The Global Energy Transition and the Future of Commodities

While the rise in fuel prices, the conflict in Ukraine and the impacts of the pandemic still dominate the news around the world, the transition to a clean economy and zero carbon emissions is gaining more and more momentum. Indeed, these events only reinforce the need for and significance of this green transition.

In August 2022, Japan took the first step in research to measure the “green GDP” – an index of economic growth with environmental consequences accounted for in conventional GDP. The transition to a clean economy has become a priority on the Japanese government’s agenda, which is now seeking to reduce carbon emissions by 46% by 2030, creating an agenda for the next 10 years with investments of around US$ 1.13 trillion. In the short term, the government will issue around $150 billion in “green transition” bonds to encourage investment in decarbonization.

The European Union, since December 2019, created the European Green Deal with the objective of becoming the first continent with zero carbon emissions by 2050, foreseeing investments of around €1 trillion in the next decade, in search of innovative solutions for the transformation of a more sustainable and resilient economy.

In the United States, in November 2021, the government created the Build Better Back Plan with investments of approximately US$ 2.2 trillion, including solutions to climate impacts and, in August 2022, signed the new climate law that allocates US$ 370 billion for clean energy projects.

Studies indicate that the global plan for energy transition and zero carbon emissions by 2050 requires around US$ 125 trillion in investments and today, most of these investments are concentrated in renewable energies, electric vehicles and related activities. And this transition will increasingly demand mineral resources that are essential for the manufacture of wind turbines, solar panels, batteries and electric vehicles.

According to the International Energy Agency (IEA), a joint effort to achieve the goals of the Paris Agreement (climate stabilization with values well below 2°C in global temperature rise) would mean quadrupling the mineral inputs used in technologies of clean energy by 2040 and, to achieve zero carbon emissions worldwide by 2050, would require about six times more mineral inputs in 2040 compared to the current market. The demand for lithium alone, for example, is expected to grow another 40 times over the next two decades. Already graphite, cobalt and nickel will have a demand between 20 and 25 times greater compared to the current moment. The types of mineral resources used vary according to technology.

It turns out that these essential resources offer a different set of challenges, and their growing demand requires energy policymakers to expand their horizons and consider potential new vulnerabilities. As countries accelerate their efforts to reduce emissions, they too need to ensure that energy systems remain resilient and secure.

Concerns about price volatility and security of supply do not differ between an energy system powered by fossil fuels and one powered by renewable sources.

The pressure on prices and the geographical concentration in a few countries in the exploration and processing of these raw materials are important concerns.

The so-called “green commodity superpowers” could rake in more than $1.2 trillion in annual revenue from supplying raw materials by 2040. Australia tops the list, with reserves of the main metals used. Chile is home to 42% of the world’s lithium reserves and a quarter of its copper deposits, most of them in the Atacama Desert. Congo has 46% of global cobalt reserves (and accounts for 70% of world production today). China is home to aluminum, copper and lithium reserves. Indonesia has large nickel reserves and Peru holds nearly a quarter of the world’s silver. And finally, other countries, such as the United States, Canada and Brazil, with their large graphene reserves, lose gains with fossil fuels, but are able to exploit vast deposits of so-called green commodities.

However, important investments can become vulnerable to geopolitical issues and local conditions. The shift to clean fuels is less an energy transition and more a commodity transition, and that energy transition comes from decisions by many governments, not just one, and decarbonizing the world takes decades to work.

Certainly, the world may be less dependent on energy-related resources in 2040 than it is today, largely because wind and sun are free natural sources. An oil crisis, for example, affects all consumers who own gasoline cars or diesel trucks. A ‘green commodity’ crisis, on the other hand, only affects the production of new assets. Consumers who already own their electric vehicles or who use solar-powered electricity will no longer be affected. Furthermore, the combustion of oil means that new supply is essential for the continued operation of oil-fired assets. Mineral inputs are infrastructure components, which can still be recovered and recycled.

Also likely to affect the leverage of the green commodity superpowers is capital expenditure. The IEA estimates that the main mines that came into operation in the last decade took, on average, 16 years to build. To meet growing demand through 2040, the mining industry must invest in new projects immediately. Estimates indicate that US$ 2 trillion should be spent on exploration and production of green minerals by 2040.

Research and technological innovation are essential to mitigate the risks listed here. In 2021, mining company BHP and Norwegian energy company Equinor invested in an artificial intelligence startup to identify new mineral deposits. The innovation could also facilitate recycling. According to the IEA, by 2040 the extraction of cobalt from old batteries could help supply 12% of total demand.

Perhaps the greatest risk to investment comes from politics. The history of commodity booms over centuries has shown that this blessing of natural resources can also become a tragedy for world geopolitics, such as wars, conflicts, ideological and territorial disputes, breaches of international agreements, etc.

Many green giants know they can help avert climate catastrophe. These risks to the reliability, affordability and sustainability of the supply of green minerals will depend on how policy makers and organizations behave. And the outcome of this will determine whether minerals vital to the energy transition are a facilitator or a bottleneck in the process.