EAA warns emissions trading could hurt European aluminium sector

New York (Platts), 7 Oct--- A key part of the EU's climate change policy -- the Emission TradingSystem -- could destroy the economic viability of Europe's aluminium industry, the European Aluminium Association said Tuesday. The European Parliament's Environment Committee recognized the impact of CO2 costs passed into electricity prices -- indirect effects -- as one of the criteria for carbon leakage, as it has a large negative effect on the competitiveness of energy intensive industries. Therefore, it is inexplicable that the Committee failed to adopt provisions for a legal mechanism to address this problem, the association said in a statement. According to Patrick de Schrynmakers, secretary general of the EAA, "Europe will export jobs and import energy intensive products, with no environmental gain. As the legislative process moves forward, EAA exhorts parliament and member states to protect the sustainability of this important sector of the European economy, through free allocation of permits to benchmark for direct emissions and electricity induced cost increases, including those in self-generation. Metal recycling, also, must be excluded to pursue key environmental objectives." While EAA welcomes the provisions for free allocation of emission allowances for the direct emissions, this would address only a small fraction of the costs imposed on aluminium by the ETS, the EAA said. By far the larger impacts will be from the indirect effects, caused by increases in electricity prices due to power generators passing through their carbon dioxide costs into electricity prices. "This will take place in a dysfunctional electricity market, where, already, barriers to competition have forced prices to prohibitive levels," the EAA's statement said. In the aluminium industry, the indirect effects can be up to six times as high as the direct effects and electricity already represents 30-40% of current production costs. As their products are sold into markets with global pricing, through the London Metal Exchange, aluminium companies are unable to pass through increases in these costs into their product prices, the EAA said. "This is true whether the electricity is purchased from third parties or self-generated. Under the revised ETS with more ambitious reduction targets after 2013, the price of CO2 allowances is expected to rise, substantially, from today's level, further increasing the electricity price," the EAA said. "These costs, from which the aluminium industry has been protected by long-term electricity contracts, will be insupportable, as the contracts expire." Commenting on the the downstream effects of this bill, the EAA said it is incomprehensible that metals recycling is proposed for inclusion in the ETS. Metal recycling, which saves most of the energy and green house gas emitted in primary production, works on very tight margins and, already, is subject to substantial leakage to China and other developing countries. According to de Schrynmakers, "Imposition of a further cost on the EU recycling industry could render it non-competitive, increasing exports of the post-consumer metal which Europe needs to meet its environmental objectives." The EAA said that the European aluminium industry supports emissions trading as the appropriate mechanism to address industry emissions because such a system can reinforce industrial sustainability. In this respect, Australia has proposed provisions in its ETS to preserve the competitiveness of energy-intensive industries. "Until the EU adopts similar provisions, however, it will be impossible for energy-intensive industry to attract the requisite investment even to maintain current operations, let alone invest in the next-generation technologies required further to reduce emissions, which would clearly be a wrong signal for an industry whose already significant voluntary climate action would remain totally unrewarded," the EAA said. In the European aluminium industry, carbon dioxide emissions have been reduced by 10% in the past 10 years and perfluorochemicals emissions with reference to the 1990 levels have been cut by more than 80% in 2005. Total greenhouse gas emissions from European aluminium have been reduced by 45% between 1990 and 2005, the EAA said.