CARBON IN MINING: PRICING, OFFSETS AND STRATEGY

In this interview, Tyson Dyck, Partner, Torys, discusses the nuances of carbon credits and their use to meet emissions reduction targets. He observes that record high carbon prices are driving companies, particularly in the mining sector, to consider investing long-term capital to reduce their reliance on carbon-intensive fuel or electricity.

A partner at Torys’ Environmental Group, Tyson leads the firm’s Climate Change practice. He has guided North America’s most high-profile energy projects, including more than 50 wind, solar, gas, hydro, and energy storage projects. In the mining and metals sector, he acts for companies acquiring, financing, developing, and operating major uranium, potash, coal, and precious metals operations across the country.

ENERGY AND MINES: How do you see the heightened focus on climate strategy changing the mining business?

TYSON DYCK: The past few years have seen a renewed focus – including from institutional investors and environmental advocacy groups – on the development and implementation of emissions reduction targets that align with a scientificallycredible pathway to limiting global temperature increases to below 1.5 degrees Celsius. The mining sector is well positioned to engage with these issues, having been a leader in the development of corporate climate change strategies. The sector has years of experience in quantifying and reporting on greenhouse gas emissions under regulatory programs. It also has extensive experience in mitigating emissions from energy and fuel use. And many companies are producing battery metals that will help facilitate electrification and the energy transition. Recent advancements in low carbon fuels like hydrogen and ammonia, and cost reductions in renewable energy systems, will likely offer new possibilities for existing

operations to reduce their emissions cost-effectively. Meanwhile, climate change issues will increasingly be front and center for new mining investments seeking to obtain project permits and social licenses.

E+M: What are the biggest challenges of building a roadmap for low or net-zero mining?

TD: Some of the biggest challenges are not unique to the mining sector. For example, a credible low carbon or net-zero strategy requires strong governance structures to be put in place, where climate change considerations can be brought to the attention of company management and board of directors and integrated into their strategic decision-making. Target setting also places an emphasis on the collection of robust data, which can prove challenging especially for Scope 3 emissions, where the data may not be available or reliable. Finally, implementing a climate change strategy requires ongoing multi-stakeholder consultation – with shareholders, regulators, environmental advocacy groups, local communities, and many others – to build confidence in a company’s plan and progress towards its goals.

E+M: What are some of the legal considerations for miners as they begin to set out their roadmap to reach net-zero goals?

TD: The regulatory landscape is changing quickly, especially in respect of Border Carbon Adjustment (BCA) and climate change disclosure. In July 2021, the European Commission published its proposal for a Carbon Border Adjustment Mechanism; when implemented, it will be the world’s largest BCA and apply to steel, iron, fertilizer, cement, aluminum, and other goods. The mining sector will need to stay attuned to how these BCAs may affect the import of products into major

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markets where mining operations occurred in jurisdictions without a carbon price. For publicly traded companies, there has also been a recent wave of proposals (including from the U.S. Securities and Exchange Commission and Canadian Securities Administrators) to require mandatory climate change disclosure under securities regulations. These regulatory standards seek to enhance uniformity and, in some cases, require more detailed reporting on climate change governance, strategy, emissions, and other metrics.

E+M: What role do you see for carbon offsets as part of mine decarbonization and what should mines be aware of when considering offsets?

TD: The carbon markets are growing quickly in response to corporate net-zero commitments. According to the World Bank, these commitments drove the total value of the voluntary carbon market to over USD 1 billion in November 2021, and the market has grown since then. Carbon credits are therefore expected to help many companies achieve their emissions reduction targets. That said, despite the improvements to offset methodologies in recent years, concerns persist about the environmental integrity of certain credits – whether they represent real, additional, verifiable, and permanent emissions reductions. Certain organizations and frameworks, like the Oxford Offsetting Principles, recommend that companies prioritize internal emissions reductions before using offsets to meet their targets. Similarly, the Net Zero Banking Alliance recommends that members use certain types of offsets, namely carbon removal (rather than avoidance) credits, to balance residual emissions where there are limited technologically or financially viable alternatives. Over time, the commitments of institutional investors to these principles may impact how they address

Scope 3 financed emissions, and therefore their lending activities in the mining sector.

E+M: What impact do you see carbon pricing having on mining companies’ decarbonization strategies - i.e. is this a real driver yet and, if not, how do you see this changing?

TD: Carbon prices vary significantly by jurisdiction, but in some locations are starting to have a major impact on decarbonization strategies. Record high carbon prices were seen last year in several compliance markets, including the European Union Emissions Trading System (ETS), the Western Climate Initiative, and the New Zealand ETS. Several jurisdictions have also announced ambitious carbon price trajectories over the short- to medium-term. For example, the government of South Africa announced a proposal to increase the carbon tax rate from the current level of under USD 10/ tCO2e to USD 30/tCO2e by 2030 and USD 120/tCO2e by 2050. Canada has proposed a backstop carbon price increase to at least CAD 170 t/CO2e by 2030. Mining companies are considering how these price increases will impact not only their direct emissions but also their energy costs. Many are therefore looking to deploy long-term capital in ways that enable them to reduce their reliance on carbon-intensive fuel or electricity or to invest in battery metals projects that can help facilitate greater electrification.

Tyson Dyck is chairing at the Energy and Mines Toronto Summit, Nov 1, 9:00 AM on the investor panel Evaluating Mining’s ESG and Climate Performance.

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