Rio Tinto, the world’s second-largest miner, has announced that it will not be able to achieve its 2025 decarbonization target of a 15% reduction in carbon emissions without purchasing carbon credits to offset its emissions. The company has also taken an $800 million write-down on its Gladstone alumina refineries due to the higher costs of annual emissions caps under the Albanese government’s stricter Safeguard Mechanism. This write-down occurs when a company’s projected cash flows are lower than the current value of the asset on its books. Rio Tinto did not anticipate or account for the impact of the imposed carbon tax on its long-term cash flow projections, resulting in the $800 million reduction in the value of its Australian alumina refineries.
This admission by Rio Tinto highlights the challenges faced by heavy industries in reducing their carbon emissions and is one of the first instances of a mining giant acknowledging that it will miss its net zero targets. According to Rio Tinto’s CEO, Jakob Stausholm, achieving the 2025 climate target is difficult because developing new solutions takes time. He stated, “There is a lot of technology that doesn’t exist and has to go through an R&D funnel, and that just takes a long time.”
Rio Tinto aims to achieve net zero emissions by 2050 in line with the Paris Agreement. The company has set a target of a 15% reduction in direct and indirect emissions by 2025 and 50% by 2030, based on a 2018 baseline. However, Stausholm has previously expressed regret over these targets, noting that reaching them requires making difficult choices. Mining is responsible for only 20% of Rio Tinto’s carbon emissions, with 50% coming from its Australian refineries, which are energy-intensive and powered by coal. In 2022, the company was able to reduce Scope 1 and 2 emissions by 7% compared to 2018 levels, mainly through the use of large-scale renewable energy to power its operations. Abating Scope 3 emissions, which are more challenging, remains a priority for Rio Tinto, with over 94% of these emissions coming from the downstream processing of iron ore, bauxite, and other products, primarily in China.
To address the expected increase in emissions between 2023 and 2025 as production grows, Rio Tinto has developed a plan for abatement projects that could result in a total of 4.2 million tonnes of CO2 abatement. The company’s decarbonization strategies include switching to renewables and reducing emissions from alumina refineries and minerals processing. In addition, Rio Tinto recognizes that carbon credits play a crucial role in its net zero pathway and plans to invest in high-quality carbon offset credits. The company aims to build a sustainable and long-term carbon credit portfolio that generates 1.7 million tonnes annually by 2030. It will focus on investing in carbon credits in regions where it has significant emissions, such as North America and Australia, and may also explore co-development or co-financing of carbon offset projects for long-term credit security.
To deliver its net zero emissions strategy, Rio Tinto will need to invest $7.5 billion in capital between 2022 and 2030, with $1.5 billion required between 2022 and 2025. Last year, the company’s decarbonization-related capital expenditure was only $94 million, well below its initial estimate of $500 million. However, decarbonization investment across the rest of the Rio Tinto Group is expected to increase beyond 2025. The company will continue to explore carbon capture and mineralization options, leveraging its exploration and geological expertise. Carbon capture technologies are emerging as a favored solution for many heavy emitters. Rio Tinto’s peers, such as BHP and Fortescue Metals Group, are currently on track to reach their climate goals, with BHP aiming for a 30% reduction in Scope 1 and 2 emissions by 2030 and Fortescue targeting net zero emissions by the same year.
As governments implement carbon taxes and other schemes, companies will be compelled to account for these costs in their cash flow projections. Rio Tinto is not the only company facing this challenge, as other heavy emitters in Australia, Canada, and Europe can expect similar issues in the future.