EU ETS Phase 4: reform for a competitive aluminium industry European Roundtable on Climate and Sustainable Transition (ERCST) Norsk Hydro, Liv Rathe Brussels 216-1-11
More aluminium to meet EU s climate change targets Increased demand for climate-friendly applications Trends for consumption In M tonnes 2 18 16 Transport Buildings Packaging Engineering Consumer durables 14 12 1 8 6 4 2 21 22 23 25 Source: EAA sustainability indicators 212. EU27 + EFTA (2)
Despite increasing demand, production in Europe is declining 216: Europe imports almost half of its consumption, despite increased recycled ingot production EU source of aluminium In ktonnes per year Primary aluminum production capacity in the EU In ktonnes 14, 13, 12, 34 32 3 28 11, 26 1, 9 8 7 6 5 4 3 2 1 198 1985 199 1995 2 25 21 215 46% net imports 37% Recyled prod. 17% Primary prod. 24 22 2 18 16 14 12 1 8 6 4 2 22 23 24 25 26 27 28 29 21 211 212 213 214 215 Source: European Aluminium Statistics. EU15 data until 1999, EU25 data for 2-4, EU27 data 25-15. 3
The climate paradox European aluminium producers have far lower carbon footprint than world average GHG emissions per ton aluminium (tco 2 e/t Al) 2 18 16.5 16 Bauxite Alumina Anode Smelting Casting Electricity 9 8 7 6 Aluminium production by power source 14 12 1 8 8.5 1.8 m ton 5 4 3 6 2 4 1 2 Europe Global average, ex. China Glob average, incl. China Hydro Nuclear Gas Coal Source: Footprint for liquid metal Power generation based on IEA physical fuel mix statistics (21) 4
Electricity costs hit electro-intensive industries Electricity accounts for 32% of global production costs Aluminium global sales price is determined daily at London Metal Exchange Electricity is priced locally Aluminium producers cannot pass on any regional costs Power costs in Europe are significantly higher compared to other regions of the world Source: 214, CRU
ETS direct and indirect cost exposure for the aluminium industry Costs before compensation Other sectors for comparison Source: Ecofys (215) 6
EU ETS reform must secure European aluminium s competitiveness Competitors outside Europe do not face similar CO 2 cost in the power price. Current and proposed rules on indirect compensation do not incentivize investments in electro-intensive industries in Europe Different treatment of direct and indirect costs discriminating electricity-intensive industries ETS reform needs to provide appropriate compensation for indirect emissions in order to secure global competitiveness Example: CO 2 costs deteriorate competitiveness - EUA 5 = 4% of LME sales price - EUA 3 = 25% of LME sales price Level of direct and indirect ETS costs for different CO 2 prices In /t of aluminium produced Direct costs Indirect costs 35 3 25 2 15 1 5 5 /t CO 2 15 /t CO 2 3 /t CO 2 Assumptions: calculations based on CO2 emission factor for Central-West Europe (,76tCO2/MWh), as per Commission s Guidelines on certain State aid measures in the context of the greenhouse gas emission allowance trading scheme post-212 With a global aluminium price of $15 ton (LME March 216), CO 2 cost in power prices means: 7
Full compensation for indirect costs needed for a successful ETS Climate advantage to maintain electro-intensive industries in Europe Carbon footprint of electro-intensive industries to become marginal as Europe decarbonizes the energy sector Revised ETS for the post-22 period to be successful IF: Acknowledging equally harmful effects of direct and indirect costs Providing same protection level for direct and indirect costs: 1%, up to benchmark level for the entire period; could be provided through a hybrid model with compensation at EU level and remaining at Member State level 8
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Discriminating compensation solution - no reason for treating direct and indirect carbon cost differently Indirect and direct benchmark-levels Company Total emissions 1:. Company exposure 2: Direct exposure Indirect exposure Total cost EUA price 3/t Net cost after compensation (free allowances 1% and State Aid % vs 75%) per tonne per tonne per tonne State Aid % State Aid 75% Company 1: 12.3 1,8 1,5 37 44 12 Company 2: -. 12.3 1,5 1,8 37 326 82 Company 1: 88 % direct and 12 % indirect Company 2: 88 % indirect and 12 % direct.