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The future of energy – is there a role for extractives?

Ahead of the UN’s Global Roundtable we discuss both the challenges and opportunities faced by the Extractives Industries in the adjustment to a zero carbon future.

Next week, on 25 May, UN Secretary General, António Guterres will lead a Global Roundtable of government ministers, industry leaders and think tanks to determine how to steer the transition to a lower carbon, more sustainable future and establish the UN’s policy stance on the extractive industries. This will build on high-level Regional Roundtables organized by each of the UN’s five Regional Commission[1] in the past six months. There is much to debate. The Climate Crisis creates significant difficulties for some countries, especially those dependent on fossil fuels, but also provides considerable new opportunities for others – especially metal producers. How can the commitment to Sustainable Development Goal 7 (access to affordable, reliable and sustainable energy for all) be delivered, especially in the face of Covid-19?

These issues are likely to be high on the agenda at COP26 in November, and so the results of this Roundtable will have considerable significance for how climate policy is shaped worldwide. Our OPM Associate, Professor Alan Roe, has been present at each of the five Regional Roundtables (together with his co-author Professor Tony Addison) – we asked Alan what his key takeaways have been so far, and what is likely be discussed at the Global Roundtable next week.

What are the key challenges?

Environmental risks and renewables

Making the transition to a zero carbon future is not straightforward. There is substantial environmental harm associated with mining the metals needed for the renewables revolution, and this will need much more attention and better support (e.g. from World Bank and UN agencies) especially in countries with weaker regulatory capacities such as the DRC. Extracting some rare earths is both extremely energy intensive, inherently dangerous because of the cancer risks, and highly inefficient in terms of the high ratio of mined rock to usable product. Yet these minerals are of increasing strategic importance for most of the newer high-technology industries associated with the renewables revolution.

Covid-19: Finance and funding

An immediate challenge mentioned in all five Roundtables, is the need to provide more help to extractive dependent countries that have suffered disproportionately from the effects of Covid-19 so that they can deal with the costs associated with both recovery and the adjustment to zero carbon. Some progress on this front is being made. However, some Development Finance Institutions have allegedly shifted priorities to Covid - related recovery and away from climate actions. On top of this, much of the funding committed to green energy has been provided only on a conditional basis.

Future uncertainty

In several of the Roundtables there was an undercurrent of uncertainty about the medium/longer term prospects for oil, gas and coal as well as the minerals extracted in low-and middle-income countries. These uncertainties relate to the extent and timing of the stranding of some assets (coal especially, but also some other fossil fuels) versus the expanded demand predicted for the critical metals needed for the renewables revolution. Another concern was how long natural gas might remain as a major transitional energy source as coal, in particular, is phased out: a major concern for some low income suppliers especially Mozambique. By contrast in the lower cost hydrocarbon producers of the Arab part of the Western Asian Region (accounting for 43% of global oil reserves), there was greater certainty about the continuing importance of some fossil fuels. There the revenues needed to support the large structural diversification planned in countries such as Saudi Arabia will surely remain highly dependent on oil.

Are there any opportunities?

Partnerships between governments and private players

A real, long-term vision for the extractives industries needs to recognize that the large investments needed for success  cannot come from governments alone. They must also leverage a wide range of private-sector activity, encouraged by a clear and reliable policy environment. A wide range of good, practical examples have emerged from the Roundtables that illustrate this potential, including phosphates in Morocco and the collaboration between mining companies and municipalities on deforestation in Brazil.

Technology

The increasing use of sophisticated technology can have a huge, positive impact in many ways. To give just one example – in Nigeria remote sensing via satellites is used to provide data that has successfully helped to reduce wasteful gas flaring. This not only cuts health-damaging emissions, but also boosts government revenues. The benefits of this type of data need to be recognised and legislated for as a “public good”, so that other countries can reap similar rewards.

Forward-thinking finance solutions

Several solutions to economic challenges have been discussed including debt suspensions and other enhanced relief including possible new debt-for nature swap mechanisms. One other specific idea that emerged was to link of the proposed new round of IMF Special Drawing Rights (SDRs) to the Covid recovery and Climate change agendas. This could be done by encouraging richer countries to re-assign some of their additional SDR allocations to poorer countries as a new form of quasi Official Development Assistance: an idea recently developed in detail by Mark Henstridge, CEO, and Stevan Lee, Acting Chief Economist at OPM.

Any final takeaways from the Regional Roundtables?

The issues noted here constitute merely a small part of the much larger agenda discussed at the five Regional Roundtables. There are, of course many other factors that must be taken into consideration such as gender equality, energy transition arrangements, tax compliance, and health and safety, to name a few. But the key takeaway is that the Climate Crisis creates an intriguing combination of significant difficulties for some extractive-dependent economies but exciting new opportunities for others. The discussions on Tuesday are expected to spell out this key point more fully but with special attention to the potential role of the UN’s own policies for the sector and its contribution to a more sustainable future. Watch this space!!

About the author:

Alan Roe holds Associate appointments at Oxford Policy Management, at the University of Warwick, and is a Non-Resident Senior Research Fellow at the UN World Institute for Development Economics Research (WIDER). The book, Extractive Industries, The Management of Resources as a Driver of Sustainable Development, co-edited with Prof. Tony Addison, is being used as a main source for the Regional and Global Roundtables.

 

[1] These five are ECA-Africa, ECE- Europe, ECLAC-Latin America, ESCAP – Asia and Pacific, ESCWA – Western Asia/Middle East)