November 13, 2019

A Decarbonized Economy: Risks and Opportunities

Samuel L. Brown and Lauren A. Bachtel

The state of New York recently established one of the most ambitious economy-wide climate targets in the world: 100 percent carbon-free electricity by 2040 and economy-wide, net-zero carbon emissions by 2050. This follows similar actions taken by other states—notably California—and other nations as part of their efforts to meet commitments made under the Paris Agreement. Meeting these targets will require a significant expansion of renewable energy, grid-scale storage, and electric vehicles, among other actions. Technology, mining, manufacturing, automotive, and energy businesses will need to innovate and implement new technologies, coordinate actions, and increase the scope and scale of the transition to a decarbonized economy.

Transportation and electricity generation are the two primary sectors of the economy that will need to reduce emissions to meet the targets. While short-term corporate actions to decarbonize, taken in isolation, may appear to be progress toward the targets, examination of all interconnected actions is necessary to facilitate a holistic assessment of risk and opportunities. Batteries and energy storage are keystones to reducing emissions from transportation and electricity generation and illustrate the tension between short-term actions and longer-term risks and opportunities. This article highlights considerations the private sector may need to assess to maximize business opportunities while reducing emissions to meet climate targets.

The largest source of greenhouse gas (GHG) emissions in the United States is the transportation sector, which accounts for 29 percent of emissions. Transportation emissions comprise an even larger percentage in some states: approximately 37 percent in California and 35 percent in New York, for example. Achieving the climate targets would require a shift from internal combustion engines to electric or similar designs that result in zero-emission vehicles.

The International Energy Agency estimates there will be 140 million electric cars globally by 2030 if countries meet their Paris Agreement commitments. To meet California’s 2030 target of emissions, that state’s government estimates that 40 percent of all new vehicle purchases must be zero-emission vehicles by 2030 (up from five percent in 2017). Some countries are explicit about the future—China and European Union (EU) countries have proposed plans to prohibit the future sales of internal combustion engines.

Government policies will likely drive growth in electric vehicles and influence how the products are designed. Despite current low demand in the United States for electric vehicles (two percent of the market in 2018) the automotive industry is investing billions in the technology and new products. The expectation is that a new regulatory framework, like the climate targets, combined with improvement to existing barriers (e.g., battery-charging infrastructure, prices, and performance) will lead to greater market demand.

Electric vehicles largely rely on lithium-ion batteries, which are not new; they power our cell phones and computers. What will be new is their large-scale application in the transportation sector to significantly reduce emissions. Lithium-ion batteries illustrate the risks and opportunities of decarbonization. An economy-wide transformation of this size creates technological, business, and legal uncertainties associated with the design, sourcing of raw materials, manufacturing, a global supply chain, and the product’s end-of-life use, including recycling, reuse, or disposal. Successful companies will be those that recognize the connections and potential synergies between traditionally distinct industries, are able to identify and mitigate risks, and fully capitalize on opportunities.

Lithium-ion batteries include lithium, cobalt, and nickel, among other components, which often exist in limited amounts, are expensive to extract, and are located in limited and developing parts of the world. More than half of the world’s cobalt, for example, is found in the Democratic Republic of the Congo, where child labor in artisanal mining is estimated to account for approximatively 20 percent of cobalt exports. Most of the world’s lithium comes from the “lithium triangle” of Argentina, Chile, and Bolivia, where indigenous peoples have protested environmental concerns associated with lithium production. Nickel production allegedly is associated with deforestation and the loss of biodiversity, as 40 percent of reserves are in locations with high biodiversity, notably Indonesia and the Philippines.

Batteries require mining, mineral processing, battery manufacturing, and transportation, among other steps in the supply chain that results in GHG emissions and traditional environmental, health, safety, and social (EHSS) risks. The increase in demand associated with the scaling of lithium-ion batteries also may create new risks. Traditional lithium production in South America, for example, relies on brine-focused production that consumes little energy because the sun processes the lithium. However, because of a rise in demand, there has been an increase in directly shipping ore from rock mining sites to China for processing and use in manufacturing of the batteries, resulting in an increase in energy consumption and emissions associated with transportation. Likewise, the rise in demand for nickel has led to an increase in extraction of the laterite-type of nickel ore, which is of a lower grade than the sulphide-type ore. Extraction operations for laterite ore are less efficient; more energy is used in mining and refining it; and the laterite ore is located in biologically diverse locations such as Brazil, Indonesia and Guatemala.

As a matter of public policy, it may not make sense for a government to mandate electric vehicles if the emissions associated with the manufacture of electric vehicles and their components negates the emission reduction associated with transitioning to zero-emission vehicles. Moreover, companies will need to ensure that their involvement in this supply chain not only is consistent with applicable regulatory requirements, but also satisfies corporate social responsibility obligations. The benefits of the transition to electric vehicles should not be outweighed by negative externalities, whether they be emissions or EHSS risks.

Options for alternative sources of these materials are limited in the short term. Therefore, to mitigate legal, commercial, contractual, and reputational risks, companies should implement appropriate audit policies and procedures throughout the supply chain to ensure, for example, that cobalt used in manufacturing lithium-ion batteries does not originate from child labor.

Additionally, technology, mining, manufacturing, automotive, and energy businesses are joining forces with international organizations and nongovernmental organizations to create a responsible global supply of batteries in a market that is predicted to be worth $100 billion by 2025. Companies will need to understand the framework of international standards and best practices that is being created and incorporate it into decision-making and supply chains. Notably, these international standards often are incorporated into governmental authorizations, financing, and contractual obligations as demonstrated through application of the Equator Principles, the IFC’s Environmental and Social Performance Standards, and similar industry-specific guidelines. See Samuel Brown & Scott Burton, Trends in Social and Environmental Responsibility, 34 Nat. Resources & Env’t 50 (Spring 2019).

Strong demand for these raw materials leads to increased risk for companies. One solution is to decrease the need to extract these materials by creating a closed-loop cycle via recycling of the lithium ion batteries. Currently, less than 3 percent of lithium-ion batteries globally are recycled. In contrast, 99 percent of lead-based batteries in the United States are recycled. This difference is attributable to numerous factors, including the lack of uniform design of lithium-based batteries, an underdeveloped recycling infrastructure, and current unfavorable economics of recycling.

A combination of regulatory and market drivers will create a need for a functional recycling industry, especially with the expected increase in the number of batteries that will require end-of-life disposal. Pressure for a recycling solution will increase in response to governments enacting product stewardship requirements that apply to lithium-ion batteries, including a ban on their disposal. The EU, for example, requires battery manufacturers to finance the cost of collection, treatment, and recycling of all batteries. Further, the European Commission is expected to review its Battery Directive in 2020. This evolving legal framework already is encouraging closer strategic relationships between automotive manufacturers and the recycling sector. In the United States, there is no federal requirement for recycling large-format lithium-ion batteries. However, establishing a recycling industry would assist with managing the corporate risk associated with compliance with the Resource Conservation and Recovery Act and equivalent state hazardous waste requirements. Recycling lithium-ion batteries on a large scale also could reduce the demand for their raw material components, mitigating the risk of supply chain choke points, reducing emissions and EHSS concerns, and mitigating corporate reputational and legal risk.

The benefits of recycling demonstrate the importance of design and early, thoughtful, integrated planning for the product’s entire life cycle. While there likely is universal agreement that recycling the components of lithium-ion batteries is one appropriate end-of-life solution, the bottom line is that a recycling industry will struggle if it does not make financial sense to recycle the components when compared to sourcing raw materials. Design decisions made now by manufacturers may determine the financial viability of recycling decades into the future.

Repurposing the batteries may be a preferable approach to recycling, but the viability of that also will be dictated by design and integration with symbiotic industries. Repurposing could provide automotive manufacturers with a critical revenue stream during a time of upheaval within the industry. Lithium-ion car and bus batteries can, on average, collect and discharge electricity for another eight to ten years after being taken off the road. During their “second life,” the repurposed batteries can be integrated into stationary sources (e.g., residences, commercial facilities, or the power grid) to store power from, for example, solar panels during periods of low demand and feed it back during periods of localized high demand. Repurposing batteries could reduce the need to manufacture large grid-scale batteries, increase the reach of renewable energy generation, and further decrease the cost of production and the scaling-up of electric vehicle use. Cross-industry integration, product standardization, cross-manufacturer compatibility, and certification programs can increase the repurposing opportunity.

Electricity generation accounts for 27 percent of GHG emissions in the United States, which is the second-largest source of GHG emissions. The current state of grid-scale battery storage poses a barrier to the utilization of solar, wind, and other renewable energy to reduce GHG emissions. The use and design of lithium-ion batteries illustrates the potential for an increase in the interconnection of the transportation and electric generation sectors and future opportunities. A consortium of automobile and energy companies in Europe, for example, are examining the deployment of “smart” electric vehicle charging stations that are tied into the electric grid. A smart design and deployment of electric vehicles and related infrastructure could create an opportunity for electric cars to charge during low-demand periods and batteries that feed back into the grid during high-demand periods.

Relatedly, traditional wind and solar power is expected to continue to grow as a percentage of the total energy generation, spurred by government mandates like the one in New York. In April 2019, hydro, solar and wind power supplied more electricity in the United States than coal for the first time ever. Similar material sourcing, design, and end-of-life considerations for the associated renewable energy infrastructure will need to be evaluated, and risks and opportunities should be assessed. Solar photovoltaic (PV) panels, for example, are a key component associated with solar energy, but the PV panels contain lead, cadmium, and other metals. The International Renewable Energy Agency estimates that by 2050 there will be 78 million metric tons of solar energy infrastructure that has reached the end of its life.

The private sector is indispensable to meeting the climate targets. The path to a decarbonized economy is laid with opportunity for companies that recognize the interconnection between short-term actions to address climate change, longer-term risks, and the ongoing dismantling of the walls between traditional industrial sectors.

Entity:
Topic:

Samuel L. Brown and Lauren A. Bachtel

Mr. Brown is a partner in the San Francisco, California, office of Hunton Andrews Kurth LLC, and is a member of the editorial board of Natural Resources & Environment. Ms. Bachtel is a senior attorney in the Washington, D.C., office of Hunton Andrews Kurth LLC. They may be reached at slbrown@huntonak.com and lbachtel@huntonak.com, respectively.