EU carbon tax relief small comfort for aluminium

 

 

The European Commission plans to allow member states, from next year, to grant the most energy efficient smelters in Europe state aid to cover up to 85 percent of the indirect carbon costs embedded in European electricty prices.

 

 

Less efficient smelters will receive less aid and the aid will drop down to 75 percent by 2020.

 

 

Carbon costs embedded in electricity prices - a result of the EU Emissions Trading Scheme - are acute for the aluminium industry, where power accounts for 30-40 percent of production costs.

 

 

They are also a concern for the Commission, which is worried that carbon costs could drive energy efficient smelters out of Europe, causing global emissions to rise as less efficient smelters continue operating in Asia.

 

 

The phenomenon is known as "carbon leakage" and the Commision's state aid plans are specifically designed to tackle this risk, which could make its environmental policies self-defeating.

 

 

But state aid can not stop the growing tide of new investment in Asia and the Middle East, where energy is cheaper irrespective of environmental policies, where labour and raw material costs are lower, and where demand growth is higher.

 

 

"Downsizing of the aluminium industry in Europe is what you would expect," said Christian Engenhofer, head of the Energy and Climate programme at influential think tank the Centre for European Policy Studies.

 

 

"What state aid guidelines can do is keep efficient installations running in Europe. If they close down inefficient installations well that is actually good for the environment."

 

 

A SLOW PROCESS

 

 

Europe's aluminium industry contests the view that only inefficient smelters will close down. It notes that the state aid guidelines are, in their current form, capped in many ways and would put even the most efficient smelters in Europe at a competitive disadvantage.

 

 

"Some member states have proposed to prohibit any compensation if the price for a tonne CO2 is below 15 euros. This would result in zero compensation in years to come," said Oliver Bell, president of metals lobby group Eurometeaux.

 

 

Eurometeaux is lobbying the European Commission to grant the most energy efficient smelters in Europe state aid to cover 100 percent of their indirect carbon costs, saying without this carbon leakage will occur.

 

 

"Carbon leakage is a slow process. Industries that are exposed may continue operations, but investment will stop and smelters would gradually be phased out," said Bell.

 

 

There is however evidence that Europe's aluminium sector is in terminal decline for reasons that go beyond carbon prices, and that policy makers should focus on how not to accelerate this decline unnecessarily.

 

 

A report from carbon investor CDC Climat, found no evidence that that the EU ETS has caused carbon leakage in the aluminium sector over the past 6.5 years.

 

 

The findings match those of the International Energy Agency in 2008. The two reports are the only ones of their kind to specifically address the effects of EU carbon taxes on the aluminium industry.

 

 

Oliver Sartor, author of the CDC Climat report, cautions that it is possible that evidence of carbon leakage is not visible yet, but he remains sceptical that state aid of 100 percent versus 85 percent would save the sector.

 

 

"It seems unlikely to me that an otherwise profitable smelter would shut down because of indirect CO2 costs, while expecting it was going to be compensated for a large proportion of those costs from 2013 onwards," said Sartor.

 

 

And perhaps of more concern for the aluminium industry are comments from the European Commission indicating it is unlikely to extend carbon tax relief for the sector when it makes its final decision on aid next month.

 

 

"100 percent compensation may severely impact the signal given by the EU ETS to invest in energy efficiency," said Cristina Arigho, former European Commission spokeswoman for competition.

 

 

"State aid distorts competition, may lead to subsidy races and is not a viable solution in the long run to assure economic growth."