1. Introduction
Well-governed extractive resources have the potential to contribute to sustainable economic development and long-term wealth generation in several ways. The extractive industries can help generate financial flows through revenues and other payments to government, provide inputs to the domestic economy (such as fossil fuels for power generation, and minerals for industrial development), and support the development of public and private sector capacity, from state-owned enterprises (SOEs) in the extractive industries, to local content. Realizing this potential has proven complicated, however, with many resource-rich countries experiencing the negative governance and economic impacts associated with the ‘resource curse’.1 The ‘good governance’ agenda that emerged in response to these impacts through the late 1990s and early 2000s emphasized the need for transparency, on the basis that publicly available information and civil society engagement could enhance government accountability. This logic has underpinned a generation of advice and assistance to producer countries, and has been central to the establishment of transparency standards for extractive industries and supply chains, most notably the Extractive Industries Transparency Initiative (EITI) in 2003.
Extractives in transition
The global transition to a sustainable, decarbonized economy is now reshaping the extractive industries, and, in turn, the risks and opportunities that producer countries face. For fossil fuel-producing countries, the transition to a ‘well below 2°C’ world2 will have profound implications, with fossil fuels sharply declining as a share of the global energy mix.3 Their oil and gas company partners are facing growing pressure to reduce their upstream emissions and make the transition to a ‘Paris-aligned’ business model. For minerals producers, the scaling of renewable energy (RE) and clean technologies is raising expectations of a surge in demand for commodities such as cobalt, lithium and copper, and of renewed investment in the mining sector. At the same time, there is growing scrutiny of the climate impact of mining and minerals supply chains, and many mining companies are now seeking to decarbonize their activities. The transition from linear supply chains to a circular economy, where metals are reused and recycled, will also affect mineral demand and investment over time.
Producer countries will face different risks and have different choices available to them, depending on the type and scale of their extractive resources, their stage of production, and the exposure of their economy, energy systems and industrial sectors to the extractive industries. Decarbonization is likely to exacerbate and/or change the nature of many well-known resource curse risks, with implications for thinking about what constitutes the ‘good governance’ of extractives resources. For example, where economic governance is concerned, uncertainty around future demand and prices for fossil fuels casts doubt on the concept of reserves as ‘high-value’ national assets, and on the reliability of the revenue forecasts that underpin macroeconomic policy. Where energy and industrial policy is concerned, the rapidly declining cost of RE and other clean technologies suggests that the ‘least cost’ route to universal access to energy may also be the cleanest. Where governments are active in the extractive industries, SOEs may reduce or increase a country’s exposure to transition risks, depending on their governance and incentives.
Extractives transparency – and the civic space required to enable civil society engagement and public scrutiny – are prerequisites for an orderly national transition.
Many producer countries are now asking how to maximize the potential of their extractive resources, while managing their risks.4 Chatham House has delivered integrated climate, energy and economic capacity-building courses for officials from across government, including ministries of finance and national planning, energy and resources, and climate and environment. Many of these officials ask about the economic and energy implications of transition, and express concern about making long-term policy and planning decisions amid great uncertainty. They stress both the need for timely, reliable data to inform policy development and decision-making, and the potential for civil society engagement with climate change and energy transition to help create the political conditions for policies that address the economic risks associated with transition and support domestic energy transition. In this context, extractives transparency – and the civic space required to enable civil society engagement and public scrutiny – are prerequisites for an orderly national transition.
Box 1: Definitions
This paper focuses on the good governance of fossil fuels (oil, gas, coal) and minerals (metals, minerals) and collectively, extractives, while acknowledging their very different exposure to climate and energy trends.
It refers to energy transition as one aspect of a wider transition to a sustainable, decarbonized economy by mid-century – in line with the long-term goals of the Paris Agreement – while acknowledging that the world is not currently on track to deliver this. It pays special attention to:
- The economic implications of transition, including the declining economic value of carbon-intensive assets and the risk of stranded assets or undeveloped resources (transition risks or climate-related financial risks) and the growth of investment in sustainable areas of the economy; and
- The energy implications of transition, including the opportunities presented by RE and clean technologies such as batteries, and the decarbonization of domestic energy use, including the use of RE and the reduction of emissions in the extractive industries (energy transition).
While not its primary focus, physical climate impacts – including rising sea levels and temperatures, and the increasing severity and occurrence of extreme weather events, droughts and wildfires – are acknowledged, given their impact on civil society and political debates, and the wider context for transparency and good governance.
Transparency in transition
There has been little dedicated research into the role that extractives transparency can play in supporting the transition to a decarbonized, sustainable economy. This paper aims to address that gap, and to explore how extractives transparency might help enhance the resilience of producer countries through transition, by providing data and supporting dialogues that can help government, business and civil society understand the risks and opportunities that transition presents in their national context, and hold decision-makers to account. It also considers the extent to which transparency can help address the structural barriers to transition that often emerge alongside the extractive industries (the so-called political economy). These include corruption, rent-seeking and the (often related) lock-in of carbon-intensive infrastructure and consumption patterns. In this context, the traditional focus of extractives transparency on anti-corruption may already contribute to transition, even if this contribution has not been articulated as such.
… the traditional focus of extractives transparency on anti-corruption may already contribute to transition, even if this contribution has not been articulated as such.
Enhanced transparency and debate about the links between the extractive industries, energy transition and climate change will also be crucial to the extractive sector’s continued social licence to operate. Transition will undoubtedly affect the industries’ value proposition for host countries and communities over time, in terms of the income, energy and employment it can provide. Energy transition is one part of a wider structural shift, with digitization and automation reshaping industry and employment, and with growing inequality highlighting the need for inclusive, sustainable models of growth. Countries and communities that are dependent on fossil fuel production and carbon-intensive industries are typically among the most exposed and least resilient to these shifts. While physical climate risks are beyond the scope of this paper, the increasing frequency and severity of such climate impacts may also create feedback loops that influence civil society debates, and affect societal acceptance of the extractive industries.5 The impacts of climate change may also complicate economic diversification, where this relies on highly exposed sectors like agriculture in which productivity may be compromised.
The role of EITI
The extractives landscape has been transformed since 2003, when EITI was founded. With the ‘resources boom’ of the late 2000s, producer countries and the development assistance community broadly agreed that, with rising global resource demand and prices, ‘extractives-led’ growth could offer countries a transformative development opportunity.6 The commodities price collapse of 2014 sent many of these countries into deep and unexpected economic shocks; and more recently, the impacts of the COVID-19 pandemic have sent commodities demand and prices plummeting. Depending on recovery, there is every chance of a much more disruptive decline in fossil fuel demand than anticipated. While demand for metals and minerals is likely to grow, the trajectory of this growth remains dependent on technology choices and consumer trends, as well as on improvements in resource efficiency and the substitution of these resources by new technologies and materials.7 Meanwhile, donors and multilateral development banks (MDBs), which provided extensive advice and assistance throughout this period, are now realigning their assistance with the Paris Agreement, and acknowledging the risks of supporting good governance of the extractive industries in isolation from wider climate and energy trends.
For EITI to remain effective and relevant as the central governance standard in the extractives sector, it will need to respond to this changing global context for extractives governance, and to the evolving needs of its implementing countries. These countries have disclosed over $2.5 trillion in payments and revenues from the extractive industries over the past decade, a significant proportion of which was reinvested in the expansion of the extractive industries and the development of fossil fuel-based energy systems. Civil society groups have previously called upon EITI to acknowledge climate risks.8 Several speakers at EITI’s Global Conference in 2019 raised the issue of energy transition, and participants at a side event on the issue broadly agreed that EITI should explore its potential role in supporting an orderly transition.9 The results of a recent EITI country consultation also suggest that most implementing countries support EITI involvement in discussions about energy transition, and see it as consistent with EITI’s mission (see Appendix). Some implementing countries are already incorporating relevant issues in their EITI processes and reporting (see boxes 2, 3 and 4).
While the direction of travel in public policy and in civil society debates is increasingly clear, EITI faces real challenges in balancing urgency of action with the need for consensus among its different constituencies.
Still, there remain significant policy and practical questions. Some stakeholders cite the recent addition of beneficial ownership, gender and environment Requirements to the EITI Standard10 as evidence of EITI’s continual ‘mission creep’, and raise concerns that engagement with energy transition might further detract from EITI’s core focus on transparency and anti-corruption, as well as duplicating other processes.11 Many stakeholders cite practical concerns relating to the capacity of the EITI International Secretariat and of national secretariats and MSGs. There are also questions around the level of EITI’s engagement, including whether Requirements relating to energy transition should be voluntary or mandatory.12 While the direction of travel in public policy and in civil society debates is increasingly clear, EITI faces real challenges in balancing urgency of action with the need for consensus among its different constituencies, and their often competing perspectives and priorities.
About this paper
This paper explores the economic and energy implications of the transition to a sustainable, decarbonized economy for EITI-implementing countries, and the potential policy and practical responses for EITI. It builds upon a series of discussions with EITI stakeholders and with climate risk and energy transition experts, including the EITI Global Conference side event Extractives, climate action and energy transition – what role for transparency? held in Paris in June 2019, the Chatham House workshop Climate Change, Energy Transition and the EITI held in London in January 2020, and a dedicated session at the EITI Board Strategy Retreat in Oslo in February 2020. The paper proceeds as follows:
- Chapter 2 explores how existing EITI data, disclosures and dialogues might help countries manage the economic risks associated with shifting demand and investment patterns and support their domestic energy transition, and where there may be a case for additional data and disclosures.
- Chapter 3 considers how EITI can contribute to improved national and international governance, including how the analysis and discussion of transition might help inform economic, energy and upstream policy, and enhance government accountability.
- Chapter 4 concludes with a series of policy and practical recommendations for the consideration of the EITI Board, EITI-implementing countries, and other relevant stakeholders.
While the EITI Board ultimately defines EITI’s mandate, the importance of stakeholder-led EITI processes and reforms, and the considerable efforts that some MSGs have already made to put energy transition on the agenda, should be restated. The analysis and recommendations presented in this paper are intended to guide a wide range of EITI stakeholders – including the Board, the International Secretariat, national secretariats and MSGs, and their partners in government, business and civil society – as well as non-EITI stakeholders with an interest in energy transition and climate risk as they consider the implications of the transition to a sustainable, decarbonized economy for the good governance of the extractive industries. While the recommendations outline potential next steps for EITI as an organization, the subsections of chapters 2 and 3 may already provide a useful checklist of areas and questions for MSGs and other interested stakeholders to explore.
1 For a review of these, see Lahn, G. and Stevens, P. (2017), The curse of the one-size-fits-all fix: Re-evaluating what we know about extractives and economic development, WIDER Working Paper 21/2017, Helsinki: UNU-WIDER, https://www.wider.unu.edu/publication/curse-one-size-fits-all-fix (accessed 11 May 2020).
2 In line with the Paris Agreement, under which countries committed to ‘holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels’. See United Nations (2015), Paris Agreement, https://unfccc.int/sites/default/files/english_paris_agreement.pdf (accessed 21 May 2020).
3 Scenarios vary in their implications for fossil fuel use, depending on their level of climate ambition and their assumptions regarding carbon capture and storage (CCS) and negative emissions. The UN International Panel on Climate Change (IPCC)’s review of 1.5ºC scenarios suggests an average absolute decline in coal use to 18 per cent of 2020 levels by 2050, oil to 34 per cent and natural gas to 57 per cent; see https://www.ipcc.ch/sr15/ (accessed 10 Jun. 2020). (For comparison, in the early months of the COVID-19 crisis, global oil demand fell to around 70 per cent of its previous level.)
4 Based on Chatham House’s experience of working with fossil fuels- and minerals-producing countries on issues relating to climate risk and energy transition between 2014 and 2020, including research projects and capacity-building courses held in partnership with donors and multilateral development banks.
5 As, for instance, is already happening in Australia in relation to the country’s coal production, following the wildfires of early 2020.
6 The extractives-led growth model is examined in Lahn, G. and Bradley, S. (2016), Left Stranded? Extractives-Led Growth in a Carbon-Constrained World, Research Paper, London: Royal Institute of International Affairs, https://www.chathamhouse.org/publication/left-stranded-extractives-led-growth-carbon-constrained-world/2016-06-17-left-stranded-extractives-bradley-lahn-final.pdf (accessed 11 May 2020).
7 Consumer concerns about the security of cobalt supply chains and their human impacts have spurred innovation in battery technologies, which have rapidly reduced the amount of cobalt required for batteries, and may eliminate the need for cobalt altogether in this context.
8 Global Witness et al. (2015), RE: Climate Change and the Extractive Industries Transparency Initiative, Letter to the EITI Board and the EITI Secretariat, https://www.globalwitness.org/documents/18123/eiti_letter.pdf (accessed 11 May 2020).
9 From comments of business leaders, discussion at the side event.
10 Since 2013, the EITI Standard has been updated at three-yearly intervals, the most recent instance being the 2019 Standard. See EITI (2019), EITI Standard 2019, Oslo: EITI International Secretariat, https://eiti.org/document/eiti-standard-2019 (accessed 21 May 2020).
11 Some supporting countries and companies expressed these concerns in discussions ahead of the EITI Global Conference and in the workshop held at Chatham House in January 2020.
12 Some implementing countries raised concerns in EITI’s strategy consultation (see Appendix) about Validation, if EITI keeps adding to the Standard.