Mitigating Carbon Risk in an Uncertain Market

With decarbonisation deadlines looming ever closer, time is ticking for miners to analyse their carbon exposure and mitigate carbon risk. But the complexity of carbon calculation across mining operations and supply chains, combined with a certain lack of consensus around how exactly to quantify emissions, can make it difficult for miners to define a clear pathway to net zero.

CARBON RISK MODELLING: NOT AN EXACT SCIENCE (YET)

The Greenhouse Gas (GHG) Protocol published its first corporate emissions accounting standard in 2001, and carbon calculation has become even more common practice in large companies since the signing of the Paris Agreement in 2015. And yet, researchers are still writing papers assessing different carbon emissions models for the mining industry: in 2022 at least two Chinese academic studies looked at carbon calculation models: one for underground fully mechanised mining processes, and the other specifically for coal mines.

A clear example of the lack of consensus affecting carbon assessments is the divide between analysing exposure in terms of absolute emissions (the total amount of GHG emissions across operations) or emissions intensity (the amount of emissions per unit of output, such as tonnes of metal produced). According to

Jun Song, Vice President, Global Carbon at Macquarie Group, there is no clear answer as to which option miners should choose.

“Absolute emissions and emissions intensity present two different metrics in terms of tracking a net zero commitment which might be in line with whatever ‘best practice’ governs how miners would like to meet their net zero targets on a voluntary basis,” he told Energy and Mines. Song recognises that the biggest challenge is around calculating scope three emissions, and advised miners to seek help where needed. “There’s a lot of ecosystem services that exist out there to help miners to calculate the overall carbon footprint of their operations from source all the way to the end customer,” he added.

The most important step at the beginning of a mine’s decarbonisation journey is to choose a standard to align with, whether it be the GHG Protocol, the Voluntary Carbon Markets Integrity Initiative (VCMI), the Science-Based Targets Initiative (SBTI), or another recognised initiative. These are always evolving, so it is crucial to stay up to date with their requirements.

“On the voluntary side, the sheer number of initiatives, councils, science-based targets and guidelines has potentially created some confusion among participants. There’s still effectively a lack of consensus as to what is accepted and to navigate that (net zero best practice),” said Song. As the carbon market matures, all these initiatives should converge into generally accepted best practices, but for now keeping a finger on the pulse of new developments is important.

For large emitters that fall within the threshold of their jurisdiction’s carbon regulation, the rules to follow are clearer — though the process may not be easier. “On a compliance front, it’s very clear what sort of thresholds are required, what scope is required, and therefore the challenge there may be around not having the experience, systems or dedicated team to monitor and make the calculation. Here, they may rely on advisers such as Big Four and other environmental consultants to help them get started on that journey,” added Song.

Carbon Offset Quality Pillars

Once miners have clearly mapped and understood their carbon footprint, they can put in place a reduction and mitigation strategy to lower their carbon risk. Carbon offsets, which companies can purchase from sustainable projects to compensate for hard-to-abate emissions, have a role to play here, as long as they are part of a holistic strategy. Song explained that miners who do not have any direct activities to reduce their carbon footprint and solely rely on offsets are at risk of being criticised and potentially associated with greenwashing. The key is to avoid emissions wherever possible, reduce the emission intensity of operations, and finally use offsets to bridge the gap between reductions and net zero targets.

Recent standards and regulations make it clear just how much decarbonisation can be achieved through offsets. That’s the case of the upcoming revamped Safeguard Mechanism in Australia, which covers 215 sites, each emitting more than 100,000 tonnes of CO2 a year, and is expected to be finalised this July. Most of the companies in the scheme will have to cut their emissions intensity by 4.9% a year, and will be allowed to use offsets to meet part of this decarbonisation target. And while the legislative proposal does not explicitly limit the use of carbon credits, it does state that if more than 30% of the emissions reduction requirement is achieved through offsets, the company in question will be required to justify “why onsite abatement hasn’t been undertaken” to the Clean Energy Regulator. It doesn’t mean the decarbonisation strategy will be rejected, but this trigger point is an indication of the amount of carbon offsetting that is considered acceptable by regulators.

When it comes to carbon offsets, it’s not just quantity miners should worry about: recent controversies have highlighted discrepancies between the carbon avoidance or absorption projects claim to achieve and their actual results. In light of these, it can be stressful for miners to choose the right offsets for their company. The exercise is made even more difficult by the fact that in the carbon world, quality remains a subjective term, with no clear consensus as to what constitutes a quality carbon credit. Initiatives like the Integrity Council for the Voluntary Carbon Market (ICVCM) and its Core Carbon Principles are actively working to bridge this gap, but in the meantime, Song recommends basing offset purchase decisions on three pillars.

“The first is carbon integrity, which relates to the underlying inputs that underpin how the carbon reduction, removal or avoidance is calculated: not every ton equals a ton. The second is co-benefits, and other positive aspects for nature, or the communities in which the projects operate. Lastly it’s about the alignment to the operation itself: how does this cohesively tie together for the actual use of the offset in the context of its removal and reduction efforts in the supply chain and social licence to operate,” he noted.

Once miners have chosen their offsets, they have several options to purchase them. As Anton Lovelle, Macquarie’s Vice President of Asian Gas, Power and Emissions, explained, the right choice will depend on each company’s specific requirements, such as price certainty, volume certainty, or even the business’s preference for methodologies or location.

According to him, one straightforward approach involves purchasing spot units from established market participants — units which can either be retired on behalf of the business or held on its balance sheet and retired as needed.

Another option is the forward purchase of carbon credits. “As companies gain more confidence in their liabilities, they can engage in forward transactions to secure a fixed volume of offsets at a predetermined price and delivery date. The two counterparties involved in such transactions can arrange for the transfer and retirement of credits. If the credits are not required on the agreed-upon date, Macquarie can facilitate carrying them forward to a new agreed date, subject to an agreed interest rate, before retiring them,” said Lovelle.

Today, more complex structures such as options or hedging strategies involving variable volumes and prices are gaining popularity, particularly among commodity players already familiar with such practices. It is also possible for miners to invest directly into carbon offsetting projects by collaborating with upstream participants. “While this approach carries certain risks, such as unknown volumes or delivery timelines, it provides access to more affordable credits,” explained Lovelle. “By delving further upstream, businesses can tap into carbon abatement opportunities that align with the marginal cost of abatement, regardless of prevailing market prices.”