MIT CEEPR The EU ETS: Perspective and Lessons 24 January 2008, Washington DC Ex-post Evaluation of the EU ETS: Impacts on the Aluminium Sector Julia Reinaud Energy Efficiency and Environment Division International Energy Agency OECD/IEA, 2008
Overview 1. Context: aluminium production and trade flows Sector boundary: which production processes? Latest developments: Production and price levels Trends in EU trade flows of primary aluminum 2. Competitiveness of the European producers Evolution of production costs Power costs 3. Impact of EU Emissions Trading Scheme Statistical tests and analysis on trade flows 4. Preliminary conclusions and initial thoughts on Border adjustments (BAs)
Production processes Semi-finished Primary smelters Focus on primary aluminum Primary ingots Casting Cast ingots, bars, billets and slabs - alloyed/unalloyed Rolling (slabs & billets): rectangular Plate, sheet, strip, foilstock, etc. Extrusion (billets): round Rods, sections, shapes, tubes, profiles, etc. Alu remelters Alu refiners Wires and cable 80% new scrap 15% primary and old scrap Primary Rolling Extrusion Average European electricity consumption (kwh/tal) 15 390 624 667 AGENCE INTERNATIONALE DE Source: L ENERGIE IAI, EAA
Primary Aluminium Production by Region: 1980-2006 2007-2011 committed projects (ca. 5,000kt) NB: No information for China! China 2% 1980 (16,131 kt) Others 8% Western Europe 22% 2006 (33,633 kt) Others 10% Western Europe 14% CIS 17% 3 549 kt China 26% 4 708 kt United States 7% Africa 5% Australia 2% Canada 7% Brazil 2% Middle East Japan Africa 3% United States 29% INTERNATIONAL 1% 7% ENERGY AGENCY CIS 13% Australia Canada 9% Brazil 5% Japan 0% Middle East 5% AGENCE INTERNATIONALE 6% DE L ENERGIE Source: EAA
Primary Aluminium Regional Balance 2006 5000 4000 3000 Exports Thousand tonnes 2000 1000 0-1000 Source: EAA -2000-3000 -4000 Europe (Russia excl.) N.America Asia (incl. China) Imports Russia Oceania Africa L-America
LME 3-Months Price in USD & EUR (1990-2007) US dollars Euro EU ETS USD per tonne 2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 World price Today, back to 2000 price levels (in EUR) 2,200 2,000 1,800 1,600 1,400 1,200 1,000 Euro per tonne 800 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 800
EU 27 primary aluminium trade 1,600,000 1,400,000 NB: Quarterly data = annual * 4 EU ETS tonnes 1,200,000 1,000,000 800,000 600,000 EU 27 imports (intra trade not included) EU 27 production 2006: 3 055 kt 400,000 200,000 2004-2005 2005-2006 EU 27 Production 1% -7% Non EU Imports -3% 15% EU 27 Exports (extra EU) 0% 7% EU 27 exports (intra trade not included) - 1Q/99 4Q/99 3Q/00 2Q/01 1Q/02 4Q/02 3Q/03 2Q/04 1Q/05 4Q/05 3Q/06 2Q/07 Based on EAA data
EU-27 imports of primary aluminium by country of origin (intra EU 27 excluded) 1,200,000 1,000,000 800,000 600,000 China South Africa Canada United Arab Emirates Iceland 400,000 200,000 0 1Q/99 4Q/99 3Q/00 2Q/01 1Q/02 4Q/02 3Q/03 2Q/04 1Q/05 4Q/05 3Q/06 2Q/07 Brazil Mozambique Russia Norway Top 5 countries represent 71% of total EU imports since 1999 Source: EAA
Summarising EU primary aluminium trade Largest importers into Europe (exc. Norway): Russia Mozambique Brazil Middle East South Africa Trends since 1999 Growing share of non-eu imports Relatively constant (low) level of EU exports A loss in European competitiveness in aluminium production? If yes, what are the driving forces? Exchange rates? Higher growth in electricity costs? Other?
2006 cost estimates Variations since 1999 2000 1500 + 31% + 44% + 40% + 29% + 26% + 50% + 66% + 48% + 44% + 35% 1000 500 0 Iceland Norway China Africa Middle East Russia Brazil Canada World EU 27 $/t EUR/USD = +16% Alumina Carbon Anode Labour Power Other Source: CRU www.crugroup.com
Cost variation between 1999 and 2006 +468% 150% + 40% Alumina 130% 110% Labour Power 90% + 31% + 26% + 66% 70% 50% + 44% + 29% + 50% + 48% + 44% + 35% 30% 10% -10% Iceland Norway China Africa Middle East Russia Brazil Canada World EU 27 Based on CRU AGENCE INTERNATIONALE DE www.crugroup.com L ENERGIE
Tracking Industrial Energy Efficiency and CO 2 Emissions Regional specific power consumption in aluminium smelting 19,000 North America SEC (kwh/t primary Al) 18,000 17,000 16,000 15,000 Europe World average Latin America Asia Oceania ENERGY INDICATORS 14,000 13,000 1980 1985 1990 1995 2000 2005 Africa East Asia Africa has the most energy efficient smelters worldwide Source International Aluminium Institute In support of the G8 Plan of Action
Evaluating power price changes (1999-2006) $/MWh 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 +30% +96% +66% - 3% +90% + 107% + 22% + 55% +48% 120% 100% 80% 60% 40% 20% 0% % growth 1999-2006 0.0-20% In USD Africa EUR/USD = +16% Canada Norway Middle East Russia Brazil China 1999 2006 Growth World EU 27 Source: IAI, EAA, CRU www.crugroup.com
Power price estimates in EUR (1999 & 2006) /MWh 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 Most European capacity is still under long term electricity supply contracts Today, 18% of EU capacity running on wholesale prices + 106% + 87% + 16% + 42% +12% + 8% + 18% + 12% + 42% 120% 100% 80% 60% 40% 20% % growth 1999-2006 0.0 0% Germany Netherlands Iceland Norway UK France Italy Spain AGENCE INTERNATIONALE www.crugroup.com DE L ENERGIE 1999 2006 Growth EU 27 Source: CRU
Electricity contracts in Europe Capacity with contracts ending in kt % of EU 27 2006 production 2008 626 20% 2009 145 5% 2010 346 11% 2011 0 2012 271 9% 2013 159 5% 2014 0 2015 91 3% 2016 256 8% Part of this is under EU DG competition scrutiny: Spain and Italy Vulnerable in the short term (before 2010): 65% of the European capacity Capacity running with wholesale prices as long term contracts ended without replacement 542 18% Capacity running on self-generation of electricity 210 7% Capacity in former Eastern European countries in private hands endangered by local unsecurity of supply 260 9% Capacity owned by state-owned companies in former Eastern European countries 137 4% Capacity having probably found a solution with Russia 103 3% Total EU 27 based capacity 3146 103% Netherlands and Germany? EU 27 production 2006: 3 055 kt
Regional features of European electricity markets Market prices set by the marginal generator or bidder Scandinavia : prices formed on NORD POOL ('merit order' principle hourly marginal cost of generation) Screen prices with trading of blocks for baseload needs UK : "screen pricing" with trading of blocks (daily, monthly, trimester) + intra-day adjustment mechanisms. Exception to screen pricing : Centrica Continental Europe : "screen pricing" for sale of annual blocks + spot (dayahead) + intra-day adjustments Annual contracts Italy : annual contracts via tenders (fixed or indexed prices) Regulated tariffs Spain : regulated tariffs may be a chosen option negotiation between industry and generators since 2006 for long term contracts (generation costs based on domestic coal-fired plants) Italy Reinaud, 2007
Impacts of the EU ETS
Ex-ante EU ETS cost impacts Operational margins for average EU smelter (2006): 49% Based on CRU data and LME 3 month ahead 2005-2006: 2 250 USD/t World average operational margin: 40% China: 18%; India: 107%; Russia: 54%; ME: 53% Impact of EU ETS on EU margins: estimates (in EUR) Based on Reinaud 2005 methodology and CRU data Assuming a 100% pass-through on electricity price Carbon price EUR/tCO2 Increase in electricity prices Aluminium cost increase (%) Aluminium cost increase (EUR/t) Operational margins (%) (Based on CRU cost estimates) 0 48% 10 11% 3.6% 44 43% 20 21% 7.2% 88 38% 30 32% 10.8% 131 34% Source: Reinaud, CRU www.crugroup.com
Ex-ante EU ETS cost impacts (2) OPERATIONAL MARGINS (%) 0 EUR/tCO2 10 EUR/tCO2 20 EUR/tCO2 30 EUR/tCO2 Increase in electricity price 0% 11% 21% 32% Germany 19% 14% 9% 5% Netherlands 30% 24% 19% 14% UK 39% 35% 31% 27% France 66% 62% 58% 54% EU 27 48% 43% 38% 34% Source: IEA, CRU www.crugroup.com
Statistical analysis Testing for CO 2 price impact on trade flows of primary aluminium Quarterly data: Q1 1999 to Q2 2007 Variable: net trade flows in EU 27 EU 27 consumption and production Aluminium price: LME (3 month ahead delivery) Price premium for delivery in Europe US/EUR exchange rate CO 2 price Year ahead price, used as reference for electricity contracts over the next calendar year Assuming full pass through of CO 2 allowance price in electricity prices Testing for structural change before and after EU ETS
Statistical results No structural changes in trade flows between 1999 and 2006 Some details R 2 = 0.82 Exchange rate USD/EUR: insignificant Significant variables (in order of importance): World aluminium price Consumption CO 2 price (starting 2Q 2004) Negative correlation between CO 2 and net imports: invalidates our model s s assumption that CO 2 prices should lead to higher imports
Initial conclusions The effects of the EU ETS, if any, could only be sought in electricity costs However, the story may change Primary Anode produced onsite Post 2012: Direct emissions are covered How will trade exposed industries be treated in the EU ETS? End of long term electricity contracts New business models for electricity contracts? Purchased carbon anode Rolling Extrusion Remelting Average 2005 emissions (tco2/t primary aluminium) 2.79 2.39 0.135 0.155 0.184 Source: EAA 20 EUR/tCO2 Direct + indirect cost OPERATIONAL MARGINS (%) With anode Without anode production production Average Germany -24% -24% Average Netherlands -17% -16% Average UK 0% 0% Average France 23% 24% Average Europe 2% 2% Source: IEA, CRU www.crugroup.com
On border adjustments As a means to adjust to a level playing field The EU ETS revision directive: review the situation in (2011) at the latest : a carbon equalisation system Some issues: At what production process level? On primary aluminum? On semi-finished? On final products? Based on what? PFC emissions? Are other GHG emissions covered in ETS? Electricity consumption? How to evaluate the CO 2 content of a MWh? Role of CO 2 price in current and renewed long term contracts
Questions/Comments No real possibility of pass-through in the aluminium sector: Does this mean loss in competitiveness? Is the pass-through rate an indication of competitiveness loss? How to isolate the CO 2 factor in final prices?
Bonus/Annex
Yt: Net trade flows Xit: LME, consumption, price premiums, CO 2, EUR/US exchange rates 30.00 25.00 20.00 /tco2 15.00 10.00 5.00 0.00 2Q/04 3Q/04 4Q/04 1Q/05 2Q/05 3Q/05 4Q/05 1Q/06 2Q/06 3Q/06 4Q/06 1Q/07 2Q/07