The fight against climate change and the shift from carbon to clean energy is a monumental undertaking. It requires the widespread manufacture and adoption of electric vehicles, batteries, wind turbines, solar panels, and other novel technologies.

This, in turn, requires exploration and the exploitation of scarce critical minerals that are often challenging to procure. These minerals are fixed geographically and are not evenly distributed around the world. For example:

• Lithium is critical for electric vehicles and lithium-ion batteries. The top three producers—Australia, Chile, and China—account for more than 90% of production, while the “lithium triangle” of Argentina, Bolivia, and Chile holds 65% of known reserves.
• Copper is in high demand not only for clean energy technologies, but in traditional industries too. Chile, Peru, and China account for nearly half the market, and China owns a quarter of all reserves.
• Cobalt, used in lithium-ion batteries, fuels cells, and wind energy, comes overwhelmingly from the Democratic Republic of the Congo, which accounts for 70% of global production.
• The top three producers of nickel—Indonesia, the Philippines, and Russia—comprise two-thirds of global production. Indonesia alone accounts for a quarter of known reserves.
• Rare earth elements, a collection of soft heavy metals, used for wind turbines, solar panels, computer technology, and solar panels, are overwhelmingly produced by China, which, along with Vietnam and Russia, holds 70% of global reserves.

Demand will continue to increase significantly as the electric vehicle and clean energy industries grow more widespread and sophisticated. The International Energy Agency estimates up to a quadrupling of demand for all critical minerals by 2040. Demand for specific minerals could increase up to 40 times.

The rise of resource nationalism?

This scarcity and skyrocketing demand have led to a resurgent economic nationalism whereby countries with abundant critical minerals move to protect their advantage. According to a recent OECD report, China, India, Vietnam, Russia, Argentina and Kazakhstan led the world between 2009 and 2020 in passing new export restrictions for critical minerals. Most of these restrictions take the form of export taxes so as not to breach international trade rules against quantitative restrictions on exports.

Some countries, however, have not shied away from that conflict. Indonesia, the world’s largest nickel producer, introduced a requirement in 2020 that all extracted raw material must be processed domestically. This caused a spike in the global price of nickel but also an influx of foreign direct investment into Indonesia to take advantage of the need to develop local refining capacity. The European Union challenged the restrictive measure before the World Trade Organization and won a favorable decision. But the failure of the defunct WTO appellate mechanism to hear Indonesia’s appeal allows the country to continue applying the measure anyway. Despite criticism, Indonesia subsequently banned shipments of bauxite (a key ingredient in aluminum) and plans to extend the export ban to tin and copper as well.

Zimbabwe and Namibia have followed suit by banning lithium exports, and both Chile and Mexico have asserted greater state control over their domestic industries. Other states have thought to band together as Bolivia has invited its neighbors Argentina, Brazil, and Chile to form an OPEC-like cartel to control the global price of lithium. Fixed and limited locations of minerals paired with protectionist policies give rise to complex value chains to encompass processing, refining, distribution and sales.

Export restrictions are motivated by more than purely economic concerns. Amid the rising battle for semiconductor supremacy, China has restricted the export of gallium and germanium and their derivatives—critical and rare minerals for producing microchips for industrial and military applications.

Under the sea

States and mining companies have turned toward the sea as a new source of these scarce critical minerals. They are collected in different forms. Polymetallic sulphide deposits were first discovered in the Red Sea in 1948. These three-dimensional accumulations from hydrothermal apertures contain large amounts of copper, zinc, lead, iron, silver and gold. Elsewhere, around areas of significant volcanic activity, ferromanganese crusts 400-5,000 meters below the surface provide a rich source of cobalt, platinum, and rare earth elements. Finally, large concentrations of minerals called polymetallic nodules sit across the ocean floor. They contain high concentrations of nickel, cobalt, copper, titanium, and rare earth elements. One deep seabed in the Pacific Ocean, the Clarion-Clipperton Fracture Zone, has an estimated 21 billion tons of polymetallic nodules, dwarfing anything that could be produced on land.

But mining the seabed poses challenges. Not only are the resources remote, they are by definition located in fragile environmental areas. Hydrothermal vents giving rise to polymetallic sulphide deposits house thriving biological communities. And exploiting two-dimensional resources such as the crusts or modules from the bottom of the sea disturbs fauna, kicks up sediment that travels for miles, and could permanently gouge the ocean floor.

Legal framework

Under international law, a coastal state has an exclusive economic zone (EEZ) of 200 nautical miles in which it has sole jurisdiction to regulate and exploit natural resources. States also have rights to the seabed of the continental shelf beyond their EEZs up to 350 nautical miles from the coast. Beyond those points lie what was traditionally known as the high seas and the deep ocean floor that are beyond any one state’s jurisdiction.

In 1982, parties concluded the United Nations Convention on the Law of the Sea (UNCLOS) to set forth the rules applicable to the EEZ, continental shelf, and beyond. Most countries are parties, and even non-parties such as the United States accept the treaty’s rules as reflecting customary international law.

UNCLOS did not authorize mining in areas beyond states’ national jurisdictions. Rather, the treaty considered the deep seabed as the “common heritage of mankind” where no one state could exercise sovereignty. UNCLOS created a body called the International Seabed Authority (ISA) to promulgate regulations for the prospecting, exploration and exploitation of deep seabed resources for “the benefit of mankind as a whole.”

The ISA finalized prospecting and exploration regulations and subsequently granted 15-year exploration licenses to over 20 commercial companies, each sponsored by an UNCLOS state party, to explore for polymetallic nodules, polymetallic sulphides, and cobalt-rich ferromanganese crusts in the Clarion-Clipperton Fracture Zone and elsewhere.

The ISA never issued final exploitation regulations. One provision of the ISA Implementation Agreement of 1994 holds that the ISA must conclude its rulemaking within two years of a request to do so by a state party. The Republic of Nauru, which sponsors a Canadian mining startup license-holder in the Clarion-Clipperton Fracture Zone, made such a request. The two-year period expired in July 2023 without final regulations. Although Nauru and its partner plan to apply for an exploitation license and commence operations in early 2024, other Pacific Island states have called for a moratorium on deep seabed mining. Now that the deadline has expired, the legal status is uncertain.

Dispute resolution

International arbitration is no stranger to disputes arising out of the extractive industries. Early disputes between states and foreign companies over oil concession agreements drove the popularity of international arbitration in the mid-20th century. The “oil, gas and mining” sector accounts for at least a quarter of the caseload at the International Centre for the Settlement of Investment Disputes.¹ Renewable energy too has given rise to a spate of disputes as governments induce investment in renewable energy projects and then later seek to unwind those incentive schemes.

Licensure regimes are usually subject to domestic legislation and regulations, as well as carefully negotiated contracts that delineate the rights and responsibilities among the parties. These agreements generally give the parties the ability to vindicate their rights through neutral arbitration. Foreign mining companies may also benefit from investment treaties that provide standards of protection distinct from legislation or contractual arrangements. Tribunals are called upon to navigate contractual rights and investment protection afforded to qualified investors with a state’s legitimate interests in regulating in the interest of environmental protection. At least one investment treaty arbitration, Odyssey Marine Exploration v. Mexico, has arisen from seabed mining within a state’s maritime territory. That dispute involves the refusal of an environmental permit to develop a seabed phosphate deposit, which if realized would meet most of North America’s fertilizer needs for the next century. The tribunal has not yet rendered its award.

But mining the deep seabed raises novel questions. First, unless and until the ISA finalizes its exploitation regulations, the regulatory scheme is unsettled. It is unknown whether or when consensus will be reached on regulations that allow mining to move forward. Although some states are calling for a moratorium on environmental protection grounds, others are keen to recognize the economic benefits. UNCLOS and the ISA envision a mechanism to share the economic benefits of the “common heritage of mankind” among all member states, whether coastal or landlocked, which has yet to be determined. At present, the ISA lacks any meaningful monitoring and enforcement mechanism if a state and its commercial partner were to begin mining before final exploitations regulations are issued. In other words, finalizing the exploitation regulations will be the beginning of the journey, not the end.

Second, dispute resolution among sponsoring states and their commercial partners may differ from land-based mining or even seabed mining within the maritime territory. The involvement of the ISA as international regulator interjects an element of uncertainty in the relationship between the sponsoring state and its commercial partner that otherwise would not exist. And it is not clear that the commercial partners have the kind of protection provided by investment treaties that they would within the maritime territory. Most investment treaties expressly apply to a country’s “territory,” which should include their EZZs and continental shelf entitlements, if applicable. But deep seabed mining occurs outside a state’s defined maritime territory and it is not clear that an investment treaty would necessarily apply under those circumstances.

Third, environmental concerns might be compounded by forthcoming opinions by the International Court of Justice and the International Tribunal for the Law of the Sea. These opinions, along with the recently concluded High Seas Biodiversity Treaty,² may impose upon states heightened environmental obligations under international law that could affect their plans for deep seabed mining. Sophisticated mining operations in the middle of the ocean also raise important labor, employment and social rights that are also complicated beyond the reach of national jurisdictions.

Conclusions

Deep seabed mining contains great promise. It could provide a much-needed boost to the green transition and be an economic boon for small, developing island states. At present, however, a great deal of uncertainty surrounds the enterprise. States and their commercial partners should carefully consider how to hedge against regulatory risk, whether and how to structure their operations to benefit from investment treaty protection, how to address ESG concerns, and how to provide for neutral and efficient disputes resolution in the light of deep seabed mining’s unique features.

Footnotes

1. See page 11.

2. Formally known as the Agreement under the United Nations Convention on the Law of the Sea on the conservation and sustainable use of marine biological diversity of areas beyond national jurisdiction.