Our Energy Solutions team is trading in the carbon markets; one part of a carefully-considered delivery strategy aimed at accelerating the global energy transition. Learn more about the work they are doing, and how your business can benefit.
Many industrial sectors are rapidly evolving to address the environmental challenges of a carbon-constrained world and mining is no different, with Anglo American adopting a comprehensive approach to sustainability across its entire value chain.
Our Energy Solutions team, who you first met in our second issue of Future Forward, are integral to this journey. Starting with the carbon markets, they are at the forefront of providing a suite of tailored, low-carbon solutions, designed to complement Anglo American’s existing product and services portfolio.
Carbon markets are fast-emerging as an important tool in worldwide efforts to tackle climate change – with a recent report from McKinsey & Co highlighting a growth of more than 20% in their total value in 2020, for a fourth consecutive year1.
Anglo American has committed to achieving carbon neutrality across its operations by 2040, with the ambition to reduce its Scope 3 emissions by 50% by 2040. We see carbon markets playing a role in helping to achieve this, supporting complementary efforts being made by businesses like ours, and those of our customers, to navigate the energy transition.
We spoke to Tom Bell, Head of Strategy, Origination and Projects within Energy Solutions, for his thoughts on the challenges and opportunities in this space, and the fundamental role that emissions offset schemes can play on the path to net zero.
Q. What are the carbon markets and how do they work?
A: Carbon markets exist across the world, under compliance schemes or voluntary programmes. In the simplest terms, their aim is that, for every tonne of CO2 emitted somewhere, another tonne is captured elsewhere. Although two very distinct and different operating markets, each has a role to play in driving emissions reduction – providing companies with a means by which to compensate for emissions that are harder to tackle, or that cannot be structurally reduced.
Compliance markets are mandatory; typically set and regulated at a government level and come with clear operating parameters. One example is the European Union’s Emissions Trading Scheme (EU ETS), currently the world’s largest cap and trade scheme.
Typically, they cap the total level of emissions allowed, with companies operating in these jurisdictions required to obtain and surrender allowances to cover the emissions they generate in a given year. Companies able to reduce their emissions by more than the agreed targets can sell their excess reductions as credits to those that have not met theirs.
This creates a financial incentive for emissions reduction, as well as mobilising capital for projects and activities designed to capture, remove or avoid emissions – including new technology projects and equipment upgrades.
Under the existing EU ETS, for example, member states must spend at least half of their auction revenues – from selling excess credits – to support emissions reductions, deploy renewables and carbon capture and storage, or to improve energy efficiency and district heating. Between 2018-20, revenues from emissions trading under this scheme amounted to €14-16 billion, with an average 70% spent for climate and energy-related purposes2.
Voluntary markets, meanwhile, consist of companies and individuals making the choice to offset their emissions by voluntarily buying carbon credits from projects targeting emissions reduction or removal. You may have seen retail businesses or commercial airlines giving their customers the opportunity to offset some, or all, of the emissions profile associated with the transaction they are entering into. The premise is the same for industrial businesses that want to manage their own emissions profiles.
While there is some debate on the best use of carbon markets, there is growing consensus on the important role they can play in driving positive behaviours around emissions reduction as part of an organisation’s broader climate mitigation strategy.
The incentive to reduce carbon in the atmosphere is also driving innovation; financing the growing number of voluntary projects that are emerging, or catalysing new ways of working to enable emissions reductions in line with caps set by the compliance markets.
Q: Where are we focusing our attention and how can our customers benefit?
A: For the emissions market, we are targeting to enter three specific areas. The Australian emissions market, which is hugely relevant, both in terms of the emissions profile we already manage in-country for our metallurgical coal business, and as a geography with an established customer base that can benefit from our experience and the low carbon solutions we are introducing to our portfolio.
The same goes for the EU ETS, the most mature and liquid emissions market operating today, where we can count on our European customers for long-lasting relationships and important collaborations on the journey to decarbonisation.
Finally, the voluntary emissions market - a new and rapidly growing sector, critical to a lot of organisations seeking to achieve their carbon neutrality ambitions. One such example in the marketplace today is the Gyapa Cookstoves Project in Ghana, focused on replacing traditional cooking methods – burning wood and charcoal, often inside the home – with low smoke stoves.
The introduction of an insulated and more efficient cookstove has several advantages – including cooking food more quickly with 50-60% less fuel required, and being less smoky. As such, it not only cuts carbon emissions, but also improves health by reducing exposure to toxic fumes. Cutting fuel requirements also saves families money and, importantly, reduces deforestation3.
Such multi-faceted projects have huge value because they offer even more than the ability to lock away carbon dioxide, with broader societal advantages including the promotion of healthy lives and wellbeing for all; or ensuring access to affordable, sustainable, reliable and modern energy – achieved in parallel with combatting climate change.
We are seeing more of these projects emerging and growing interest in this space, and are excited about the opportunity to work with our customers and project developers to bring the same rigour and integrity that we deploy in running our physical operations to low carbon products, and projects.
Q: The effectiveness of carbon markets in reducing global warming remains a matter of debate. What is your take on this?
A: While this is a complex topic, the debate is rapidly shifting towards carbon markets being seen as a complementary measure, rather than an alternative, to decarbonisation. After all, the higher the price of carbon, the better the incentive for industry to decarbonise.
There is a huge spectrum of examples; with things that have been done well, and things that have not been done so well, which we need to learn from. There are also plenty of examples (including the one I mentioned previously in Ghana) to show that, when implemented correctly, the carbon markets can be a mechanism that delivers tangible and promising results.
You only need to look at other purpose-driven organisations – Microsoft and Google, for example – that don't need to be active in the carbon emissions market but have chosen to be there. They are showing that the carbon markets can be a component for change and have demonstrated that they can be used for the right reasons.
Of course, no single organisation can be a one-stop-shop when it comes to achieving net zero. We need to collaborate, to build partnerships, to co-develop technologies and solutions, and to try and cover as much of the value chain as we can. That is our ambition as a team. The energy transition is a journey and this is one part of a highly-considered delivery strategy that sees these products co-exist with, and support, other longer-term solutions.
Q: Is there anything holding back your progress in this space?
A: The market is changing at a phenomenal pace and keeping on top of those changes will be crucial in ensuring our ability to respond to the rapidly evolving needs of our customers. Perception is also key. We are a critical part of the solution and the work we undertake with other stakeholders in this space will be imperative to meeting the world’s decarbonisation targets. We need to ensure that our role is well-understood by those within our industry, and beyond it.
1 ‘Putting carbon markets to work on the path to net zero’, 28 October 2021, McKinsey & Co https://mck.co/3qxKEpM
2 Emissions Trading – Putting a Price on Carbon, European Commission, 14 July 2021 https://bit.ly/3wOVdIT
3 The Gyapa Cookstoves Project, Gold Standard, https://bit.ly/3wHRLxW