Making critical minerals supply chains sustainable and responsible

Given the global nature of mineral markets, international policy is needed to address the complete supply chain. Moreover, despite company policies to avoid minerals sourced from conflict zones, and the IRA requiring mineral sourcing from U.S. trade allies, it will be increasingly necessary to engage in risky supply chains.

Addressing environmental and social impacts of mining

International policy must meaningfully address the environmental and social impacts associated with mining. There is a moral imperative to do so. If “high risk” countries are shut out of the supply chain, they may miss this opportunity to support durable economic growth and alleviate poverty through their natural resources. Worse, if less scrupulous buyers continue to purchase their output, pervasive governance and human rights issues are not likely to improve. Downstream companies in the United States and elsewhere should remain engaged in these supply chains and seek improved environmental and social standards.

A concerted effort to reduce environmental and social impacts will also help ensure that progress does not slow on decarbonization and that U.S. industries remain competitive. This is because environmental and social harms have the potential to disrupt supply, creating uncertainty for investors and increasing the cost of deploying clean energy technologies.

For instance, if companies cannot demonstrate to local communities that they can operate mines safely and without harm to the environment, it will be difficult to maintain a social license to operate. In turn, local conflict can slow or stop production. Meanwhile, in many contexts, the mining sector has been a hotbed for corruption and revenues can be co-opted to fund armed conflict. Projects failing to address these issues may struggle to find willing investors; Angola, Democratic Republic of Congo, Mozambique, South Africa, South Sudan, Tanzania, Zambia, and Zimbabwe rank near the bottom in terms of attractiveness for mining investment. Taken together, these obstacles could result in shortages of minerals needed for electric vehicles and renewable projects.

Expanding domestic production subject to strict environmental and labour standards may partially fill this gap. But if meeting these standards increases costs, it may be difficult to compete with materials produced under less robust regulatory regimes.

A classic case of market failures

In economics terms, the environmental and social harms from mining are not fully reflected in the market price for processed metals or the end-consumer products. Instead, local communities absorb the costs from environmental degradation or corrupt practices. Many of these harms go unnoticed, absent negative press or through the rare lawsuit.

However, this may be changing. Increasingly, companies are being asked–or required–to investigate the harms and risks that may be prevalent in their supply chains (so-called supply chain due diligence). This practice stands in contrast to the place-based restrictions placed on tax credit eligibility in the IRA, although both schemes require traceability advances. U.S. companies are already required to investigate risks associated with high-risk and conflict-affected areas for tin, tantalum, tungsten, and gold. The European Union is preparing to significantly expand this requirement through its sustainable batteries regulation, which would require due diligence for batteries sold into that market.

Alongside these legal requirements, investors and consumers are also beginning to demand supply chain attention. Ford and Umicore, for instance, have voluntarily adopted a due diligence policy for cobalt.

Leveling the playing field

Due diligence requirements can encourage upstream producers to address environmental and social concerns. But a critical role remains for regulatory standards applied to mining operations by local authorities. According to a recent analysis from the International Energy Agency, most countries have some form of environmental standards for mining. These can take the form of environmental impact assessments, rehabilitation and reclamation requirements, or pollution standards.

That said, simply having laws on the books does not guarantee rigorous or consistent application and enforcement. The U.S. government has several initiatives to provide technical assistance and support to regulators around the world, such as the Energy Resource Governance Initiative (ERGI). Meanwhile, several industry groups, including the International Council on Mining and Metals (ICMM) and the Mining Association of Canada (MAC), have established standards and best practices to increase environmental and social performance at mine sites around the world. These efforts seek to raise standards across the board and create a more level playing field.

Coordination is needed

To be sure, the problems associated with mining are complex and multifaceted. However, failing to make progress on these issues could ultimately endanger efforts to meet global climate goals. Companies and policy makers will need to redouble efforts to improve environmental and social standards and should strengthen international coordination to ensure policies are well-aligned with key trading partners.