Published on 28 February 2024
Share Tweet  Share

Is there a trade-off between net zero goals and productivity growth?

The UK’s mining sector has declined because of falling oil and gas output. This trend has reduced the country’s carbon footprint; but as they are high value-added activities it has contributed to slow productivity growth. Thomas Aubrey explains how expanding mining for critical raw materials required for new technologies such as batteries can boost productivity growth and assist the net zero transition.

The decline of Britain’s Mining & Quarrying sector has dragged down the UK’s productivity growth rate. Between 1997 and 2022 the productivity of the overall economy increased by about 30%, while the Mining & Quarrying sector declined by nearly three quarters (Chart 1).

Chart 1: UK Productivity Growth Output per Hour: Quarrying & Mining vs Whole Economy

Source: ONS

The major driver behind this fall has been the decline in size of the sector due to falling levels of oil and gas production. In 1997 Mining & Quarrying accounted for 2.0% of the overall economy but has shrunk to just 1.1% in 2022. Crucially though, Mining & Quarrying is the sector with the highest value added per hour (Table 1), which means that it has a disproportionate negative impact on productivity growth when it falls.

Table 1: Value added per hour by sector

Source: ONS

Although the decline of oil and gas production has made the UK economy less productive, this fall has been positive for the UK’s carbon footprint in the battle against climate change. This trade-off may well negatively impact other high value-added carbon intensive sectors as the UK economy begins to move towards net zero. However, the decarbonisation process could also potentially lead to a revitalisation of the Mining & Quarrying sector with a significant boost to productivity growth through the mining and processing of critical raw materials. Decarbonisation will increase demand for batteries, electronics and wind turbines all of which consume critical minerals.

A recent report by the British Geological Survey for the UK Critical Minerals Intelligence Centre indicates that the UK has reserves of critical raw materials (Table 2) in a number of locations that have been mined historically. These include: Loch Maree near Gairloch; parts of the central Highlands and Aberdeenshire; mid-County Tyrone in Northern Ireland; parts of Cumbria; parts of the North Pennine Orefield; areas in north-west Wales and Pembrokeshire; and south-west England. These identified locations include deposits of critical raw materials that have been recognised as being of high or elevated criticality for the UK.

Table 2: Critical Raw Materials (CRM) of high or elevated criticality for the UK

Source: British Geological Survey

While it is still too early to tell to what extent these deposits might be of sufficient quantities to be extracted commercially, there is clearly potential for UK firms in conjunction with government to explore these opportunities. This is also why the UK government has developed a critical minerals strategy, which is a good start in attempting to accelerate the UK’s domestic capabilities. In addition to assessing the potential to exploit these resources, as well as rebuilding the mining skills base and R&D (research and development) capabilities, the strategy also highlights the importance of recycling critical minerals from waste products.

As was noted above, Mining & Quarrying is a high value-added sector, so growth in this sector will boost productivity growth. However, UK oil and gas production is expected to shrink by about half by 2030, thereby having a further negative effect on productivity growth. The real GVA of the oil and gas sector was £10.7bn in 2023. By 2030 this could have fallen to less than £5bn.

But if the UK is able to develop the capacity to mine and process critical raw materials, then its economy can also generate potential growth, feeding through to higher wages and funding for improved public services. One recent example suggests that there is indeed a considerable opportunity. In 2017 construction work started on the Woodsmith mine located in the North York Moors National Park with the aim to mine a high grade polyhalite deposit. Polyhalite can be used as a fertilizer, without needing to go through a carbon intensive process to manufacture the fertiliser.

The Woodsmith Mine owned by Anglo-American, who announced in December 2023 that it was looking for a partner to complete the project, is expected to be operational by 2027 based on a $9bn investment. The mine itself is a complex piece of engineering requiring the ore to be mined and transported through an underground tunnel to the materials handling facility at Wilton on Teesside, where the ore is to be crushed and turned into granules before being shipped to international customers worldwide.

While the process of estimating GVA (Gross Value-Added) for a business is complex given that all inputs and intermediate costs need to be subtracted from output, it is possible to use ONS data to estimate what a typical ratio of revenue to GVA might be. The GVA for oil and gas production is around 55% of revenue, for the quarrying of stone it is around 30%, and for other mining activity about 40% which is probably a reasonable assumption to use in this instance.

By 2030, the mine is forecast to be generating around 5m tonnes per annum, and current prices for UK delivery have been estimated to have a price of £200 per tonne generating potential revenues of about £1bn. The mine is forecast to subsequently increase production to 13 million tonnes generating potential revenues of £2.6bn per annum. Once fully operational, this one mine could be generating GVA of around £1bn per annum, roughly 20% of the forecast for the entire oil and gas sector by then.

The ability for the UK to develop its mining sector will depend on many things including the geological potential in specific sites, as well as the capacity and capability of UK firms to exploit these mineral deposits. But it will also require local residents to want to have the mines bringing good jobs and higher wages.

On the path to net zero there will be many trade-offs to be made. As the UK winds down its oil and gas sector, it could decide to support a switch to other high value-added mining activities. This would be good for productivity growth, essential to improve living standards and public services, and despite the environmental impact of mining would contribute essential materials for green technologies.


Image: Woodsmith Mine complex from Fylingdales Moor. By The joy of all things – Own work, CC BY-SA 4.0


The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.

Authors

Thomas Aubrey

Thomas Aubrey is the founder of Credit Capital Advisory. He has written widely on financial and economic issues including All Roads Lead to Serfdom (2022), Profiting from Monetary Policy (2012)...

Back to Top