5. Extractives-led development in a carbon constrained world
Extractives-led growth – where resource-rich low-income countries use revenue from extractive sectors to deliver social dividends – has been a model for development for decades. Countries like Mozambique, Ghana and Zambia and others have used this model over the last decade resulting in significant GDP growth. For many other countries, the extractives sector plays an extremely important role for their exports.
The following charts present mineral production value and mineral contribution to exports for important extraction countries in the developing world:
However, this model has the potential to lock countries in a carbon-intensive pathway. As discussed earlier, analysis by Carbon Tracker (2011) and others has indicated that 60-80% of the world’s coal, oil and gas reserves cannot be burnt in the next few decades if the world can reasonably achieve climate change targets.
In the decades to come, the extractives-led growth model is likely to change as the world is moves to a low carbon transition path resulting in a transformation of the global energy system. Depending on the specific characteristics of their reserves and their economies, some countries might be in a better position than others to exploit their oil, gas and coal resources.
In a business as usual scenario, a large amount of investment might have been made in developing oil, gas and coal projects. In a scenario where the world meets its climate commitments under the ‘Paris Agreement’, some of this investment will be curtailed and unneeded. The map on the next page gives further detail.
Map of unneeded capex for oil, gas and coal development to 2025, and associated avoided CO² emissions to 2035, in order to limit temperature increase to 2 degrees Celsius
Risks and opportunities for the extractives sector
Risks arise for the extractives sector as a result of this scenario. Disruptive changes in markets are taking place, such as the drop in the price of renewable energy and storage, the increased uptake of electric vehicles and development of enabling infrastructure.
These changes can pose significant medium to long-term demand risks for some fossil fuels and have the potential to impact the development prospects of resource-rich exporters.
Some governments are taking note. For example, the Saudi Arabian government announced in 2016 that it plans to sell state oil assets to create a $2 trillion sovereign wealth fund in preparation for the transition to a low carbon economy. China is another example of a country reconsidering its carbon intensive growth.
In resource-rich countries, a number of preliminary actions can be taken to address these risks:
1. Understand the medium and long-term implications of a transition to a low carbon world for their economic and fiscal policy and development pathways
2. Review their energy and extractives sector policies and strategies
3. Promote efficient management of greenhouse gas emissions in extractives operations
4. Include greenhouse gas management requirements when awarding concessions
5. Look for opportunities for diversified development to minimise the risks created by dependence on any one sector
The transition to a low carbon economy means that there will also be opportunities for the extractives sector, especially in countries where the sector operates with comparatively lower carbon intensity and is overall more efficient.
Case study: Is Brazil a competitive energy exporter, prepared for the low carbon transition?
Brazil compares favourably against other countries seeking to develop their fossil fuel reserves. In South Africa, the focus is on domestic demand for coal, while Australia relies on exports to make use of their reserves. Brazil’s current energy mix is not heavily reliant on fossil fuels and its low-cost production of oil aimed for the global market. Brazil also has a strong renewable resource base (e.g. biomass, hydro and biofuels) that provides access to alternative energy markets likely to prosper from a transition to a low carbon world.
Prepared with information from Carbon Tracker (2013)
Transition to a low carbon economy also means that demand for some commodities could rise significantly over the next few decades. Strong growth can be expected for commodities that are needed for the expansion of electricity networks or used in the manufacture of electric vehicles, battery storage and renewable technologies such as copper and some precious metals and rare earths. There will also be an increased demand for energy efficient solutions, clean-tech, renewables and some types of biofuels.