The role of lithium in a low carbon economy and associated challenges

The journey to achieve the goal of the Paris Agreement, limiting global warming to 1.5 °C, has opened the way for technological innovation to help reach a peak of greenhouse gas (GHG) emissions. Technology aims to have the double purpose of improving our resilience towards climate change and to reduce GHG emissions. That is why technological innovation is key to move towards a low carbon economy, where the output of GHGs into the atmosphere is minimal.

Electric mobility is one of the solutions being incentivized around the globe in varying magnitudes. Nevertheless, its implementation presents challenges to keep up with the growing demand of electric batteries and the risks in the lithium supply chain. A sustainable approach is needed to address the challenges from the extraction of this critical raw material, which is crucial in the fight against climate change.

Within the transportation sector, road transport has by far the biggest share in the sector’s GHG emissions. Therefore, one of the initiatives to lower them is to incentivize the deployment of low emission transport alternatives such as electric vehicles (EVs). Scientific studies have reached different conclusions about the real environmental footprint of EVs and the extent to which they can help mitigate climate change. The differences are due to the research scope and other factors such as the energy mix of the studied location. Nevertheless, the uptake of EVs continues to increase year-on-year. According to a report from the International Energy Agency (IEA), the global stock of EVs reached 7.2 million in 2019. This amount makes up only 1% of the total global car stock. However, it also represents a 40% year-on-year increase from 2018; EVs keep gaining share in the global car sales.

Countries around the world with different market sizes for these vehicles are offering incentives to increase the number of these units on their streets. For example, in Mexico, where only a few dozen EVs are sold per month, the owners are exempt from a tax that applies to all new cars and from driving bans that apply to conventional cars to cut down pollution. In China, the largest market for EVs that accounts for approximately 50% of global sales, EVs are not subject to registration restrictions or driving bans and receive purchase incentives. Norway has set the target that all new cars sold by 2025 should be zero emission vehicles. In this country, EVs are exempt from the import tax, are not subject to the 25% VAT, and enjoy other type of benefits such as reduction in parking fees. In 2019, one of every two newly registered cars in Norway was electric. The IEA estimates that under a Stated Policies Scenario, the global EV stock will reach almost 140 million in 2030.

With more EVs on the market and strong incentives to increase this number, the demand for materials used in EV batteries, such as lithium, cobalt, nickel, and others, can be expected to increase accordingly. The lithium-ion (Li-ion) batteries are the most widely used today and will likely dominate the market in the upcoming decade. Compared to its competitors, Li-ion batteries can store higher amounts of energy with lower mass and weight, have high energy efficiency, good high temperature performance, and lower self-discharge. The US Geological Service (USGS) reports that in 2020, 71% of the global end use of lithium was for batteries. The IEA estimated that the lithium demand could increase up to 185,000 tons per year by 2030, compared to the 17,000 tons per year in 2019, without considering other lithium applications like electronic devices, grid storage, ceramics, and glass.

The projections for the demand of lithium present a challenge to its global supply chain, which has already struggle in the recent years to meet the demand. In 2018, the lithium price peaked due to a growing demand and high expectation of EVs’ market penetration, but according to the USGS, this was not fulfilled as China cut back on EV subsidies leading to a lower-than-expected demand. The plummet of prices during the last three years caused the cease of production on some small sites and halted planned projects. In 2021, the price of lithium is starting to recover which will incentivize extraction projects to resume operations.

Continuous exploration and a profitable market have increased lithium reserves around the world, estimated to be 21 million tons from which 82,000 tons were mined in 2020. Chile has the largest reserves with 9.2 million tons, followed by Australia, Argentina, and China. However, Australia is by far the leader of production with 40,000 tons mined in 2020, followed by Chile (18,000 tons) and China (14,000 tons).

The preferred extraction method used in Australia is hard rock mining of spodumene, an ore material with a theoretical content of 8% of lithium oxide. This method is considered energy intensive as the rock must be processed to extract the lithium. South America, in the “lithium triangle” between parts of Argentina, Chile, and Bolivia, utilizes the water intensive brine method in which salt-rich waters are pumped to the surface to undergo an evaporation process that takes months to extract the minerals.

Lithium production has important sustainability challenges that need to be addressed to fulfill its role in the transition into a low carbon economy. Most lithium is currently extracted from only 10 sites around the world found in Australia, Argentina, Chile, and China. This geographical disparity is a challenge for the rest of the world, especially for regions like the EU with high stakes in the low carbon transition. Other challenges can be political and financial issues that affect the profitability of lithium projects. For example, while Bolivia has the largest lithium resources of the world, it does not have a strong commercial extraction of the product yet.

As any raw material, there are important social and environmental challenges that arise from the extraction process. The Salar de Atacama region in Chile is a dry environment and is inhabited by indigenous communities. Lithium extraction is resource intensive, therefore, it represents water stress, land use, and pollution risks. Social issues must be addressed with tools like community consultation, engagement, and free, prior, informed consent. A thorough environmental and social impact assessment and the establishment of maximum extraction levels can aid in the reduction of environmental risks.

Recycling of electric batteries is a developing sector that could help fulfil the world’s need for lithium and reduce its environmental and social impacts. Higher pressure in the raw materials market will increment the need and profitability of recycling lithium accompanied by environmental policy to steer the sector into end-of-life practices. The Li-ion battery recycling market is projected to grow from USD 1.5 billion in 2019 to USD 18.1 billion by 2030. Other alternatives are being studied to alleviate the environmental impact of the extraction process, for example, lithium extraction from geothermal waters where geothermal energy is naturally powering the lithium extraction from the solid rock.

We seize environmental, social and governance (ESG) risks and embed responsible business practices across our company. For any insurance business transactions, we consider the ESG risks associated with such transactions.