The Australian resources sector must rise to the challenge of the global net zero transition
The Net Zero Momentum Tracker Resources Sector report, the seventh sector report in a series by CilmateWorks Australia with the Monash Sustainable Development Institute, analyses 22 of Australia’s biggest emitters within the resources sector. It evaluates each company’s alignment with the global goal of net zero emissions by 2050, based on its stated commitments and actions.
It finds all 22 companies are taking steps to decarbonise their operations, with half committed to reducing their operational emissions in line with the net zero by 2050 goal. It also finds that action to reduce their most significant emissions – those that stem from customer use of their products and the goods and services the resources companies procure – falls well short of that 2050 goal.
Australian resources are domestically and globally significant from an economic and greenhouse gas emissions perspective. Australia is one of the world’s top exporters of coal and liquefied natural gas; its resource extraction and processing companies are amongst the largest in the world.
Direct (scope 1) emissions generated from the oil, gas, mining and metals processing industries and indirect (scope 2) emissions from the energy powering their operations contribute more than one-quarter of Australia’s total greenhouse gas emissions. Typically, 80 per cent or more of emissions from companies within these industries are from indirect (scope 3) emissions – such as those associated with the commodities that Australian resource companies supply. Some estimates suggest that, by 2030, emissions from the use of Australian fossil fuel exports alone could be responsible for over 10 per cent of global carbon dioxide emissions.
This analysis focuses on coal mining, oil and gas exploration and refining, and the mining, refining, processing and manufacture of metals. It looks specifically at 22 companies involved in these activities that reported the highest total scope 1 and 2 emissions in Australia in 2018-19.
The report finds 50 per cent of the companies assessed have commitments aligned with net zero by 2050 for their operational scope 1 and 2 emissions, of which:
Five – Anglo American, BHP, Fortescue, Santos and South32 – have specific targets and strategies to achieve net zero by 2050 (with Anglo American, Santos and Fortescue seeking to reach this by 2040).
Six others – ConocoPhillips, GFG Alliance (Liberty Primary Metals), Glencore, Rio Tinto, Shell and Woodside – have expressed an aspiration to reach net zero by 2050 or have interim targets aligned with this goal.
In terms of indirect scope 3 emissions, the analysis finds:
- One company, Glencore, has set an aspiration to reach net zero emissions by 2050 for emissions from the downstream use of their products.
- The majority – 18 companies, representing 82 per cent of those assessed – are undertaking emissions reduction initiatives. Of those, five – Anglo American, BHP, Fortescue, Santos and Shell – have set targets or goals that address scope 3 emissions, but none of these is aligned with a net zero by 2050 pathway.
- The remaining three companies, or 14 per cent of companies assessed, have no emissions reduction targets or activities for their scope 3 emissions.
Strategies developed to reduce scope 3 emissions include a diversification into renewables and zero carbon fuels, such as green hydrogen, and investments in the development of low-carbon processes and products, such as low-carbon steel and aluminium. Over half of the companies assessed are implementing carbon capture and storage technologies or investing in its development. These strategies tend to focus on the growth of low-carbon solutions, but very little action is currently undertaken to reduce the production of high-emissions goods.
To decarbonise their operations, resource companies increasingly power facilities, vehicles and equipment with renewable electricity and alternative fuels. Metal manufacturers recycle from scrap to reduce lifecycle energy consumption; oil, gas and coal companies try to reduce flaring and fugitive emissions of the potent greenhouse gas methane, including through collaborations to improve methane emissions regulation and quantification.
The climate ambition of resource companies has recently increased materially, with 82 per cent of those assessed as net-zero aligned having adopted a net zero target or aspiration for their operational (scope 1 and 2) emissions in the past 12 months. This corresponds with a strong push by investors for climate risk management, for example through the Climate Action 100+ initiative, and with the increase in company-led sectoral initiatives to decarbonise, such as the Oil and Gas Climate Initiative, Australian Industry Energy Transitions Initiative and ResponsibleSteel.
Several of Australia’s biggest trading partners (including China, Japan, South Korea and the EU) have committed to achieve net zero within the second half of this century or sooner. More are expected to follow. As the global transition to net zero accelerates, resource companies face unprecedented declines in demand for carbon intense commodities, declines that raise the prospect of dramatic asset write-downs. Yet the net zero transition also presents opportunity. Australia has reserves of mineral commodities required for technology needed to reach net zero, and ample renewable energy resources to power its resources sector and facilitate green hydrogen production for domestic use and for export.
By acting now to implement their own comprehensive net zero by 2050 targets and strategies, Australian resource companies can capitalise on the transition and secure their future within a global net zero economy.
Key steps companies can take to improve their alignment to net zero include: strengthening actions to reduce scope 3 emissions by engaging with suppliers and customers to ensure they have targets and commitments; committing to reduce production of commodities associated with high emissions; implementing and investing in suitable technologies to tackle emissions from downstream processing of their products; and investing in and deploying nature-based and technological solutions that offset and sequester unavoidable emissions.
Australia is endowed with diverse and extensive mineral and energy reserves.
The resources sector accounts for more than eight per cent of Australia’s GDP and over half of its exports (Australian Industry ETI 2020; Department of Industry Science Energy and Resources 2020).
During the first two decades of the 21st century, Australian resources exports tripled to over AU$260bn, driven by demand from China and other Asian countries for iron ore, liquefied natural gas (LNG) and coal, and by a subsequent rise in prices (Phillips 2016).
By 2019, Australia had become the world’s top exporter of coal and LNG, making its resource companies some of the world’s largest (Climate Analytics 2019; Consultancy.org 2019; Toscano 2020a). As a result, the Australian resources sector exerts a significant influence on the local and international economy, and contributes substantially to global greenhouse gas emissions.
In 2019, one estimate put Australia’s coal, oil and gas exports at almost four per cent of global carbon dioxide emissions. If government and industry projections for fossil fuel exports are accurate, the figure could increase to over 10 per cent by 2030, with the largest contribution coming from exports of thermal and metallurgical coal (Climate Analytics 2019; Morton 2019). Australian mineral exports can also have high associated scope 3 emissions since they often require energy and emissions intensive downstream processing.
Globally, many resources companies are striving to achieve emissions reduction targets to meet growing demand for greener options from customers and more stringent regulatory requirements, which are incentivising the need for low-carbon commodities (Yep 2020). Some organisations are already providing carbon neutral products, although with a strong reliance on offsetting at this stage. For example, Shell has agreements with Tokyo Gas and GS Energy, and with China’s CNOOC Gas & Power Group, to supply carbon neutral LNG. Similarly, French multinational Total has committed to achieve net zero emissions across all production and energy products used by its customers in Europe by 2020 (Shell 2019; Shell 2020; Total 2020).
Investors and lenders increasingly expect organisations they back to manage their climate risks and set emissions reduction targets. Australia’s biggest four banks have all committed to stop financing thermal coal, with ANZ, Commonwealth Bank and Westpac to cease in 2030, and the National Australia Bank to follow in 2035. Institutional investors, such as HESTA, Aware Super and BlackRock, are divesting from some fossil fuels and closely engaging with high emitting companies. Superannuation funds AustralianSuper, Cbus, HESTA, Rest and UniSuper have committed to net zero portfolios by 2050. This focus on decarbonising investment and lending portfolios is increasing capital costs for carbon-intensive industries (Livsey 2020; Mills 2019), and means companies in hard-to-abate sectors such as resources must now consider and communicate how they will viably transition to a net zero global economy (Blundell 2020). The Climate Action 100+ initiative also demonstrates investors’ growing expectation for companies to manage and disclose climate risks. This coalition of over 500 global investors is targeting 167 of the world’s largest greenhouse gas emitting companies to ensure they put in place net zero business strategies (Climate Action 100+ 2020; Moore 2020).
This study examines companies whose primary activities include coal mining, oil and gas exploration and refining, and the mining, refining, processing and manufacture of metals (note that gas extraction companies such as Origin and AGL with a substantial energy retailing and generation portfolio will be included in a Net Zero Momentum Tracker energy sector report). Within these parameters, this analysis looks at the 25 entities that reported the highest total scope 1 and 2 emissions in 2018–19 under Australia’s National Greenhouse and Energy Reporting (NGER) scheme (Clean Energy Regulator 2020). Taking into consideration parent/subsidiary relationships, this means a focus on 22 organisations. Scope 3 emissions are not incorporated into the selection criteria since multinational resources sector companies with Australian operations typically do not report the scope 3 emissions associated specifically with commodities extracted and processed in Australia. Seven of the 22 companies analysed do not disclose their scope 3 emissions at all. Scope 3 reporting is not required under the NGER scheme, and there are inconsistencies in emissions sources included by companies that do report scope 3 (Downie & Stubbs 2013). Figure 1 shows the total scope 1 and 2 emissions for top resources sector emitters that report under the NGER scheme, and the cut-off for companies included in the analysis. Those excluded have comparatively lower scope 1 and 2 emissions. BP, which is amongst those excluded on this basis, has recently announced pending closure of its Kwinana refinery, a material contributor to the company’s emissions.
This Net Zero Momentum Tracker resources sector report assessed the pledges, commitments and activities of 22 resource companies to evaluate their degree of alignment with achieving net zero emissions by 2050.
Together, these companies represent 31 per cent of scope 1 and 2 emissions reported under Australia’s National Greenhouse Gas and Energy Framework, and 15 per cent of market capitalisation in the ASX200.
Seventy per cent of the assessed companies report their major sources of scope 3 emissions.
This analysis considers commitments and activities that address: scope 1 and 2 emissions from each company’s Australian operations, and those that address their scope 3 emissions, such as those generated by their suppliers and from use and processing of their products by customers (The Greenhouse Gas Protocol 2004).
Table 1 provides an indication of each company’s overall net zero by 2050 ambition, with separate assessments also shown for scope 1 and 2, and scope 3 ambition.
Table 2 illustrates findings from assessment of each company’s scope 1 and 2 emissions reduction commitments and activities for four categories: energy conservation, renewable energy, electrification and fuel switching, and non-energy/offsets. The latter category includes efforts related to carbon capture and storage. Table 3 provides the same assessment with a focus on activities and initiatives that address scope 3 emissions.
Supporting details for Tables 1, 2 and 3 are provided in the appendix (in the PDF report).
Overall ambition is strongly influenced by efforts to reduce scope 3, the most material emissions for all 22 companies. The highest level of overall ambition among the companies considered is ‘aligned aspiration/pathway’ (Figure 2).
- One company assessed – Glencore – has expressed an aspiration to achieve ‘net zero total emissions by 2050’ for its scope 1, 2 and 3 emissions.
The ‘partially aligned’ category is assigned to 10 of the 22 companies assessed: namely, those that have targets for net zero by or before 2050 covering a small proportion of their emissions.
Although some of the companies assessed have strong commitments to decarbonise their operations, only Glencore’s net zero aspiration indicates the company is taking steps to align its scope 3 emissions with net zero by 2050.
Action on scope 3 emissions is emerging amongst other companies. Of the 22 companies assessed:
- Eighteen are taking some steps to reduce their scope 3 emissions. Of these, five companies – Anglo American, BHP, Fortescue, Santos and Shell – have targets or goals that address scope 3 emissions. These, however, are either not aligned with net zero by 2050, target a small proportion of emissions, or are broad statements of support rather than explicit targets.
Three companies – Centennial, Newcrest Mining and Whitehaven – have no disclosed scope 3 emissions reduction targets or commitments.
Different companies use different strategies
Strategies adopted by the fossil fuel companies to address their scope 3 emissions include diversification into renewables and low-carbon fuels; pivoting towards customers and suppliers with net zero aligned emissions reduction targets and strategies; working with their customers to reduce their scope 1 and 2 emissions; and investment in development of carbon capture and storage technologies.
For example, Shell, which has a target to reduce the emissions intensity (gCO2e/MJ) of its products by 65 per cent by 2050, is diversifying into renewables and alternative fuels through its New Energies business. It has bought Sonnen, a company that supplies home battery storage in Europe, North America and Australia, and owns a 49 per cent stake in ESCO Pacific, a utility-scale solar developer that has implemented almost 500MW of operational solar generation in Australia. Shell has also expressed interest in producing green hydrogen as a commodity, to be sold either as a zero emissions fuel or industrial feedstock, as have Fortescue and Woodside.
To reduce the emissions intensity of their products, metals and mining companies are investing in development of low-carbon processes and products such as low-carbon aluminium, and steel manufactured using green hydrogen rather than metallurgical coal (Green Review 2020). In doing so, they are collaborating and engaging with peers, suppliers and customers to share knowledge and align approaches. BHP has made a broad pledge to assist the steelmaking industry achieve a 30 per cent emissions intensity reduction by 2030.
Inpex and ConocoPhillips state that they are including climate change considerations in their supplier selection criteria.
Efforts to decarbonise shipping are evident from three companies. Anglo American has flagged support for efforts to decarbonise international shipping by 2050. BHP has committed to support a ‘40 per cent emissions intensity reduction of BHP-chartered shipping’ in alignment with the International Maritime Organization’s (IMO) target, which was made legally binding in October 2020 (Harvey 2020). Fortescue also supports the IMO targets and is working closely with shipping partners to deliver on these targets. However, shipping only constitutes approximately two per cent of scope 3 emissions for these companies.
Under net zero by 2050 scenarios, carbon capture and storage is expected to play a role in addressing residual emissions from extraction and industrial processes, amid ongoing demand for some fossil fuels as a feedstock and energy source for manufacturing for example (IPCC 2018). More than half of the companies assessed are investing in development of carbon capture and storage technologies – particularly those working in oil, gas and coal.
Strategies amongst the companies assessed to address emissions from use and processing of their products tend to focus on growth of low-carbon solutions, but very little action is currently being undertaken to reduce production of high emissions goods. For example, none of the oil and gas companies have targets to reduce their production of fossil fuels.
Companies are taking action on scope 1 and 2 emissions
In general, our analysis finds a far greater alignment with net zero by 2050 for operational scope 1 and 2 emissions, with all of the 22 companies assessed taking some steps to reduce their operational emissions.
Eleven companies, or 50 per cent of those assessed, have commitments aligned with net zero by 2050 for their operational emissions, of which:
- Five – Anglo American, BHP, Fortescue, Santos and South32 – are ‘fully aligned’ and have specific targets and strategies to achieve net zero for their operations by 2050, with Anglo American, Santos and Fortescue seeking to reach this by 2040.
- Six others – ConocoPhillips, GFG Alliance (Liberty Primary Metals), Glencore, Rio Tinto, Shell and Woodside – have expressed an ‘aligned aspiration’ to reach net zero by or before 2050, or have interim targets aligned with the goal.
The other 50 per cent have commitments or are undertaking activities that will reduce their operational emissions but these are ‘not aligned’ with net zero by 2050, of which:
- Five companies – Alcoa, BlueScope, Chevron, Inpex and Newcrest – have interim targets or commitments to reduce emissions that are not aligned with net zero by 2050.
- Six – Centennial, ExxonMobil, Peabody, Viva Energy, Whitehaven and Yancoal – have not made any commitments but are engaged in a range of activities to reduce operational emissions.
The companies assessed are decarbonising their energy use by electrifying facilities, vehicles and equipment; purchasing renewable energy; investing in renewable energy generation and storage; and using alternative fuels such as hydrogen, biofuels, furnace off-gas and coal mine waste gas.
South32, Santos, Shell, Centennial and Fortescue have all deployed onsite renewable generation at their own facilities, or invested in large-scale renewable and battery storage projects. BlueScope Steel and aluminium smelter Alcoa are manufacturing steel and aluminium from recovered and recycled scrap, which significantly reduces lifecycle energy consumption. Anglo American, BHP and Fortescue have formed a Green Hydrogen Consortium with engineering consultancy Hatch to look at ways hydrogen can be used to decarbonise their operations (Hatch 2020; Woodside 2020). GFG Alliance (Liberty Primary Metals), Shell and Woodside have also shown an interest in using green hydrogen for their operations.
Strategies to address non-energy emissions include minimising methane leakage and fugitive emissions, implementing carbon capture and storage, and investing in offsetting solutions. Rio Tinto and Alcoa have partnered through the ELYSIS joint venture to develop an aluminium smelting process with no direct greenhouse gas emissions, a technique they plan to license in 2024.
Companies are increasingly collaborating
Many of the fossil fuel companies assessed emphasise collaboration and investment to reduce resources sector emissions of methane, a potent greenhouse gas. Centennial, South32 and Whitehaven are investing in studies on methane capture and utilisation. As a member of the Oil & Gas Climate Initiative (OGCI), ExxonMobil is working with other OGCI members to reduce the methane intensity of their oil and natural gas products (ExxonMobil 2020). Four of the oil and gas companies assessed – Chevron, ExxonMobil, Shell and Woodside – have committed to the Methane Guiding Principles, which requires collaboration through industry partnerships, trade associations and proactive stakeholder engagement to improve methane emissions management across their supply chains (Methane Guiding Principles 2020).
Shell and Woodside have endorsed the World Bank’s Zero Routine Flaring initiative, which requires them to eliminate routine flaring by 2030.
The Chevron-led Gorgon Carbon Dioxide Injection Project is expected to capture
40 per cent of the total emissions from one of the world’s largest natural gas projects, located in Western Australia. Both Shell and ExxonMobil also have an interest in this joint venture (Macdonald-Smith 2020b; Morton 2019b). Alcoa, Woodside, Shell, Glencore, Inpex and BHP are investing in natural solutions, including reforestation, afforestation and ‘blue’ carbon, to offset their emissions.
Momentum to address emissions within Australia’s resources sector has significantly accelerated in the past year. Nine of the 11 companies assessed as aligned with net zero by 2050 for their operational emissions set commitments conducive to this status within the past 12 months. Within this time period, heavyweights such as Shell, Glencore and BP have all announced plans to reduce operational emissions to net zero and steps to address their material scope 3 emissions. (Although BP is not included in this analysis, a case study of the company’s commitments can be found at netzerotracker.org).
Although a primary driver is the accelerating transition towards net zero in key export markets, this momentum also corresponds to increased pressure from investors for companies to disclose and manage their climate risks. Twelve of the 22 companies assessed are being targeted by Climate Action 100+, a coalition of over 500 global investors targeting the world’s largest greenhouse gas emitting companies to ensure they have net-zero business strategies and targets (Climate Action 100+ 2020; Moore 2020). Most of the companies examined are also members of peak bodies, and collaboration initiatives such as the Oil and Gas Climate Initiative, Australian Industry Energy Transitions Initiative and ResponsibleSteel, which are mobilising companies in the sector to increase their climate ambition and supporting them in charting pathways towards net zero emissions.
To fully align themselves with net zero by 2050, resource companies must commit to decarbonising their operations by 2050, and set absolute net zero by 2050 scope 3 targets that include emissions from the use and processing of their products. They must support these goals with strategies that outline interim targets, and signal to customers, suppliers and investors a pathway to decarbonisation through:
- A transition to low-carbon practices and products where feasible
- Inclusion of climate change criteria for supplier selection and mandatory emissions criteria in supplier agreements (Cuff 2018)
- Investment in suitable technologies and nature-based solutions that offset and sequester unavoidable greenhouse gas emissions
- Collaboration with peers, customers and suppliers to decarbonise across the resources value chain through initiatives such as the Mission Possible Platform, the Oil and Gas Climate Initiative, Australian Industry Energy Transitions Initiative and ResponsibleSteel.
Transformation of the sector to align with an economic transition to net zero requires long-term investment and re-skilling of the workforce. In Australia, now is an excellent time to act.
In the wake of the COVID-19 pandemic, the Reserve Bank of Australia has cut the cash interest rate to an historic low, significantly reducing corporate borrowing costs (Holden 2020). Investors and lenders are also increasingly providing financial incentives and products geared towards supporting industry decarbonisation. For example, transition bonds are a new asset class designed to enable industries with high greenhouse gas emissions to raise capital for decarbonisation of their business and supply chains (BNP 2020; Gross & Stubbington 2020).
To stimulate business investment, Australia’s 2020 federal budget enhanced asset write-off arrangements, allowing businesses with up to AU$5 billion in annual turnover to claim an immediate deduction of the full value of eligible, depreciable assets such as plant and infrastructure used or installed before 30 June 2022 (ATO 2020; Janda & Chalmers 2020).
The Australian government has also said, in its ‘Low Emissions Technology Statement’ of September 2020, that it will prioritise investment in the technologies necessary to support decarbonisation of the resources sector, such as ‘clean’ hydrogen, low-carbon steel and aluminium, as well as carbon capture and storage (ARENA 2020; Department of Industry Science Energy and Resources 2020).
Resource companies that fail to act risk unprecedented declines in demand for emissions intense commodities, resulting in dramatic asset write downs – as more trading partners follow China, Japan and South Korea in setting net zero targets, and the global transition towards net zero by 2050 accelerates (Blackmon 2020; Livsey 2020; Morton 2020b).
This transition also presents opportunities for Australia. The country’s resources sector has a comparative advantage, with access to ample renewable energy to power operations and produce greener products. Australia also has enviable reserves of commodities required for electrification and the storage and generation infrastructure necessary to achieve net zero emissions. Other advantages include existing mining expertise, effective logistics and an attractive investment landscape.
We are in the transformational decade for addressing climate change (ClimateWorks 2020). By acting now, the resources sector will be better positioned to manage climate risks and capitalise on the global net zero transition.