2
25–50
Paris Agreement, 2 °C
2020
USD/t CO2
5–20
2 °C 2.5 °C Paris Agreement, 2 °C
1.5 °C
2020 2015 2020
USD2005/t CO2 USD2010/t CO2 USD/t CO2
60 184 30–50
2015
USD2005/t CO2
642
2 °C
2015
USD2005/t CO2
264
The Challenge of Global Warming: Economic Models and Environmental Policy (Nordhaus, 2007) The Challenge of Global Warming: Economic Models and Environmental Policy (Nordhaus, 2007) DICE 2013R: Introduction and User’s Manual (Nordhaus and Sztorc, 2013) Revisiting the social cost of carbon (Nordhaus, 2017) Energy Technology Perspectives 2015 – Mobilising Innovation to Accelerate Climate Action (IEA, 2015, p. 383) Perspectives for the Energy Transition – Investment Needs for a Low-Carbon Energy System (OECD/IEA and IRENA, 2017) Mission report – Proposals for aligning carbon prices with the Paris agreement (Canfin et al., 2016) Carbon prices in national deep decarbonization pathways – Insights from the Deep Decarbonization pathways Project (Carbon Pricing Leadership Coalition, 2017) Carbon price variations in 2 °C scenarios explored (Guivarch and Rogelj, 2017)
Paris Agreement, 2 °C
2020
USD/t CO2
24–50
2 °C
2020
GBP/t CO2
25 (14–31)
2 °C
2020
GBP/t CO2
60 (30–90)
Paris Agreement, 2 °C
2020
USD/t CO2
40–80
Temperature Boundary 2 °C
Year
2020
USD2010/t CO2
18–250
5th Assessment Report of the Intergovernmental Panel on Climate Change (IPCC, 2014, p. 450) Report of the High Level Commission of Carbon Prices (High Level Commission of Carbon Prices, 2017) Carbon Valuation in UK Policy Appraisal: A Revised Approach (Department of Energy and Climate Change, 2009) Carbon Valuation in UK Policy Appraisal: A Revised Approach (Department of Energy and Climate Change, 2009) Carbon Pricing Corridors – The Market View 2018 (CDP, 2018)
Unit
Price
Name/Author
Table 1 Studies with carbon prices for 1.5 °C and 2 °C boundary scenarios.
Differs between other (USD 5), BRICS (USD 10) and OECD (USD 20) countries, energy focus, WEM based ETS floor and ceiling suggestions based on expert interviews Global result of a meta-study analysing national scale scenarios from 16 key countries Based on “process-based IAMs”, greater than 66 % probability "…, carbon prices in 1.5 °C scenarios are up to about 2–3 times higher than in the 2 °C scenarios as defined above" (p.12) Results from cost-effectiveness analysis (CEA) modelling; range is from "high 2 °C" to "low 2 °C" scenarios CEA; range is from "high overshoot 1.5 °C" to "below 1.5 °C" scenarios SSP2 scenario, NPV 2020–2100 in 2010 value
Updated 2 °C-consistent SCC Updated 2.5 °C-consistent SCC Energy focus; based on IEA world energy model (WEM)
Initial DICE model, includes a 1.5 °C -consistent SCC
Based on global mitigation costs in idealized implementation scenario Group of economists to represent the collective views on Carbon Prices needed for the Paris Agreement UK government prices (mitigation cost based) used for non ETS emissions UK government prices (mitigation cost based) used for ETS emissions Estimates from business leaders; range for chemicals and energy industries Initial DICE model, includes a 2 °C-consistent SCC
Summary/Comments
83-273
9-3648
9-633
29-777
14-259
28
19-37
4-14
72 239 21-35
995
409
17-35
23 (13–28)
55 (27–82)
28-56
18-252
Price 2016 [USD/ t CO2]
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the carbon price is used. For currencies, the authors use average exchange rates for 2016 as stated by the U.S. Internal Revenue Service (IRS, 2018). To adjust for inflation the average global rate of 3.6 % from the World Bank (2005–2017) is used (The World Bank, 2018b). To adjust for the different base years for carbon prices, a discount rate of 5 % as applied in the majority of studies is used. Table 1 shows the results of the literature review including carbon prices adjusted to 2016. 14 studies considering a 2 °C boundary and 4 studies considering 1.5 °C are found including a wide range of carbon prices, from 4 to 633 USD/t CO2 for 2 °C and 9 to 3648 USD/t CO2 for 1.5 °C in 2016. This significant difference is related to the application of different models, methods and scenarios as described above. The lowest value for the 2 °C boundary is from the OECD/IEA and IRENA (2017) publication, which is specific to energy transition and non-OECD countries. However, given that the transition needed in mining is also very energy focused and that many mines are located in non-OECD countries, the authors include this value in their analysis. The highest values come from studies that do not allow for a temporary overshoot of the target temperature increases. All studies show increases in carbon prices beyond 2020, which is contrary to the assumptions of companies as stated in (CDP, 2017). Most also mention that carbon prices need to be part of a broader policy mix of aligned regulation, standards and subsidies, rather than a stand-alone solution and that they would also have broader, positive, sustainability related ‘side effects’ (e.g. reduced air pollution). The calculations of the economic impact on the four metals and companies considered are done for 2016, which is the latest year of data availability for most data used in this study. To calculate carbon costs, the authors use the minimum (4 and 9 USD/t CO2 and maximum 633 and 3648 USD/t CO2) carbon prices as shown in Table 1, as well as the median (49 and 410 USD/t CO2) prices from all studies for both the 2 °C and the 1.5 °C boundary. The prices are then multiplied with the 2016 average CO2 emissions from producing iron ore and steel, bauxite and aluminium, copper and gold at a commodity level as shown in Table 2. The same calculation is done with the CO2 emissions (scope 1 and 2) as self-reported of the selected companies, listed in Table 3. They were selected because they represent between 19 % and 68 % of the global mine production for each of the analysed commodities as stated by Tost et al. (2018a). The largest steel producer, ArcelorMittal, and the largest aluminium producer, China Hongqiao, were added to this selection. For lack of more detailed data, the companies are considered as a whole, meaning that their results also include other commodities (e.g. for the diversified companies such as BHP or Rio Tinto) as well as downstream production processes (e.g. manufacturing in the case of Alcoa) and other business activities (e.g. commodity trading in the case of Glencore) to various degrees. The data is not checked any further concerning reliability and coverage. In a last step, the direct impact of the carbon costs on the 2016 average prices of the analysed ores and metals, as well as the direct financial impact on the revenues and net profits of the selected
Table 3 2016 CO2 emissions (scope 1 and 2), revenues and net profits /net losses for the largest mining companies (based on (Tost et al. (2018a) (Table 2), the largest steel company ArcelorMittal and the largest aluminium company China Hongquiao. Source of company data: company annual reports and sustainability reports).
Iron ore Steel Bauxite Aluminium Copper Gold
Production (Mt)
Commodity prices (USD/t)
38.8 3,059 1.4 1,058 75 75
3,259 1,610 285 59 20 0.003214
73 433 28 1773 4,863 40,252,735
CO2 emissions (Mt CO2)
Revenues (M USD)
Profit/ Loss (M USD)
Vale1 Rio Tinto2 BHP2 FMG1 Arcelor Mittal Alcoa Chalco3 CBG Hydro2 China Hongqiao3 Codelco Grupo Mexico Mining Freeport-McMoRan Glencore2 Barrick2 Newmont2 Anglo Gold Ashanti2 Goldcorp Kinross
14.7 32 18 1.8 190 25.7 68.6 No data 13.6 96.2 5.9 3.5 10.3 35.6 3.5 4.3 4.1 1.1 1.6
29,363 33,781 30,900 7,083 56,791 9,318 25,616 No data 9,371 13,274 11,537 6,210 14,830 152,948 8,558 6,711 4,085 3,510 3,472
3,982 4,776 −6,207 984 1,779 −400 336 No data 753 728 −334 956 −4,154 1,379 655 −220 80 162 −104
1 2 3
anticipating carbon price within 2 year. using carbon pricing internally. 2017 data.
companies is analysed statically. The analysis basically assumes an application of carbon pricing in 2016 and aims at quantifying the resulting differences in commodity prices and profits or losses. Hence, this paper does not take into consideration dynamic impacts of carbon prices, such as the interaction between supply and demand to gauge the impacts on the market equilibrium, the impact of market concentration/ consolidation or the impact on value chains and final products, thus the estimates are likely upper-bound estimates. Neither is the aim to analyse in detail the likelihood of the political application of carbon pricing globally or in different mining countries. However, the results can provide a first impression of how difficult an application might be or what effects have to be taken into consideration. The calculation sheets are provided in the supplementary data. 3. Results The 18 studies result in minimum, median and maximum carbon prices of 4, 49 and 633 USD/t CO2 for 2 °C and 9, 410 and 3648 USD/t CO2 for 1.5 °C in 2016. 3.1. Impact on the commodities Given the range of carbon prices considered, the impact on the price of the four commodities also shows a wide spread, ranging from 0.07 % price increase for iron ore and bauxite for the 2 °C minimum carbon price to 3,705 % price increase for aluminium for the 1.5 °C maximum carbon price (Table 4). For the 2 °C boundary, the impact of carbon pricing on commodity prices is low for the minimum and median carbon prices, except for aluminium where the price increases by almost 50 %. For the maximum carbon price, the increases are still low for the ores, but high for the metals, i.e. steel (278 %) and aluminium (643 %). For the 1.5 °C boundary, the impact is much higher. Whilst still relatively low for the minimum carbon price, the increase is considerable when applying the maximum carbon price – between 212 % for gold and 3,705 % for aluminium. The impact is lower for the ores, than it is for the metal products, i.e.
Table 2 2016 CO2 emissions, production and prices for iron ore, steel, bauxite, aluminium, copper and gold (CO2 emissions from (Tost et al. (2018a) (averages from Table 4), production from World Mining Data (Reichl et al. (2018) and for steel from US Geological Survey (USGS, 2018), commodity prices from (USGS, 2018) and for steel from EIU in (Deloitte, 2017)). CO2 emissions (Mt CO2)
Company
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Table 4 Price increases on 2016 average prices in percent for iron ore, steel, bauxite, aluminium, copper and gold applying 2 °C and 1.5 °C minimum, median and maximum carbon prices. Price Impact 2 °C (%)
Iron ore Steel Bauxite Aluminium Copper Gold
Price Impact 1.5 °C (%)
2 °C min
2 °C med
2 °C max
1.5 °C min
1.5 °C med
1.5 °C max
0.07 1.75 0.07 4.06 0.30 0.23
0.80 21.49 0.86 49.76 3.73 2.85
10.30 277.60 11.08 642.81 48.16 36.85
0.15 3.95 0.16 9.14 0.68 0.52
6.67 179.80 7.18 416.36 31.19 23.87
59.38 1,599.82 63.84 3,704.56 277.53 212.39
The results shown in Table 5 compare to internal carbon prices reported to the CDP for 2016 by ArcelorMittal (USD 24–33), BHP (USD 24, 50 and 80), Glencore (USD 5–140), Newmont (USD 25–50) and Anglo Gold Ashanti (USD 9) – without further details provided on how they use these carbon prices internally. In the case of ArcelorMittal, their internal carbon price is higher than the profit diminishing price, in the case of Glencore the price is within the range of their internal carbon price and for Anglo Gold Ashanti their internal carbon price is lower. The companies use carbon prices aligned with the two minimum carbon prices used in this study and in some cases also with the 2 °C median carbon price of USD 49.
for steel and aluminium, which can be explained by the high carbon intensity of the metal production processes. For the two ores and the metals copper and gold the price increases are still within the market driven price variations of up to 400 % in the last 20 years, which have been caused mainly by Chinese demand (WEF, 2015). For steel and aluminium, the impact of the minimum carbon prices would be below recent US import tariffs of 25 % for steel and 10 % for aluminium. It would be above price variations of up to 300 % in recent years in the case of the 1.5 °C maximum scenario for steel and both the maximum and the 1.5 °C median scenario for aluminium (Infomine, 2018). 3.2. Impact on companies
4. Discussion
Similar to the results for the specific ores and metal products, the impact on the mining companies analysed in this study shows a wide range. Applying the different carbon prices, revenue reductions would range from 0.13 % at the 2 °C minimum carbon price for Goldcorp to about 2,644 % at the 1.5 °C maximum carbon price for the aluminium company China Hongqiao, meaning carbon costs exceed their revenues by far. In fact, in the 1.5 °C maximum scenario only for the iron ore miner FMG and the diversified mining and trading company Glencore do carbon costs not exceed the companies’ revenues. Carbon costs also have a significant impact on the net profits of the companies, with the lowest reduction being 0.73 % in the 2 °C minimum scenario for FMG. All companies that were profitable in 2016 would still be so in the 2 °C minimum scenario. However, this changes when applying the other carbon prices: In the 2 °C maximum and the 1.5 °C median and maximum scenarios none of the companies analysed make a profit. The authors also analyse the carbon price sensitivity of the companies reporting a profit for 2016 to find the carbon prices that reduce these profits to 0. Chalco is the most sensitive with a price of 5 USD/t CO2 and FMG the least sensitive company with a price of 547 USD/t CO2 (i.e. making a profit in all but the two maximum scenarios), as shown in Table 5.
This study presents a point in time snapshot of the potential impact of carbon pricing on the metal mining sector. The results, which should be considered an upper-bound estimate, indicate that, if climate action is taken seriously and a 1.5° target pursued, the impacts on the sector are remarkable, as the applied prices would diminish revenues and in some cases even make mining non-profitable. Of course, what this study provides is only a limited perspective, as only one point in time is analysed using a static approach, with the underlying assumption of a sudden implementation of a pricing system without any transition and adaptation phase. While these limitations could be overcome by future research, the aim of this study is to raise awareness of the overall economic dimension of serious climate mitigation actions for a sub-set of the global economy. Additional research could be done applying dynamic modelling, covering longer time periods and considering the influence of different discount rates, which the authors also see as an important sensitivity given the long term nature of mining investments (Garnaut, 2019), and more detailed, process-based analysis, and could be expanded to other metals and minerals. Further, the interaction between supply and demand to gauge the impacts on the market equilibrium has to be analysed in more detail, as Lanz et al. (2013) did for copper, and the impact on value chains and final products, as Rootzen and Johnsson (2016) did for cars. More detailed, reliable reporting from companies at the commodity level would also be required (Kim and Lyon, 2011; Tost et al., 2018a), as would be more details about internal carbon pricing and especially the assumptions and schemes behind them (Gillingham et al., 2017). The range of Paris Agreement-consistent carbon prices considered is very wide given that all different models and scenarios from the underlying studies have been considered. With increasing demand for carbon pricing as a mitigation measure, which is also driven by the ongoing political debate, it can be expected that the price range will narrow (Shell, 2018). Also, more work is needed regarding the impact of pricing other environmental pressures from mining and metals such as water or land use, how they might interact and what this could mean for instance for metal production’s contribution to the sustainable development goals (SDGs) (United Nations, 2018) or what an “inclusive green economy” would mean in this context.
Table 5 Profit diminishing carbon prices for the companies reporting a net profit for 2016. Company
Carbon Price (USD)
Vale Rio Tinto FMG ArcelorMittal Chalco Hydro China Hongqiao Grupo Mexico Mining Glencore Barrick Anglo Gold Ashanti Goldcorp
271 149 547 9 5 55 8 273 39 187 20 147
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Declaration of Competing Interest
5. Conclusions
The authors declare no conflict of interest.
Taking climate change seriously requires decreasing greenhouse gas emissions. A market-based tool to do so is carbon pricing. In this study, the authors estimate the impact of different levels of carbon prices needed to reach the goals of the Paris Agreement to limit global warming to 2 °C or 1.5 °C respectively, on the prices of iron ore and steel, bauxite and aluminium, copper and gold and on the major producing companies’ revenues and profits. At a commodity level the impact of carbon pricing on metal prices is within recent commodity price fluctuations for copper and gold. The situation looks different however for steel and especially aluminium, where prices would increase significantly for most of the carbon prices applied and would be beyond recent price fluctuations. In the period up to 2030, McKinsey estimates the abatement potential for the iron and steel sector at costs below 60€/t CO2 at about 1.5 Gt CO2 per year, about 27 % of total emissions (McKinsey&Company, 2009). It would mean that industry and customers search for – and most likely find – alternatives, and/or that the industry will have to spend significantly on research & development to develop new processes beyond the abatement potential considered by McKinsey or initiatives already underway to increase the use of renewable energy in mining and minerals processing, such as replacing coal and gas with hydrogen or carbon capture and storage (CCS), (e.g. (H2Future, 2017; Shell, 2018)). Hence, the consequences for metal mining would be severe, as this could mean that for reaching the Paris Agreement goals not only fossil fuels, but also certain metals, or at least metals from certain mines, will have to remain in the ground (Carney, 2015; van der Ploeg and Rezai, 2019) or that certain uses of these metals (e.g. gold for jewelry) might become unacceptable for society. At a company level, profitability is significantly impacted by carbon prices. This is the more accentuated, the more downstream metal-focused a company is, e.g. ArcelorMittal or China Hongqiao. In some cases even the minimum carbon prices have a significant impact on profits, as in the case of Chalco, which is heavily reliant on coal-based electricity. Looking at this from a societal perspective, one could argue that a carbon price would be beneficial and do exactly what it is intended to do, i.e. to penalise Chalco more than Hydro, whose electricity is coming from hydropower. The question arises, if users of these metals, both industry and individuals, as well as broader society are willing to accept such a high cost (Rozenberg et al., 2018; Sen and von Schickfus, 2017). The four metals analysed are however key for the shift towards a “green economy” as propagated by the UN Environment Programme (UNEP, 2019a), based upon renewable energy and cleaner production. Clear contradictions become apparent, as such a shift will require a strong increase in the extraction of especially copper, but also the other metals. Hence, this paper underlines the findings of e.g. Jackson (2017), Raworth (2017) and indeed UNEP itself, who move towards a model of an “inclusive green economy” (UNEP, 2019b). To stay within our planetary boundaries, society – instead of only shifting from the current production model to a cleaner one – will also have to shift to more resilient lifestyles based upon sharing, circularity, collaboration, solidarity, opportunity, and decreased consumption levels. The question remains, how well prepared mining and metal companies are for such a world of carbon pricing and a transition towards a low carbon world within the temperature boundaries of the Paris Agreement, as the internal carbon prices currently used by some of the companies in this study, with many reporting none at all, might not high enough – and as business as usual will not be possible.
Acknowledgments The authors would like to express our appreciation to our anonymous reviewers, who helped to improve this paper. Appendix A. Supplementary data Supplementary material related to this article can be found, in the online version, at doi:https://doi.org/10.1016/j.exis.2020.01.012. References Buxton, A., 2012. MMSD+10: Reflecting on a Decade. International Institute for Environment and Development, London. Canfin, P., Grandjean, A., Mestrallet, G., 2016. Mission Report – Proposals for Aligning Carbon Prices With the Paris Agreement. Retrieved October 30, 2018, from Mission report:. . https://www.engie.com/wp-content/uploads/2016/07/executivesummary.pdf. Carattini, S., Kallbekken, S., Orlov, A., 2019. How to win public support for a global carbon tax. Nature 565 (7739), 289–291. Carbon Pricing Leadership Coalition, 2017. Carbon Prices in National Deep Decarbonization Pathways. Retrieved October 30, 2018. from Carbon prices in national deep decarbonization pathways. https://www.carbonpricingleadership. org/open-for-comments/2017/5/28/carbon-prices-in-national-deepdecarbonization-pathways-insights-from-the-deep-decarbonization-pathwaysproject-ddpp. Carney, M., 2015. Bank of England. Retrieved August 29, 2019. from Breaking the tragedy of the horizon - climate change and financial stability. https://www. bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climatechange-and-financial-stability. CDP, 2017. Carbon Pricing. Retrieved October 10, 2018. from Putting a price on carbon. https://www.cdp.net/en/reports/downloads/2738. CDP, 2018. Carbon Pricing Corridors – the Market View 2018. Retrieved November 03, 2018. from Carbon Pricing Corridors. https://www.cdp.net/en/reports/downloads/ 3326. Clarke, H., Waschik, R., 2011. Australia’s Carbon Pricing Strategies in a Global Context. Centre for Climate Economics & Policy, Crawford School of Economics and Government, The Australian National University, Canberra. Deloitte, 2017. Overview of Steel and Iron Market. Retrieved December 12, 2018. from Overview of steel and iron market. https://www2.deloitte.com/ru/en/pages/ manufacturing/articles/2017/overview-of-steel-and-iron-market-2017.html. Department of Energy and Climate Change, 2009. Carbon Valuation in UK Policy Appraisal: A Revised Approach. Retrieved October 29, 2018. from Carbon Valuation in UK Policy Appraisal: A Revised Approach. https://www.gov.uk/government/ publications/carbon-valuation-in-uk-policy-appraisal-a-revised-approach. Garnaut, R., 2019. Superpower: Australia’s Low Carbon Opportunity. La Trobe University Press, Carlton. Gillingham, K., Carattini, S., Esty, D., 2017. Lessons from first campus carbon-pricing scheme. Nature 551 (7678), 27–29. Government Offices of Sweden, 2017. The Climate Policy Framework. Retrieved December 7, 2018, from. https://www.government.se/articles/2017/06/theclimate-policy-framework/. Guivarch, C., Rogelj, J., 2017. Carbon Price Variations in 2°C Scenarios Explored. Retrieved October 2018, 30. from Carbon price variations in 2°C scenarios explored. https://www.carbonpricingleadership.org/open-for-comments/2017/5/29/carbonprice-variations-in-2c-scenarios-explored. H2Future, 2017. H2Future Green Hydrogen. Retrieved January 10, 2019, from. https:// www.h2future-project.eu/. High Level Commission of Carbon Prices, 2017. Report of the High Level Commission of Carbon Prices. World Bank, Washington, DC. Ho, M., Morgenstern, R., Shih, J., 2008. Impact of carbon price policies on U.S. Industries. Resources for the Future 37, 1–87. ICMM, 2013. The Cost of Carbon Pricing: Competitiveness Implications for the Mining and Metals Industry. ICMM, London. IEA, 2015. Energy Technology Perspectives 2015 – Mobilising Innovation to Accelerate Climate Action. IEA, Paris, France. Infomine, 2018. Commodity and Metal Prices. Retrieved December 12, 2018, from. http://www.infomine.com/investment/metal-prices/. IPCC, 2014. Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA. IPCC, 2018. Global Warming of 1.5°C. IPCC, Incheon. IRS, 2018. Yearly Average Currency Exchange Rates. Retrieved December 04, 2018, from. https://www.irs.gov/individuals/international-taxpayers/yearly-averagecurrency-exchange-rates. Jackson, T., 2017. Prosperity Without Growth. Routledge, Abingdon and New York.
Funding This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. 6
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The Extractive Industries and Society journal homepage: www.elsevier.com/locate/exis
Original article
Carbon prices for meeting the Paris agreement and their impact on key metals Michael Tosta,*, Michael Hitchb, Stephan Lutterc, Susanne Feiela, Peter Mosera a
Chair of Mining Engineering and Mineral Economics, Montanuniversitaet Leoben, Austria School of Science, Department of Geology, Mining Division, Tallinn University of Technology, Estonia c Institute for Ecological Economics, Vienna University of Economics and Business (WU), Austria b
A R T I C LE I N FO
A B S T R A C T
Keywords: Carbon pricing Paris agreement Climate change Metal mining Aluminium Copper Gold Steel
Under the Paris Agreement, nations of this world aim to limit temperature increase to well below 2 °C above preindustrial levels and to pursue efforts to further limit the increase to 1.5 °C. Putting a price on CO2 emissions has been suggested as one approach to tackling global warming. This paper uses the results of suggested carbon pricing systems in the context of the Paris Agreement that consider biophysical boundary conditions for CO2 emissions. The impact of such carbon pricing is estimated statically for two ores – iron ore and bauxite – and four metals/ alloys – steel, aluminium, copper and gold – at a commodity level and a company level for some of the largest mining companies in the world. The authors conclude that at the commodity level the upper-bound impact of carbon pricing on metal prices would still be within the market driven price variations of recent years for copper and gold. The situation however looks different for steel and aluminium and for the companies, where prices and profitability would be significantly impacted, in some cases even by the minimum carbon prices used in this study, which would make mining unprofitable.
1. Introduction The United Nations (UN) lists global warming – amongst other issues such as health, food, oceans or water – as one of the greatest challenges the world is facing. Impacts range from shifting weather patterns that threaten food production to rising sea levels that increase the risk of catastrophic flooding, being global in scope and unprecedented in scale (United Nations, 2020). Yet humankind has so far failed to find solutions to seriously address the issue (e.g. (IPCC, 2018; The World Bank, 2018a). In 2015, representatives of almost 200 nations came once again together in Paris to find such a solution. One outcome of the Paris Agreement is to limit “the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C” (UNFCCC, 2018). However, given the current political situation, i.e. the withdrawal of the US from the agreement and the currently submitted insufficient nationally determined contributions (NDCs), the window for reaching the ambitious landmark agreement is closing, with 1.5 °C warming to be reached at the current rate of temperature rise between 2030 and 2052 (IPCC, 2018). Putting a price on released (or avoided, respectively) CO2 equivalent emissions, or ‘carbon pricing’, as it is commonly known, has been
⁎
suggested for many years as a market-based solution for tackling global warming, and is also understood as representing a proxy for the level of effort needed in mitigation (The World Bank, 2018a). It may be done in the form of a carbon tax like applied in Finland and the other Northern European countries for almost 20 years. Another form of implementation are emission permits like the European emissions trading scheme (ETS), which is the largest market so far and has been running for more than 10 years (IPCC, 2018). The standard economic solution for setting the price is called the social cost of carbon (SCC), based in principle on Pigou (1920), which sets the cost based on the net present value of aggregate climate damages from one more tonne of CO2 emitted (IPCC, 2018, p. 558). Well known examples of SCC estimates include Nordhaus’ “To slow or not to slow: The economics of the greenhouse effect” (Nordhaus, 1991) and the Stern Review (Stern, 2006). In contrast to the SCC, target-consistent approaches set the price based on estimates of the abatement costs for reductions needed to meet certain emissions reduction targets. For example, this approach has been used by the UK government since 2009 (Department of Energy and Climate Change, 2009). A good summary explanation of the two approaches can be found in (IPCC, 2018, p. 150). In 2019, the World Bank stated that the adaptation of carbon pricing is accelerating: 57 initiatives were or are being implemented around the
Corresponding author. E-mail address: [email protected] (M. Tost).
https://doi.org/10.1016/j.exis.2020.01.012 Received 29 August 2019; Received in revised form 27 January 2020; Accepted 27 January 2020 2214-790X/ © 2020 Elsevier Ltd. All rights reserved.
Please cite this article as: Michael Tost, et al., The Extractive Industries and Society, https://doi.org/10.1016/j.exis.2020.01.012
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2. Literature, materials and methods
world, covering around 20 % (up from 15 % in 2018) of global greenhouse gas (GHG) emissions. However, less than 5 % of them have carbon prices in the range needed to reach the Paris Agreement (World Bank, 2019). Research focusing on global carbon pricing is also picking up (e.g. (Weitzman, 2014; Carattini et al., 2019; Nordhaus, 2015). As is use in business, with 1400 companies reporting their practices or plans regarding internal carbon pricing in their 2017 CDP carbon disclosure. These include 10 of the 19 companies analysed in this paper. However, as the CDP report notes, it remains unclear if companies are prepared for higher prices in the medium to long term, as 85 % of the companies reporting a carbon price assume a static price and only very few disclose price assumptions past 2025 (CDP, 2017). Metal mining generates emissions through its specific unit operations, including drilling, blasting, loading, hauling and particularly crushing, grinding and processing ores into metals. Diesel is largely used as a power-generating fuel in places where electrified infrastructure is not available or for mobile equipment. Most of the in situ mining infrastructure (e.g. process plants, smelters and refineries) rely on fossil fuels or electricity as their primary source of energy. Tost et al. (2018a) estimate the CO2 emissions for 2016 from iron ore, bauxite, copper and gold mining (including smelting for the latter two, which is often done at integrated production sites) in the range of 150 Mt to 233 Mt, with an average of 190 Mt, indicating that mining these four commodities contributes between 0.4 and 0.7 percent of the global emissions. This number changes significantly to 4.3 Gt, or 12 percent of global emissions, when considering also steel production and aluminium refining (which is mainly done at different locations than the mine sites), which also includes the process related CO2 equivalents from other GHGs. The mining sector’s response to global warming has been to acknowledge the problem years ago, but it has since taken a ‘wait and see’ position (Buxton, 2012). The largest mining companies like Anglo American, Glencore or Rio Tinto have mainly reduction targets based on improving carbon intensity and in comparison, their climate change position is behind that of companies from other industrial sectors such as BMW, LG or Philips (Tost et al., 2018b). The objective of this paper is to examine the global implications of target-consistent carbon prices which consider limiting global warming to 1.5 °C or 2 °C as the target, on the production of two ores – iron ore and bauxite – and four metal products – steel, aluminium, copper and gold –, analyse, using a static framework, the impact of the resulting costs on metal prices and the largest metal companies and compare to the carbon prices these companies are currently using. The four metals1 are chosen as they represent over 96 percent of all metals mined globally in terms of bulk tonnage and possess over 68 percent of industrial value (Tost et al., 2018b). This paper contributes to the scientific literature by providing a first estimate of the impact of a wide range of Paris Agreement-consistent carbon prices on these four metals and the largest companies mining them. In Section 2 the authors review the literature for the application of carbon pricing in the mining industry and for Paris Agreement targetconsistent carbon prices. They list the global CO2 emissions for the selected two ores and four metal products overall and the largest companies globally producing them. In Section 3, a range of carbon prices (minimum, median and maximum price) is applied to the estimated emissions at an aggregate level, and for the selected companies. The impact of carbon pricing on revenues, profits, as well as ore and metal prices is calculated and a comparison with internal carbon prices of the companies is done. The results are discussed in Section 4 and conclusions are presented in Section 5.
1
2.1. Literature review Concerning carbon pricing and its implications on the mining and metals industry, an often referenced study was done in 2013 by the International Council on Mining and Metals (ICMM). It analysed the impact from existing pricing initiatives in key mining regions on various commodities using prices ranging from USD 15/tCO2 to USD 24/ tCO2 as well as a global carbon price of USD 25/tCO2. ICMM concluded that the electricity sector, its carbon intensity and ability to pass through carbon costs could have a significant impact on mining, i.e. on energy intensive copper refining and aluminium smelting (ICMM, 2013). Other studies from “mining countries” confirm these findings. Whilst mainly looking at the trade implications of national or regional carbon prices on manufacturing or the broader economy, they use a similar range of carbon prices and find the mining and metals industry to be one of the most impacted industry sectors due to its energy intensity and trade exposure (e.g. Ho et al. 2008; National Round Table on the Environment and the Economy, 2008; Clarke and Waschik, 2011). Lanz et al. (2013) simulated trade and carbon leakage aspects in the copper industry using USD 50/tCO2 finding that consumers and producers were price inelastic. They also found that over a timeframe of 10–20 years due to its capital intensity carbon emissions were insensitive to carbon policy and that about 30 % of reductions would be compensated due to leakage to countries without carbon pricing policies. Rootzen and Johnsson (2016) analysed the impact of carbon pricing on the steel industry, concluding that the 2016 prices of the European ETS were too low to unlock investments in low carbon production processes. They also analysed the impact of a EUR 100/tCO2 carbon price on steel on cars, which would lead to a price increase for a mid-size car of less than 0.5 %. No studies were found looking at the implications of target-consistent carbon prices. 2.2. Materials and methods The basis of the calculations carried out in this paper is a review of studies on global carbon prices that consider a biophysical boundary for GHG emissions. The boundary conditions of 350 and 430 ppm stated in Steffen et al. (2015) and the temperature goals of the Paris Agreement, i.e. 2 °C and 1.5 °C, were considered in the review. However, the focus of the present analysis is set on 1.5 °C/430 ppm and 2 °C. No literature could be found for 350 ppm, since the world has already passed this point. The purpose of the review is not to find the right price, but a range of prices to be applied to the selection of metals and independently from their current or potential political application. Hence, peer reviewed and non-peer reviewed studies are considered and differences between the underlying models (e.g. integrated assessment models (IAM) such as DICE or WITCH) and methods (e.g. costeffectiveness analysis vs. cost-benefit analysis vs. social cost of carbon with temperature limit), or differences in the probabilities, i.e. 50 % vs. 66 %, of reaching the set temperature limit, have not been considered. All possible scenarios (e.g. ‘below 1.5 °C’, ‘low overshoot’ and ‘high overshoot’ in (IPCC, 2018) discussed in the studies are considered.2 Carbon taxes as shown in (World Bank, 2019) are not considered, since their policy goals are either national (e.g. to have net zero emissions of greenhouse gases in 2045 in the case of Sweden (Government Offices of Sweden, 2017) or unknown concerning boundary conditions. Since the analysed studies use different currencies and years as the base for the time value of money and carbon prices, both are adjusted to 2016 as follows: If the year for the time value is not stated, the same year as for 2 For readers interested in further details on integrated assessment models, economic modelling, probabilities and overshoot scenarios, the authors refer to (IPCC, 2018) and (IPCC, 2014).
The authors acknowledge that technically steel is an iron based alloy. 2
3
Scenarios towards limiting global mean temperature increase below 1.5 °C (Rogelj et al., 2018)
2030 2010
USD2010/t CO2 USD2010/t CO2
15– 6050 50–165 (NPV)
Global Warming of 1.5 °C (IPCC, 2018)
2030
USD2010/t CO2
15–1050
Global Warming of 1.5 °C (IPCC, 2018)
2030
USD2005/t CO2
40–1080
Carbon price variations in 2 °C scenarios explored (Guivarch and Rogelj, 2017)
Paris Agreement, 1.5 °C Paris Agreement, 1.5 °C
Paris Agreement, 1.5 °C Paris Agreement, 2 °C
Paris Agreement, 2 °C
2030
USD2005/t CO2
20–360
Paris Agreement, 2 °C
2020
USD/t CO2
40
Paris Agreement, 2 °C
2020
EUR/t CO2
25–50
Paris Agreement, 2 °C
2020
USD/t CO2
5–20
2 °C 2.5 °C Paris Agreement, 2 °C
1.5 °C
2020 2015 2020
USD2005/t CO2 USD2010/t CO2 USD/t CO2
60 184 30–50
2015
USD2005/t CO2
642
2 °C
2015
USD2005/t CO2
264
The Challenge of Global Warming: Economic Models and Environmental Policy (Nordhaus, 2007) The Challenge of Global Warming: Economic Models and Environmental Policy (Nordhaus, 2007) DICE 2013R: Introduction and User’s Manual (Nordhaus and Sztorc, 2013) Revisiting the social cost of carbon (Nordhaus, 2017) Energy Technology Perspectives 2015 – Mobilising Innovation to Accelerate Climate Action (IEA, 2015, p. 383) Perspectives for the Energy Transition – Investment Needs for a Low-Carbon Energy System (OECD/IEA and IRENA, 2017) Mission report – Proposals for aligning carbon prices with the Paris agreement (Canfin et al., 2016) Carbon prices in national deep decarbonization pathways – Insights from the Deep Decarbonization pathways Project (Carbon Pricing Leadership Coalition, 2017) Carbon price variations in 2 °C scenarios explored (Guivarch and Rogelj, 2017)
Paris Agreement, 2 °C
2020
USD/t CO2
24–50
2 °C
2020
GBP/t CO2
25 (14–31)
2 °C
2020
GBP/t CO2
60 (30–90)
Paris Agreement, 2 °C
2020
USD/t CO2
40–80
Temperature Boundary 2 °C
Year
2020
USD2010/t CO2
18–250
5th Assessment Report of the Intergovernmental Panel on Climate Change (IPCC, 2014, p. 450) Report of the High Level Commission of Carbon Prices (High Level Commission of Carbon Prices, 2017) Carbon Valuation in UK Policy Appraisal: A Revised Approach (Department of Energy and Climate Change, 2009) Carbon Valuation in UK Policy Appraisal: A Revised Approach (Department of Energy and Climate Change, 2009) Carbon Pricing Corridors – The Market View 2018 (CDP, 2018)
Unit
Price
Name/Author
Table 1 Studies with carbon prices for 1.5 °C and 2 °C boundary scenarios.
Differs between other (USD 5), BRICS (USD 10) and OECD (USD 20) countries, energy focus, WEM based ETS floor and ceiling suggestions based on expert interviews Global result of a meta-study analysing national scale scenarios from 16 key countries Based on “process-based IAMs”, greater than 66 % probability "…, carbon prices in 1.5 °C scenarios are up to about 2–3 times higher than in the 2 °C scenarios as defined above" (p.12) Results from cost-effectiveness analysis (CEA) modelling; range is from "high 2 °C" to "low 2 °C" scenarios CEA; range is from "high overshoot 1.5 °C" to "below 1.5 °C" scenarios SSP2 scenario, NPV 2020–2100 in 2010 value
Updated 2 °C-consistent SCC Updated 2.5 °C-consistent SCC Energy focus; based on IEA world energy model (WEM)
Initial DICE model, includes a 1.5 °C -consistent SCC
Based on global mitigation costs in idealized implementation scenario Group of economists to represent the collective views on Carbon Prices needed for the Paris Agreement UK government prices (mitigation cost based) used for non ETS emissions UK government prices (mitigation cost based) used for ETS emissions Estimates from business leaders; range for chemicals and energy industries Initial DICE model, includes a 2 °C-consistent SCC
Summary/Comments
83-273
9-3648
9-633
29-777
14-259
28
19-37
4-14
72 239 21-35
995
409
17-35
23 (13–28)
55 (27–82)
28-56
18-252
Price 2016 [USD/ t CO2]
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the carbon price is used. For currencies, the authors use average exchange rates for 2016 as stated by the U.S. Internal Revenue Service (IRS, 2018). To adjust for inflation the average global rate of 3.6 % from the World Bank (2005–2017) is used (The World Bank, 2018b). To adjust for the different base years for carbon prices, a discount rate of 5 % as applied in the majority of studies is used. Table 1 shows the results of the literature review including carbon prices adjusted to 2016. 14 studies considering a 2 °C boundary and 4 studies considering 1.5 °C are found including a wide range of carbon prices, from 4 to 633 USD/t CO2 for 2 °C and 9 to 3648 USD/t CO2 for 1.5 °C in 2016. This significant difference is related to the application of different models, methods and scenarios as described above. The lowest value for the 2 °C boundary is from the OECD/IEA and IRENA (2017) publication, which is specific to energy transition and non-OECD countries. However, given that the transition needed in mining is also very energy focused and that many mines are located in non-OECD countries, the authors include this value in their analysis. The highest values come from studies that do not allow for a temporary overshoot of the target temperature increases. All studies show increases in carbon prices beyond 2020, which is contrary to the assumptions of companies as stated in (CDP, 2017). Most also mention that carbon prices need to be part of a broader policy mix of aligned regulation, standards and subsidies, rather than a stand-alone solution and that they would also have broader, positive, sustainability related ‘side effects’ (e.g. reduced air pollution). The calculations of the economic impact on the four metals and companies considered are done for 2016, which is the latest year of data availability for most data used in this study. To calculate carbon costs, the authors use the minimum (4 and 9 USD/t CO2 and maximum 633 and 3648 USD/t CO2) carbon prices as shown in Table 1, as well as the median (49 and 410 USD/t CO2) prices from all studies for both the 2 °C and the 1.5 °C boundary. The prices are then multiplied with the 2016 average CO2 emissions from producing iron ore and steel, bauxite and aluminium, copper and gold at a commodity level as shown in Table 2. The same calculation is done with the CO2 emissions (scope 1 and 2) as self-reported of the selected companies, listed in Table 3. They were selected because they represent between 19 % and 68 % of the global mine production for each of the analysed commodities as stated by Tost et al. (2018a). The largest steel producer, ArcelorMittal, and the largest aluminium producer, China Hongqiao, were added to this selection. For lack of more detailed data, the companies are considered as a whole, meaning that their results also include other commodities (e.g. for the diversified companies such as BHP or Rio Tinto) as well as downstream production processes (e.g. manufacturing in the case of Alcoa) and other business activities (e.g. commodity trading in the case of Glencore) to various degrees. The data is not checked any further concerning reliability and coverage. In a last step, the direct impact of the carbon costs on the 2016 average prices of the analysed ores and metals, as well as the direct financial impact on the revenues and net profits of the selected
Table 3 2016 CO2 emissions (scope 1 and 2), revenues and net profits /net losses for the largest mining companies (based on (Tost et al. (2018a) (Table 2), the largest steel company ArcelorMittal and the largest aluminium company China Hongquiao. Source of company data: company annual reports and sustainability reports).
Iron ore Steel Bauxite Aluminium Copper Gold
Production (Mt)
Commodity prices (USD/t)
38.8 3,059 1.4 1,058 75 75
3,259 1,610 285 59 20 0.003214
73 433 28 1773 4,863 40,252,735
CO2 emissions (Mt CO2)
Revenues (M USD)
Profit/ Loss (M USD)
Vale1 Rio Tinto2 BHP2 FMG1 Arcelor Mittal Alcoa Chalco3 CBG Hydro2 China Hongqiao3 Codelco Grupo Mexico Mining Freeport-McMoRan Glencore2 Barrick2 Newmont2 Anglo Gold Ashanti2 Goldcorp Kinross
14.7 32 18 1.8 190 25.7 68.6 No data 13.6 96.2 5.9 3.5 10.3 35.6 3.5 4.3 4.1 1.1 1.6
29,363 33,781 30,900 7,083 56,791 9,318 25,616 No data 9,371 13,274 11,537 6,210 14,830 152,948 8,558 6,711 4,085 3,510 3,472
3,982 4,776 −6,207 984 1,779 −400 336 No data 753 728 −334 956 −4,154 1,379 655 −220 80 162 −104
1 2 3
anticipating carbon price within 2 year. using carbon pricing internally. 2017 data.
companies is analysed statically. The analysis basically assumes an application of carbon pricing in 2016 and aims at quantifying the resulting differences in commodity prices and profits or losses. Hence, this paper does not take into consideration dynamic impacts of carbon prices, such as the interaction between supply and demand to gauge the impacts on the market equilibrium, the impact of market concentration/ consolidation or the impact on value chains and final products, thus the estimates are likely upper-bound estimates. Neither is the aim to analyse in detail the likelihood of the political application of carbon pricing globally or in different mining countries. However, the results can provide a first impression of how difficult an application might be or what effects have to be taken into consideration. The calculation sheets are provided in the supplementary data. 3. Results The 18 studies result in minimum, median and maximum carbon prices of 4, 49 and 633 USD/t CO2 for 2 °C and 9, 410 and 3648 USD/t CO2 for 1.5 °C in 2016. 3.1. Impact on the commodities Given the range of carbon prices considered, the impact on the price of the four commodities also shows a wide spread, ranging from 0.07 % price increase for iron ore and bauxite for the 2 °C minimum carbon price to 3,705 % price increase for aluminium for the 1.5 °C maximum carbon price (Table 4). For the 2 °C boundary, the impact of carbon pricing on commodity prices is low for the minimum and median carbon prices, except for aluminium where the price increases by almost 50 %. For the maximum carbon price, the increases are still low for the ores, but high for the metals, i.e. steel (278 %) and aluminium (643 %). For the 1.5 °C boundary, the impact is much higher. Whilst still relatively low for the minimum carbon price, the increase is considerable when applying the maximum carbon price – between 212 % for gold and 3,705 % for aluminium. The impact is lower for the ores, than it is for the metal products, i.e.
Table 2 2016 CO2 emissions, production and prices for iron ore, steel, bauxite, aluminium, copper and gold (CO2 emissions from (Tost et al. (2018a) (averages from Table 4), production from World Mining Data (Reichl et al. (2018) and for steel from US Geological Survey (USGS, 2018), commodity prices from (USGS, 2018) and for steel from EIU in (Deloitte, 2017)). CO2 emissions (Mt CO2)
Company
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Table 4 Price increases on 2016 average prices in percent for iron ore, steel, bauxite, aluminium, copper and gold applying 2 °C and 1.5 °C minimum, median and maximum carbon prices. Price Impact 2 °C (%)
Iron ore Steel Bauxite Aluminium Copper Gold
Price Impact 1.5 °C (%)
2 °C min
2 °C med
2 °C max
1.5 °C min
1.5 °C med
1.5 °C max
0.07 1.75 0.07 4.06 0.30 0.23
0.80 21.49 0.86 49.76 3.73 2.85
10.30 277.60 11.08 642.81 48.16 36.85
0.15 3.95 0.16 9.14 0.68 0.52
6.67 179.80 7.18 416.36 31.19 23.87
59.38 1,599.82 63.84 3,704.56 277.53 212.39
The results shown in Table 5 compare to internal carbon prices reported to the CDP for 2016 by ArcelorMittal (USD 24–33), BHP (USD 24, 50 and 80), Glencore (USD 5–140), Newmont (USD 25–50) and Anglo Gold Ashanti (USD 9) – without further details provided on how they use these carbon prices internally. In the case of ArcelorMittal, their internal carbon price is higher than the profit diminishing price, in the case of Glencore the price is within the range of their internal carbon price and for Anglo Gold Ashanti their internal carbon price is lower. The companies use carbon prices aligned with the two minimum carbon prices used in this study and in some cases also with the 2 °C median carbon price of USD 49.
for steel and aluminium, which can be explained by the high carbon intensity of the metal production processes. For the two ores and the metals copper and gold the price increases are still within the market driven price variations of up to 400 % in the last 20 years, which have been caused mainly by Chinese demand (WEF, 2015). For steel and aluminium, the impact of the minimum carbon prices would be below recent US import tariffs of 25 % for steel and 10 % for aluminium. It would be above price variations of up to 300 % in recent years in the case of the 1.5 °C maximum scenario for steel and both the maximum and the 1.5 °C median scenario for aluminium (Infomine, 2018). 3.2. Impact on companies
4. Discussion
Similar to the results for the specific ores and metal products, the impact on the mining companies analysed in this study shows a wide range. Applying the different carbon prices, revenue reductions would range from 0.13 % at the 2 °C minimum carbon price for Goldcorp to about 2,644 % at the 1.5 °C maximum carbon price for the aluminium company China Hongqiao, meaning carbon costs exceed their revenues by far. In fact, in the 1.5 °C maximum scenario only for the iron ore miner FMG and the diversified mining and trading company Glencore do carbon costs not exceed the companies’ revenues. Carbon costs also have a significant impact on the net profits of the companies, with the lowest reduction being 0.73 % in the 2 °C minimum scenario for FMG. All companies that were profitable in 2016 would still be so in the 2 °C minimum scenario. However, this changes when applying the other carbon prices: In the 2 °C maximum and the 1.5 °C median and maximum scenarios none of the companies analysed make a profit. The authors also analyse the carbon price sensitivity of the companies reporting a profit for 2016 to find the carbon prices that reduce these profits to 0. Chalco is the most sensitive with a price of 5 USD/t CO2 and FMG the least sensitive company with a price of 547 USD/t CO2 (i.e. making a profit in all but the two maximum scenarios), as shown in Table 5.
This study presents a point in time snapshot of the potential impact of carbon pricing on the metal mining sector. The results, which should be considered an upper-bound estimate, indicate that, if climate action is taken seriously and a 1.5° target pursued, the impacts on the sector are remarkable, as the applied prices would diminish revenues and in some cases even make mining non-profitable. Of course, what this study provides is only a limited perspective, as only one point in time is analysed using a static approach, with the underlying assumption of a sudden implementation of a pricing system without any transition and adaptation phase. While these limitations could be overcome by future research, the aim of this study is to raise awareness of the overall economic dimension of serious climate mitigation actions for a sub-set of the global economy. Additional research could be done applying dynamic modelling, covering longer time periods and considering the influence of different discount rates, which the authors also see as an important sensitivity given the long term nature of mining investments (Garnaut, 2019), and more detailed, process-based analysis, and could be expanded to other metals and minerals. Further, the interaction between supply and demand to gauge the impacts on the market equilibrium has to be analysed in more detail, as Lanz et al. (2013) did for copper, and the impact on value chains and final products, as Rootzen and Johnsson (2016) did for cars. More detailed, reliable reporting from companies at the commodity level would also be required (Kim and Lyon, 2011; Tost et al., 2018a), as would be more details about internal carbon pricing and especially the assumptions and schemes behind them (Gillingham et al., 2017). The range of Paris Agreement-consistent carbon prices considered is very wide given that all different models and scenarios from the underlying studies have been considered. With increasing demand for carbon pricing as a mitigation measure, which is also driven by the ongoing political debate, it can be expected that the price range will narrow (Shell, 2018). Also, more work is needed regarding the impact of pricing other environmental pressures from mining and metals such as water or land use, how they might interact and what this could mean for instance for metal production’s contribution to the sustainable development goals (SDGs) (United Nations, 2018) or what an “inclusive green economy” would mean in this context.
Table 5 Profit diminishing carbon prices for the companies reporting a net profit for 2016. Company
Carbon Price (USD)
Vale Rio Tinto FMG ArcelorMittal Chalco Hydro China Hongqiao Grupo Mexico Mining Glencore Barrick Anglo Gold Ashanti Goldcorp
271 149 547 9 5 55 8 273 39 187 20 147
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Declaration of Competing Interest
5. Conclusions
The authors declare no conflict of interest.
Taking climate change seriously requires decreasing greenhouse gas emissions. A market-based tool to do so is carbon pricing. In this study, the authors estimate the impact of different levels of carbon prices needed to reach the goals of the Paris Agreement to limit global warming to 2 °C or 1.5 °C respectively, on the prices of iron ore and steel, bauxite and aluminium, copper and gold and on the major producing companies’ revenues and profits. At a commodity level the impact of carbon pricing on metal prices is within recent commodity price fluctuations for copper and gold. The situation looks different however for steel and especially aluminium, where prices would increase significantly for most of the carbon prices applied and would be beyond recent price fluctuations. In the period up to 2030, McKinsey estimates the abatement potential for the iron and steel sector at costs below 60€/t CO2 at about 1.5 Gt CO2 per year, about 27 % of total emissions (McKinsey&Company, 2009). It would mean that industry and customers search for – and most likely find – alternatives, and/or that the industry will have to spend significantly on research & development to develop new processes beyond the abatement potential considered by McKinsey or initiatives already underway to increase the use of renewable energy in mining and minerals processing, such as replacing coal and gas with hydrogen or carbon capture and storage (CCS), (e.g. (H2Future, 2017; Shell, 2018)). Hence, the consequences for metal mining would be severe, as this could mean that for reaching the Paris Agreement goals not only fossil fuels, but also certain metals, or at least metals from certain mines, will have to remain in the ground (Carney, 2015; van der Ploeg and Rezai, 2019) or that certain uses of these metals (e.g. gold for jewelry) might become unacceptable for society. At a company level, profitability is significantly impacted by carbon prices. This is the more accentuated, the more downstream metal-focused a company is, e.g. ArcelorMittal or China Hongqiao. In some cases even the minimum carbon prices have a significant impact on profits, as in the case of Chalco, which is heavily reliant on coal-based electricity. Looking at this from a societal perspective, one could argue that a carbon price would be beneficial and do exactly what it is intended to do, i.e. to penalise Chalco more than Hydro, whose electricity is coming from hydropower. The question arises, if users of these metals, both industry and individuals, as well as broader society are willing to accept such a high cost (Rozenberg et al., 2018; Sen and von Schickfus, 2017). The four metals analysed are however key for the shift towards a “green economy” as propagated by the UN Environment Programme (UNEP, 2019a), based upon renewable energy and cleaner production. Clear contradictions become apparent, as such a shift will require a strong increase in the extraction of especially copper, but also the other metals. Hence, this paper underlines the findings of e.g. Jackson (2017), Raworth (2017) and indeed UNEP itself, who move towards a model of an “inclusive green economy” (UNEP, 2019b). To stay within our planetary boundaries, society – instead of only shifting from the current production model to a cleaner one – will also have to shift to more resilient lifestyles based upon sharing, circularity, collaboration, solidarity, opportunity, and decreased consumption levels. The question remains, how well prepared mining and metal companies are for such a world of carbon pricing and a transition towards a low carbon world within the temperature boundaries of the Paris Agreement, as the internal carbon prices currently used by some of the companies in this study, with many reporting none at all, might not high enough – and as business as usual will not be possible.
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Funding This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. 6
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