The important thing to understand here is what those various scopes describe.The scope one and two classes effectively cover all climate-changing emissions released in doing whatever it is you do to make a living. In Rio’s case, that means the carbon dioxide released in digging up iron ore, in building the equipment to make that happen, in running the machinery that delivers its product to a market place and in delivering its people and the services they need to mining camps around the world.
Scope of the problem
So what is the scope-three story then?
Well, that covers the volume of emissions that are released by the people who buy your goods. And, when your business is providing raw materials that are transformed into various forms of metals and their precursors, then the numbers can be disproportionately high.
Indeed, it is made very plain in Rio’s latest sustainability report, the scope three emissions are the Achilles heel of an iron-ore business that last year contributed nearly 65 per cent of the company’s underlying earnings and that, through the last two years alone, has generated nearly $US22.8 billion ($32.3 billion) in earnings before interest and tax.
Rio’s latest data-rich and best-practice compliant climate report reveals that iron ore is a comparatively efficient business when it comes to scope one and two emissions. But it is the elephant in room when it comes to scope three.
In generating the lion’s share of Rio’s wealth, the Pilbara iron-ore business pumps out 3.2 million tonnes of carbon dioxide. That matches the contribution of Rio’s copper business but is five times less than is emitted across the company’s large share of the global aluminium chain.
Interestingly, the breakdown of Rio’s integrated aluminium pillar lists the Australian-based Pacific Aluminium as the biggest single contributor to Rio’s scope one and two emissions, generating 8.2 million tonnes of CO2 last year. But, somewhat surprisingly, Rio’s hydro-energised Canadian aluminium smelters pump out 3.9mt of scope one emissions, which puts it too ahead of the Pilbara.
The coal-generation challenge
Unlike some in Australian politics, Rio is prepared to acknowledge the need to confront the coal-generation challenge.
“Large energy-consuming sites like Boyne Smelters in Queensland, the Oyu Tolgoi mine in Mongolia, and Richards Bay Minerals in South Africa, currently source electricity from coal-fired power generation,” the company’s climate report says.
“To remove these emissions, we will need low-cost and low-emission alternatives that also generate a reliable power supply.”
So, having profitably trimmed coal from its asset portfolio, Rio is reviewing the options for a future without coal-fired power.
All told, Rio’s scope one and two emissions totalled 28.2mt in 2018, which is about 16 per cent less than four years ago.
But Rio’s customers pumped out 536mt of carbon dioxide in putting the miner’s minerals and metals to good use in their refineries, smelters, sinter plants and blast furnaces. To put that into some sort of digestible context, Australia’s total emissions are about 560mtpa.
Rio’s climate report noted its scope three emissions were “mostly related to iron ore” and were effectively the scope one emissions of the world’s steel industry.
The next step
By my back-of-the-envelope numbers, “mostly” means about 70 per cent.
Last year, Rio sold about 340mt of iron ore to steelmakers around the region. It takes 1.6 tonnes of iron ore to make a tonne of steel. So Rio’s export ore is turned into about 212 million tonnes of steel. Making one tonne of steel produces about 1.83 tonnes of carbon emissions. So Rio is the ultimate source of 389mt of climate-changing emissions.
Market Forces wants to know what Rio proposes to do about that. And so does Rio.
The miner is a member of the Energy Transitions Commission (ETC), which is a council of leaders from the public, private and social sectors. Its mission is to map out an accelerate route to low-carbon energy systems.
One of the ETC’s specific ambitions is to take the emissions challenges of the “hard-to abate” industrial and transport sectors of the economy. That, self-evidently, includes steel.
The great challenge of steel is you cannot make it in the quality of volumes the world needs without using traditional blast-furnace technologies. Those machines require, as feed stock, pig iron that is made in sinter plants. The raw materials in that process require pretty equal measures of iron ore and metallurgical coal. The coal is needed to trigger the heat and chemical reaction that makes iron.
As Rio calls out, without step-change in either the way steel is made or in the capacity of mills to capture and use or store carbon emissions, the industry is going to account for an increasing proportion of total global emissions.
The ETC recently published a report called “Mission possible: Reaching zero-carbon emissions from hard-to-abate sectors by mid-century”. It concluded that the technology was available to affordably decarbonise the hard-to-abates. It assessed the bigger challenges were aligning government policies and establishing an appropriate pace of economy-shaking transformations.
Rio’s climate report includes an assessment of the future values of its portfolio through scenarios developed by the International Energy Agency that describe the most-likely pathways to a 2 degree globe.
The conclusion is that, having disposed of coal, Rio’s iron-ore business is its only loser in a decarbonising world.
While the numbers are missing, the narrative is clear enough. The report assesses that, in the shorter term, the “Pilbara iron ore becomes less attractive due to the effect of increased use of scrap, however, the business continues to be highly profitable. Demand for lump and pellet is robust. There is scope to significantly decarbonise our iron-ore mining operations in order to maintain cost-competitiveness.”
But Rio warns there “is large uncertainty around how the steel production sector will decarbonise in the long run and that could materially affect the value of Rio Tinto’s iron-ore business”.
Significantly, in its approach, Market Forces finds itself in alignment with Western Australia’s suddenly radicalised Environmental Protection Agency.
Last week, EPA WA issued greenhouse emissions guidelines that require net zero scope-one emissions targets for all future projects that require approval and that will emit more 100,000 tonnes or more of CO2. These new guidelines, which were prepared without any consultation with industry or, it seems, government, arrived with a scope three kicker.
The guidelines announced that the “EPA may consider scope three emissions from a proposal, having regard to the nature of the development and noting that a proposal’s ‘value chain’ emissions may be many times more than those from its own operations.”
The guidelines continued: “In particular, the EPA will consider seeking information on scope three emissions where there is a proximate link between the proposal’s activity and emissions from downstream consumption (such as combustion of fossil fuels), and where scope three emissions will be relatively large compared to scope one and two emissions.”
What “consider” might mean here is uncertain but the EPA would appear to be inflating the importance of scope three in its review processes. And that has to be as much a worry for governments in Perth and Canberra as it does for the Pilbara iron-ore miners, the people they employ and the communities they support.