Member Article

The 15^thedition of the World Economic Forum’s (“WEF’s”)The Global Risk’s Report 2020(the “Report”) was recently published. The top five global risks identified by the WEF in terms of likelihood are, for the first time in the Report’s existence, all of an environmental nature (namely extreme weather, climate action failure, natural disasters, biodiversity loss, and human-made environmental disasters).

This list of likely apocalyptic risks is followed by the top five global risks in terms of impact and, with the exception of weapons of mass destruction, all relate to the environment and the associated socio-economic impacts, namely climate action failure, biodiversity loss, extreme weather and water crises.

Technology related risks, particularly cyber insecurity and consequences of digital fragmentation forming a new class of technology “have-nots”, then follow on both lists.

Changes in the environment and technology will continue to impact the mining industry in the future. It therefore comes as no surprise that legislative developments making the most impact on the mining industry are likely to be of an environmental nature and with the aim of facilitating the transformation of the current carbon intensive economy.

Technology not only offers a solution to the mining industry’s resolve to undertake sustainable resource development, but digital technologies also have tremendous potential to move beyond stagnant growth and deliver exceptional shareholder, customer and environmental value. As with the energy transition and its resulting socio-economic impacts, digitisation will transform the mining sector with its own socio-economic consequences.

The transition to a low-carbon economy

The Integrated Resource Plan, which was released on 18 October 2019, maps out South Africa’s current and future electricity demand and provides for nine policy interventions to ensure the pragmatic security of South Africa's electricity supply. The need for intervention exists because the ability of the world’s energy supply infrastructure to meet rising global demand in energy consumption is neither secure nor sustainable. An energy transition is therefore inevitable and its socio-economic implications are unavoidable. Thus, an urgent call has been sounded for this transition to be a just transition, not just in South Africa, but globally. Sustainable mining, within a green economy, will continue to offer a solution.

The current energy system overwhelmingly relies on fossil fuels and associated combustion technologies. The transition from a fossil fuel base to an alternative energy system relies, in particular, on metals to manufacture and maintain energy conversion technologies. These low-carbon technologies rely on “green metals” and the utility of these metals rely on their extraction and that, in turn, relies on a mine being established.

The South African Planning Commission’s National Development Plan envisages South Africa’s transition to a low-carbon, resilient economy and a just society in which all sectors of society are actively engaged in building a competitive, resource-efficient and inclusive future. The transition to a low-carbon economy is often portrayed as being in conflict with mining and it is generally assumed that natural resource-based economic activities have no future in a low-carbon economy. However, the transition will rely heavily on the availability of the metals and minerals necessary for the manufacturing of clean technologies. The question then is how sustainable investment can be attracted in order to develop our green metal resources, in the face of carbon mitigation measures such as carbon tax.

The carbon tax

The Carbon Tax Act, 2019 (the “Act”), which commenced on 1 June 2019, is a bold step in the national debate about what sustainable development means in the context of the nation’s economic priorities and the impact of climate change in achieving them. The carbon tax will impact mining companies in two ways. The first is the direct carbon tax liabilities which mining companies will be required to pay to the South African Revenue Service. The second is the increased costs that mining companies will face as their suppliers reprice their goods and services to include the carbon tax.

Informal evidence that we have collected thus far suggests that mining companies’ direct carbon tax liabilities will generally be fairly low during the first phase of the carbon tax (which ends in 2022). However, this may change during the second phase of the carbon tax as the generous level of tax-free allowances may be reduced resulting in an increase in the effective rate of carbon tax for mining companies.

In addition, in order to achieve alignment between the carbon tax and the soon-to-be legislated carbon budgets (which will be administered by the Department of Department of Environment, Forestry and Fisheries), it is proposed that all emissions that are within a mining company’s carbon budget will be taxed according to the current rate of carbon tax (ZAR120 per ton of carbon dioxide equivalent emissions) while emissions that exceed the carbon budget will be taxed at a higher rate of carbon tax. Mining companies whose current carbon tax liabilities appear low should take into account the likely future increases to the cost of carbon tax and plan accordingly.

The second area in which mining companies will feel the effect of carbon tax is through their supply chain. To cushion the potential adverse impacts on energy intensive sectors such as mining, the introduction of the carbon tax for the first phase will not have an impact on the price of electricity. This will be achieved through a tax credit for the renewable energy premium built into the electricity tariffs and a credit for the existing electricity generation levy. As these relief measures are withdrawn during the second phase of the carbon tax, mining companies will experience the effect of increases in the price of electricity.

Carbon offset allowances

In order to reduce the impact of direct carbon tax liabilities, section 13 of the Act (read with Schedule 2) provides for carbon offset allowances. Depending on the industry involved and the activity/sector undertaken, companies will be able to reduce their carbon tax liability by using offset credits up to a maximum of five or 10 percent of their GHG emissions. According to the Carbon Offsets Paper (April 2014, published by National Treasury), carbon offsets will incentivise investment in projects that can generate considerable sustainable development benefits in South Africa, including channelling capital to rural development projects, creating employment, restoring landscapes, reducing land degradation, protecting biodiversity, and encouraging energy efficiency and low carbon growth. Carbon offset allowances in the context of the carbon tax regime will kick-start the carbon offset market in South Africa, with its mandatory demand and supply.

However, a voluntary carbon offset scheme may develop, which will enable companies and individuals to purchase carbon offsets on a voluntary basis outside of the carbon offset compliance market. As indicated in the Carbon Offsets Paper, the purpose of introducing a carbon tax is intended to send the necessary policy and price signals to investors and consumers to ensure that future investments are more climate-resilient.

However, in the South African context where there is an electricity crisis and the economy is struggling, the transition to a greener economy will need to be a gradual process that balances various stakeholders’ interests. Developing a stronger carbon offsets market in South Africa could be one of the mechanisms used to effect this transition. However, change also brings opportunity. The carbon offset market will bring about opportunities for green mining companies to use their considerable technical prowess to develop green technology methodologies and approved offset projects. Proactivity is key in identifying potential opportunities for investment and capital growth in an emerging market that values sustainable development.

A digitised mining economy

It would be with this same technological flare that the mining industry embraces a digitised mining economy (eg, remote sensors and remote sensing, autonomous operations, 3D printing, remote operations centres, advanced analytics, etc). As stated above, technology may offer solutions to mitigate environmental risk but it will also transform the mining industry in significant ways. In the 2015 WEF report, titled, “Mining and Metals: digital transformation and the industry’s ‘new normal’”, the WEF states that digitalisation could generate a reduction of 610-million tonnes of CO2 emissions, with an estimated value to society and environment of USD30-billion, and an improvement in safety, with around 1 000 lives saved and 44 000 injuries avoided. This equates approximately to a 10% decrease in lives lost and a 20% decrease in injuries in the industry.

However, the potential loss of about 330 000 jobs, or nearly 5% of workforce, over the next decade as a consequence of increased digitalisation must also be considered and, where possible, mitigated. The transition to a low-carbon economy may itself also poignantly leave “stranded workers” of “stranded assets” in high-carbon sectors in its wake. It is therefore important that South Africa positions itself in a manner that will enable the country to take advantage of the future commodities market and to meet the increased demand for metals within a low-carbon economy and at the same time creating good quality jobs.

Lloyd Christie Executive Natural resources and environment [email protected] +27 82 210 2159