Memorandum by the Aluminium Federation
Ltd
THE ISSUES
LEVEL OF
EMISSIONS REDUCTIONS1. The
proposed level of emissions reductions and the automatic change
from 20% to 30% should an international agreement be reached.
The concept of long-term targets is logical.
However, the actual values must be based on affordable technology
and the potential of given industries to make the necessary savings.
All evidence and available data, including risk analyses and competitiveness
effects, should be scrutinised by the Committee before Government
agrees to arbitrary targets. Budgets and targets are aspirational
tools which may need to be amended in the light of operating circumstances.
Reference should also be made to an equivalent
contribution from the non-traded sector.
We do not believe the adjustment should be automatic.
It should depend on the strength of the international agreement,
which should as a minimum contain proposals for a global emissions
trading scheme matching the scope of the EU scheme with a central
cap set by an international body such as the United Nations.
An automatic adjustment could lead to EU business
being disadvantaged on a global scale.
The Aluminium Industry recognises its obligations
to protect the environment and minimise the effects of climate
change. It supports the concept of trading as a means of achieving
further reductions of greenhouse gas emissions. However, driven
by the high proportion of energy cost to total cost of production,
the Aluminium Industry has worked relentlessly on process improvement
and energy conservation, with consequent reduction in greenhouse
gas emissions. The industry is also highly effective in recycling
waste aluminium materials. The scope for further reduction in
greenhouse gas emissions is, therefore, very limited. The Government
should take this into account when agreeing to burden sharing.
SCOPE AND
OPERATION
2. The sectors and gases that the Commission
proposes to include and exclude. We would be particularly interested
in views on the inclusion of Land Use, Land Use Change and Forestry
(LULUCF) sectors, including agriculture.
— With regard to the proposed inclusion
of emissions of CO2 and PFCs from primary aluminium production,
CO2 and PFC emissions are at BAT levels in EU Aluminium smelters
as a result of the implementation of IPPC. We therefore consider
there to be very little scope for further improvement and thus
consider the environmental benefits from inclusion of this sector
to be negligible.
In addition, several independent studies, including
the Commission's own impact assessment, confirmed that the competitiveness
of the European aluminium industry would be at stake. Reduced
production in Europe would be made up by imports from other regions
of the world with different environmental standards and carbon
constraints.
The EC proposes a broad definition of a Combustion
Installation. This means that, if the thermal capacity of fossil
fuel burning equipment on a site exceeds 20MW, the site would
be included in the EU ETS. Recognising that this threshold could
capture small emitters, the EC proposes a combined exclusion clause.
Secondary aluminium companies above the exclusion limit would
still be included in the ETS.
The UK Secondary Aluminium market is made up
of Refiners who process mainly scrap aluminium and Remelters who
recover excess material from post-consumer and customer processes.
Recycling operations should be exempted from
the definition of combustion installation and secondary aluminium
(recycling) should be removed from Annexe 1.
The Commission itself has identified the need
for industry to become more resource efficient and increase the
recycling of valuable raw materials. Already around 40% of aluminium
used in Europe is recycled material. Recycling results in energy
savings of up to 95% compared with the production of primary aluminium.
This also means that up to 95% less carbon dioxide is emitted.
Further, by investing in new technology, emissions are, in general,
at Best Available Technology values.
Recycling should be encouraged rather than constrained.
It makes no sense to include the aluminium recycling industry
in the ETS as it consists of a large number of small plants counting
for less than 0.01% of total EU emissions.
Scrap is a raw material of strategic importance.
It is the only aluminium containing "raw material" which
is generated in the EU. There should be a strong interest to keep
this material in Europe and to support the recycling industry.
Inclusion of secondary aluminium in the EU ETS would, at the very
least, influence investment decisions concerning further capacity
increases in the EU.
Inclusion of secondary aluminium in the EU ETS
creates a market distortion between EU companies, and makes EU
companies uncompetitive against Non-EU companies because it includes
only the companies of a certain size, who tend to already be using
best available technology (BAT) because they are already IPPC
regulated, and who are market leaders in their field. As such
it is penalising success.
Inclusion of secondary aluminium in EU ETS would
add cost and further weaken the competitiveness of EU secondary
industry competing in global markets.
Carbon leakage is a significant threat for both
primary and secondary producers of aluminium, due to the global
nature of the aluminium market. For example, the UK has four aluminium
rolling-related plants, whereas there were six, just two years
ago; and the biggest extrusion plant has recently closed. Carbon
leakage is a one-off, one-way event. EU ETS only includes facilities
of a certain size. If you force these facilities to close, they
will remain closed forever and never return to the EU.
We do not consider that LULUCF is an appropriate
sector for inclusion within the scheme as the costs of abatement
in this sector are not comparable to that of an industrial installation.
3. The practical application and enforceability
of the scheme.
No comments other than the scheme has had a
high level of compliance to date.
4. The key strengths and weaknesses of the
proposal. You may wish to consider in particular:
The scheme as designed is unlikely to encourage
technical innovation in the aluminium sector. This is because
the technology applied in aluminium smelting is already considered
to be BAT, driven by the application of IPPC.
Because of this the aluminium sector is expected
to be a net buyer of allowances. However we are unable to pass
through the costs of this as aluminium is a globally traded commodity—its
price is set on the London Metals Exchange. This means that any
increase in costs due to purchase of carbon allowances represent
a reduction in profitability.
As such consumers of aluminium will feel no
price signal reflecting the carbon content of aluminium.
Drawing on experience gained from Phase I and
Phase II, the EC believes that the overall functioning of the
EU ETS can be improved. The review aims to strengthen the scheme
in order that it meets strategic objectives to deliver cost effective
emissions reductions without distorting the playing field for
competition. The Aluminium Industry contends that the revision
fails to meet these objectives, as non-EU based producers of aluminium
will experience no carbon price.
— The extent to which the scheme as
currently designed will encourage technological innovation.
UK aluminium smelter emissions are comparable
with other international, pre-bake smelters and have minimal opportunity
for further reduction, even if PFC's are included. UK aluminium
production will be at benchmark by 2012. Smelters are Part A processes
covered by the IPPC Directive. The technology employed is BAT.
Permits include emission limits, cross referenced to CCA's and
energy efficiency improvements.
The primary aluminium industry is extremely
energy intensive as it uses on average 15 MWh/ tonne aluminium
produced. Energy conservation has therefore been at the forefront
of technological innovation for many years. Consequently, scope
for further improvement is limited.
— Whether it will result in the appropriate
price signal being sent.
— Whether it will be efficient and/or
equitable.
The EU ETS distorts trade and increases the
risk of carbon leakage. Carbon leakage is the same as increased
dependency on imported materials. These imported materials will
have to come from countries outside the EU.
5. The potential application of the new
Article 24a permitting allowances to be issued in respect of projects
outside the scope of the Community scheme that reduce greenhouse
gas emissions.
We support the inclusion of projects that could
increase the supply of allowances to the EU ETS.
ALLOCATION AND
AUCTIONING
6. Whether decisions about the proportion
of permits to be allocated for free rather than auctioned should
be taken at the EU level or at the Member State level, and what
the time-frame for such decisions should be.
Decisions should be taken at EU level on a sectoral
basis to avoid national bias causing competitive distortion.
Industry needs clarity concerning which sectors
and sub-sectors will be covered by this commitment and the possible
measures taken at the earliest date possible in order to prepare
the plants concerned for future operations or closure. The measures
should take into account both the direct and indirect effect of
CO2 cost pass-through if the serious risk of carbon leakage is
to be addressed. The carbon equalization system, (Recital 20),
will not be suitable for the aluminium sector.
Any revisions of the measures proposed must
take into account sectoral agreements.
7. Which sectors (if any) should continue
to receive a proportion of their emissions permits allocated free
of charge, and for how long.
Those sectors determined as being subject to
carbon leakage[1]
should continue to be allocated to for free. The free allocation
should cover both the direct (ie combustion and process related)
emissions and be used to compensate for electricity price rises
associated with emissions costs passed through the electricity
generation supply chain.
The electricity used by primary aluminium smelters
comes from several different sources with different CO2 emissions.
These are called the indirect emissions, which can be up to six
times higher than the direct emissions from smelting. With the
introduction of the Emission Trading Scheme, the power suppliers
have incorporated and passed through the costs of indirect CO2
emissions into their electricity prices.
For an energy intensive industry like aluminium,
this means that the cost of producing a tonne of primary aluminium
is increased by more than 20%. Since the price of aluminium is
a global price, quoted in USD, and determined on the London Metal
Exchange, the European producers have no possibility of passing
on this extra cost to their customers. These effects need to be
addressed if the aluminium industry is to avoid carbon leakage
and continue with operations in Europe. A commitment to compensation
for pass-through costs must be clearly expressed in the Directive.
Transitional free allocation to installations
should be provided for through harmonised Community-wide rules,
establishing sector benchmarks, in order to minimise distortions
of competition within the Community. These rules should clearly
set out the process of establishing the sector benchmarks. Further,
the principles for setting benchmarks must be agreed with the
sectors concerned and reflect the current emissions and technical
options for emissions reduction within that sector. Within the
primary aluminium sector benchmarks must be developed to reflect
the different classes of smelters in operation, as a minimum to
identify and benchmark the different types of grid connected and
self-generating smelters.
The provision to avoid "distortion of markets
for electricity and heat" should not prevent free allocation
to existing CHP plants or self-supply of electricity. Self-supply
by energy-intensive industries should be treated differently from
utility generation because the competitive situation of its end-use
is entirely different from a utility.
Free allocation should be maintained until an
international sectoral agreement is implemented.
The best solution to carbon leakage is a comprehensive
international climate agreement.
8. Whether the redistributive element of
the Commission's proposal (whereby poorer Member States are allocated
more auctionable emissions permits, thereby increasing the revenues
accruing to their Treasuries) is appropriate.
No, auctioning rights should be determined by
share of emissions on a predefined date. Revenues raised should
be recycled to participants in the form of lower business taxes
and/or funding for environmental improvements.
The revenues should not be used for removing
inconsistencies in economic growth across member states—this
is a role for general EU taxation and expenditure.
The proposal to allocate more auctionable emissions
permits to poorer Member States should be rejected. Any redistribution
of wealth should be agreed as part of the European Social Policy
and funded via the EU budget. Alternative schemes are open to
malpractice.
THE INTERNATIONAL
DIMENSION
9. The extent to which EU operators should
be allowed to meet obligations under the ETS by investing in projects
to reduce emissions outside the EU through the Clean Development
Mechanism (CDM).
Flexibility of compliance should be maximised
for EU Operators which is why we suggest that no restrictions
should be placed on the use of allowances generated by the CDM.
The environmental benefit is the same regardless of where the
emission reduction is made and maximum flexibility will result
in emissions reductions at the lowest cost—the primary objective
of market mechanisms such as emissions trading.
10. The likely feasibility of creating links
between the ETS and other similar schemes around the world.
Linking the EU scheme with others is desirable
for two reasons:
— It increases the amount of participants,
thus the amount of emissions reduction opportunities also increases
which will result in lower carbon prices.
— It can also serve to bring in competing
industries lowering the risks of carbon leakage.
However links with other schemes should only
be made where the same level of environmental integrity exists.
We consider the European Commission's suggestions to be appropriate
criteria.
WHAT IS
NEEDED
— Acknowledge CO2 cost pass-through
into electricity prices:
— as an enduring consequence of
the carbon constraint regardless of exact state of competition
in the power markets or whether the permits are given freely or
purchased.
— Adjust the post-2012 EU ETS scheme
to ensure appropriate mitigating measures for CO2 cost pass through
into power prices:
— for those energy intensive industries
producing commodities that are subject to global competition;
— such measures must be implemented
on a EU wide basis to alleviate possible state aid concerns.
— Ensure international competitiveness
of aluminium sector is preserved post 2012.
— The threshold for smaller installations
should be raised to 50 Ktpa CO2.
— Keep secondary aluminium industry
out of the post-2012 EU ETS.
— Provide guidelines to Member States
for adoption of short term remedies:
— to insure survival of the affected
sectors;
— bring forward decision dates
to provide more certainty for investment; and
— continue operation of CCA's.
CONCLUSION
In summary, Aluminium is an exciting material
of to-day and of the future. It is a truly sustainable material
which is cost-effective, strong, lightweight, corrosion resistant,
flexible in design and fully recyclable. The UK Aluminium Industry
alone employs approximately 20,000 people and has an annual turnover
of over £3 billion. Aluminium has many industrial uses from
aircraft manufacture to beverage cans. It would be unforgivable
to see this vital industry forced to relocate outside of the European
Union.
The aluminium industry is already heavily regulated
via the IPPC Directive, the Landfill Directive, the Water Framework
Directive, the REACH Directive, etc. Also, for seven years the
industry has participated in the Climate Change Agreements and
achieved below-target reductions in greenhouse gas emissions.
We urge the Committee to challenge the EU ETS
legislation and establish clear rules and consequences of participation.
The aluminium industry supports measures to achieve cost-effective
emissions reduction. However, as drafted, the revised Directive
will damage the international competitiveness of the UK and European
Aluminium Industry and result in carbon leakage to other parts
of the World.
June 2008
1 Carbon leakage occurs where manufacture of the
product in question will move outside of the traded area and then
be imported. Back
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