Photo: Fruta del Norte Mine, Ecuador / Lundin Gold
Ecuador is estimated to hold a prodigious source of extractable reserves including antimony, copper, iron ore, silver, and world-class gold deposits. It is considered an untapped mineral potential, and geologists believe the country holds as much copper as Peru—the world’s second largest producer. These rare-earth and minor metals are essential structural materials needed for the deployment of renewable technology such as wind turbines and solar panels, which are growing in demand amid global decarbonization. However, several questions remain: how does the extraction of these raw materials impact local communities and ecologies? What are the cost-benefit implications of relying on extractivist economic models for countries such as Ecuador? Most importantly, how can climate finance better aid sustainable development in Ecuador to ensure it benefits from renewable technologies while avoiding local environmental degradation?
There is very little specific legislation which governs the sourcing of raw materials. The OECD Due Diligence Guidance for Responsible Mineral Supply Chains provides an important source of reference for the responsible corporate management of supply chains and resource extraction. While these non-binding guidelines underline important considerations regarding human rights abuses and conflict, they fail to include any environmental considerations of mining extraction and its direct impact on vulnerable stakeholders.
The electric vehicles (EV) industry is one prominent example of harmful supply chains which contribute to environmental and social degradation through the extraction and transportation of raw materials. At the same time, however, the EV industry offers lithium-rich countries a lucrative opportunity to capitalize on the production of EV batteries; it is estimated that the worldwide market for cathode for lithium-ion batteries will increase from $7 billion in 2018, to $58.8 billion by 2024. Today, more than 50 percent of the global lithium resources are concentrated in the Lithium Triangle region of Chile, Argentina, and Bolivia. The extractive experiences of these countries, particularly Chile and Argentina, are useful examples for sustainable mining in Ecuador.
Holding one of the largest lithium reserves in the world, Chile is responsible for exporting 40 percent of the world’s demand. In the country’s Salar de Atacama region, an area within the Lithium Triangle, lithium mining uses around 65 percent of the region’s water to pump out brines from drilled wells. Lithium extraction involves pumping substantial amounts of water, raising concerns over its devastating effects on local environments. Chile is the only country in the world where water resources and management are solely controlled by the private-sector. Sociedad Química y Minera de Chile (SQM) owns the water rights in the Salar de Atacama region. This commodification of water and lack of protection for land and indigenous rights dates back to Chile’s 1980 Constitution, enacted under the military dictatorship of Augusto Pinochet. As a result, the lithium industry has also overwhelmed the local agriculture sector by limiting water supplies and polluting waterways, causing concern within scientific communities which report that activities linked to lithium extraction are “one of the most important causes of local environmental degradation” in the Atacama region.
Inevitably, Indigenous populations and environmentalists have fought for greater collaboration among the private sector, government, and local authorities to guarantee fresh water for local consumption and agricultural activities. The Atacama People’s Council, representing 18 Indigenous communities, have fought to claim rivers, wetlands, and grasslands to protect their habitats, which have been greatly reduced over the last decade. Diego Hernández, president of Chile’s mining society, Sonami, believes that local water monitoring is deficient, noting that “the government does not have a hydrological model of the entire aquifer” and arguing that the state “should be able to make informed decisions based on technical data. But in Chile we have more rules and laws than money to execute them.” As a result, both companies working in the area, Albemarle and SQM, independently monitor groundwater levels.
In Argentina the extractive experience differs from that of Chile, where mining companies have faced other obstacles. Political instability, volatile foreign currency policies, and a lack of clear fiscal norms has impeded company decision-making on new long-term projects and foreign investment in its mining industry. Additionally, a lack of reliable infrastructure to power mining equipment, as well as opposition from local communities and environmentalist groups have further impacted the industry’s growth. Several instances of social opposition in Argentina have exemplified the state’s inability to control or monitor the performance of extractive companies, creating a fundamental distrust against mining companies in society. Prominent cases have included the Alumbrera Ltda. lawsuit of gold extraction in Alpachiri, Tucumán and the 2015 cyanide contamination of the Potrerillos river, which implicated Canadian company Barrick Gold and Chinese firm Shandong Gold.
Furthermore, there is no legal framework regulating lithium extraction in Argentina, as exploitation remains framed under general mining laws. Under current legislation, the exploration, extraction, and commercialization of lithium rests in the hands of transnational corporations. Hence, with the state and local provinces having little to no involvement in the value chains of any lithium derivatives, extraction offers little benefit for the state beyond the corporate taxes paid by these corporations, unlike Chile or Bolivia, whose governments operationalize extraction as a national business.
Since 2015, Ecuador has adjusted outdated tax policies to attract investment for its mining industry. President Guillermo Lasso’s authorization to expand crude oil outputs through risk-sharing agreements with petroleum companies marks his first move to reignite the country’s energy sector. Ecuador’s hydrocarbon and mining industries offer Lasso a strong opportunity for economic growth and development. Yet, the economic potential offered by renewable energy sources better help Ecuador adhere to the environmental considerations enshrined in its constitution that promote sustainable development (Art. 3) and the use of environmentally clean technologies (Art. 15).
Using the EV industry as an example, technological advances within the industry are improving product efficiency and mitigating the environmental impact caused by resource extraction. By 2035, recycled batteries could make up more than a fifth of the lithium and 65 percent of the cobalt needed to manufacture new batteries. As value chains become less dependent on extractivism, investment in Ecuador must be directed toward building infrastructure that promotes value-adding activities such as final-stage battery production and battery recycling. Renewed pledges from high-income countries to provide the pledged $100 billion of climate finance—projected by the climate finance delivery plan to be met in 2023—offers Ecuador an opportunity to overcome the challenges facing domestic value addition specified by the UNCTAD’s latest report on EV battery value chains. Value-adding activities can also reduce Ecuador’s reliance on external price shocks, as the bulk value of raw materials used in EV battery production is determined by international markets.
Any development related to hydrocarbons or renewable technology needs to meet environmental requirements and respect local interests. As COP26 demonstrated, Indigenous traditional knowledge and custodianship of land and forest rights are indispensable and cost-effective solutions to tackling climate change. In August of this year, President Lasso issued Executive Decree No. 151, outlining a clear action plan and timeframe for developing an efficient environmentally and socially responsible mining industry that operates with the best practices for resource exploitation. Therefore, political readiness will be crucial for Lasso to strike a balance between Indigenous interests, climate commitments, and the urgent need of fiscal revenue. To achieve this balance, the plan should look at the lessons learned from mining in Argentina and Chile:
- Governments should control or audit mining operations taking place in their countries.
- States should set clear fiscal policies and a strong regulatory framework to ensure government revenue from mining activities and attract foreign investment.
- Governments should establish legal accountability mechanisms that promote corporate transparency and sanction firms that do not comply with regulations.
- Public goods, such as water, must not be treated as commodities and should only be controlled by the government.
- National authorities and local stakeholders must collaborate to reach an appropriate consensus on sustainable and environmentally friendly mining legislation.
- Governments must offer greater financing to build stronger institutions, administrative processes, mining infrastructure, and human capital, so that best practices of natural resource exploitation avoid local degradation and meet constitutional requirements.
The diversification of revenue generated in Ecuador’s extractive sector to value-adding activities would mitigate environmental degradation and promote a greener, long-term industrial growth plan that meets global climate commitments, undoing the country’s historic reliance on procyclical fiscal policies dependent on commodity exports. To ensure this, climate finance serves as a crucial international mechanism that can place Ecuador, and countries most vulnerable to the adverse effects of climate change, at the forefront of a green technological revolution. However, until this is realized, the responsible mining of hydrocarbons will more immediately meet Ecuador’s urgent demand for greater fiscal revenue.
Delfina Scagliotti and Ryan Arenas are former interns at Global Americans.