Why would the Executive Director of a charitable non-governmental organization dedicated to improving artisanal gold mining in developing countries engage with a gathering of executives from the energy, renewables, and fossil fuel industries?
In addition to my longstanding friendships with those who invited me and my prior experience in the petroleum and energy sectors, I believe there is a compelling reason to discuss artisanal and small-scale gold mining (ASGM) with a group of executives convened to explore the intricacies of the energy transition.
Allow me to introduce myself.
I have the privilege of leading the Artisanal Gold Council since May 2023. While I do not claim expertise in mineral geology or metallurgy, my perspective on ASGM is grounded in institutional economics. Within this framework, I am taking the liberty to share some insights on the convergence of the energy transition, mining, and artisanal mining.
Mining and the Energy Transition
The energy transition is now a reality. Renewable energy is rapidly becoming the predominant energy source, accounting for 40% of the increase in primary energy sources. In 2022, electric vehicle (EV) sales reached approximately 8 million units, with sales projected to surge to 51.6 million vehicles by 2035. Notably, EVs require a more significant supply of minerals compared to internal combustion (IC) vehicles, signifying a substantial surge in mineral demand as the world shifts away from IC vehicles.
According to climate experts, achieving net-zero goals necessitates the decarbonization of electricity sources. Low-carbon technologies like solar photovoltaic (PV) and wind power, while vital for reducing carbon emissions, have a higher mineral intensity compared to fossil fuel technologies. As echoed by the World Bank and other institutions, the energy transition will place substantial demands on the mining sector, governments, and society.
To meet these ambitious goals, massive investments are required. Although 2022 witnessed a record high of $1.3 trillion in energy transition-related investments, cumulative investments up to 2030 must reach $35 trillion to maintain global temperatures below 1.5 degrees Celsius [. The mining industry has responded with increased investments, with the top 40 mining companies worldwide investing around $85 billion in 2022, a 29.7% increase from the previous year. Still, these figures fall short of the levels necessary to meet the growing demand for minerals in the energy transition.
Predicting mineral demand growth is challenging due to consumer response and policy uncertainties. The path to the energy transition is not singular; it hinges on consumer preferences, government policies, and societal responses to extensive infrastructure changes aimed at replacing fossil fuel-dependent economies. Competing technologies, government subsidies, and carbon tax schemes are influenced by political choices. Mining, a long-term endeavour, demands substantial preparation. Therefore, questions linger about the enduring demand for materials currently used in the energy transition and potential shifts in government policies.
To attract significant investments, the mining industry must address its environmental footprint, secure land access, ensure policy stability, and gain community acceptance for its projects. These challenges are far from guaranteed.
Firstly, the mining industry needs to reduce its reliance on fossil fuels to power its operations. Mining is energy-intensive, consuming approximately 6% of global energy. As mineral demand surges, mining companies must explore alternatives to fossil fuels, further driving the demand for minerals. All this must occur while ensuring a reliable and cost-effective supply source. Secondly, access to land is essential for the mining industry, especially in areas where energy transition minerals (ETM) are abundant, often near indigenous and economically disadvantaged communities. These projects require extensive consultation and the free, prior, and informed consent of affected communities, a process often slow and uncertain. Currently, roughly 73% of ETM projects in Latin America are situated in or near indigenous lands [. Lastly, the energy transition calls for a diverse range of minerals, some categorized as “critical” due to their susceptibility to supply disruptions arising from geographic concentration, limited availability, or challenging extraction.
Expanding the mineral supply necessitates the discovery of new reserves, with many located in countries of the Global South. Challengingly, this influx of revenues might inadvertently trigger what is commonly referred to as the resource curse, as experienced by petroleum-rich countries in Africa, Latin America, and the Middle East. Despite significant revenue from petroleum, these nations encountered challenges such as poor governance, high corruption levels, increased violence, and social conflicts. These are well-known issues in natural resource economics.
The Impact of Artisanal and Small-Scale Mining (ASM)
One aspect receiving limited attention in the energy transition discourse is the role of ASM. ASM is prevalent in at least 80 countries in the Global South, primarily linked to gold, accounting for 20% of global gold production, as well as gems, coal, and minerals crucial for the energy transition, including cobalt, tin, tungsten, and tantalum. Evidence suggests that at least 16 minerals considered critical for the energy transition have some level of ASM activity.
In a world characterized by demand uncertainty and price volatility, ASM can act as a nimble buffer, responding more swiftly than large mining companies to demand fluctuations. While the share of ETM sourced from ASM remains marginal, its role may become increasingly relevant due to demand unpredictability. The challenge for the mineral industry, the energy supply chain, governments, and civil society at large is to transform ASM from a perceived “problem” into a valuable “solution.” ASM is often associated with poverty and related societal concerns, including child labour, environmental degradation, resource competition, health-related issues (i.e. mercury usage), and governance issues such as land tenure and informality. On the flip side, ASM also serves as a significant source of employment and wealth transfer to rural communities, yielding positive contributions to local economies due to high multiplier effects. In the sector, efforts to transition from the perceived poverty trap to a value-creating activity have proven elusive. A major hurdle is the intricate process of achieving “formalization.”
The Quest for Formalization
Formalization is a cornerstone in any endeavour to enhance the lives of ASM communities, but its definition lacks uniformity. The planetGOLD Programme defines formalization as the process of integrating ASGM into the formal economy, society, and regulatory system, representing a critical step in addressing challenges and unlocking the sector’s development potential. Bringing ASM into the formal economy can result in higher incomes, improved working conditions, and the mitigation of social and environmental challenges.
Formalization is intrinsically tied to private property rights. These rights are fundamental for economic prosperity, as nations thrive when private property rights are well-defined and enforced. Notwithstanding the recognized benefits, ASM largely operates in the realm of informality, devoid of clear property rights.
In most Global South countries, mineral resources are owned by the state, which determines who, how, and under what conditions these resources can be exploited. Economic theory dictates that the most efficient resource exploitation occurs through a market-based competitive system bolstered by strong property rights. Therefore, governments must establish a substitute for mineral property rights, akin to exclusive and tradable property rights, while ensuring the internalization of negative externalities arising from resource exploitation.
A critical distinction between large mining operations and ASM is the incentive for compliance with mineral rights laws. Large mining operations refrain from substantial capital expenditures without a contract securing their rights to profit from resource exploitation. This expected gain provides governments with leverage to enforce legal compliance. Furthermore, to attract investments, governments often extend incentives to large mining investors, such as tax exemptions and free importation of capital equipment. In return, mining companies have a vested interest in respecting legal requirements, such as acquiring mineral titles, submitting environmental impact assessments, and adhering to labour codes. Failure to comply jeopardizes access to valuable mineral resources covered by contracts extending over extensive periods (often 30 years or more).
In the ASM sector, governments cannot typically enforce laws governing mineral rights and other requirements associated with formalization. Consequently, the cost of non-compliance remains low, as do incentives for internalizing negative externalities. The exploitation of resources in the ASM context often resembles an “open access” system. Additionally, the formalization process in ASM is frequently time-consuming, expensive, and bureaucratic. When granted, ASM mineral rights are often short-term. The incentive for formalization may remain unclear, especially if tax payments are expected without corresponding benefits in terms of secure mineral rights, improved security, or access to infrastructure.
Despite the theoretical advantages, relying solely on a market-based property rights model can lead to substantial inequalities. Large operations enjoy the ability to negotiate favourable terms due to their substantial investments, resulting in unequal conditions for ASM communities. To address these disparities, contracts sometimes include initiatives by large mining operations to support the professionalization of ASM communities. These efforts are often relegated to corporate social responsibility actions and do not amount to strong mineral rights for ASM.
Formalization efforts in ASM should weigh the trade-off between efficiency and social welfare. Large mining operations may be perceived as more efficient due to economies of scale, investments, and anticipated tax revenues. Nonetheless, granting land access to ASM and ensuring secure mining rights can incentivize the internalization of negative externalities, ultimately strengthening social welfare. Achieving this requires special legislation for ASM and a comprehensive support system, encompassing access to mercury-free clean technologies, financial access, and mechanisms for incorporating production into formal supply chains. Unfortunately, the challenges lie in the difficulty of developing effective formalization processes within many governments in the Global South.
The energy transition is highly dependent on minerals, many of which will be sourced from countries in the Global South where ASM plays a pivotal role. The central question for governments is whether they want these resources to be exploited. Deterrence mechanisms are effective for large mining operators but may not work in the ASM context. To secure a consistent mineral supply and leverage this demand for environmentally sustainable and economic prosperity in developing communities, governments must champion a formalization process granting ASM communities robust mineral rights. These rights must offer sufficient incentives for ASM operators to internalize negative externalities. Achieving this requires a holistic approach encompassing financial access, technology, participation in formal supply chains, and capacity building.
These principles are at the core of the formalization process advocated by the Artisanal Gold Council when implementing projects for entities like planetGOLD and other stakeholders.
To put it in a simple formula a conclusion: without formalization, ASM will not flourish, and without a thriving ASM sector, investments in mining may fall short of supporting the energy transition.
Laing Timothy, Pinto Avanti Artisanal and small-scale mining and the low-carbon transition: Challenges and opportunities. Environmental Science Policy. 149 (2023)
Although not exhaustive a list of minerals and materials required for the energy transition includes: aluminium, cadmium, cobalt, copper, dysprosium, gallium, graphite, lithium, manganese, neodymium, nickel, praseodymium, platinum, steel, silicon, silver terbium, tellurium, etc.
Clausen Fabian; Barreto Maria Laura, Ataran Amir. Property rights and the reform of artisanal and small-scale mining in developing countries