Is Carbon Trading Having an Impact on Industry?

by: Research Recap

Although there is no strong evidence yet that the European Union’s Emissions Trading Scheme is driving industries away to more pollution-tolerant parts of the world, it seems likely that this may occur.

That appears to be the tentative conclusion of a working paper from the International Energy Agency examining the impact of the ETS scheme on the European aluminum smelting industry.

The purpose of the paper was to explore the issue of “carbon leakage,” the increase in emissions outside a region as a direct result of the policy to cap emission within that region. Carbon leakage means that the domestic climate mitigation policy is less effective and more costly in containing emission levels, a legitimate concern for policy-makers.

The report shows that the European primary aluminum sector on average has not suffered from carbon leakage to date. “However, the absence of statistical evidence of a direct effect of CO2 prices on aluminum trade flows is not surprising. There is a number of reasons as to why the impacts during the period under review would have been difficult to observe: the prevalence of long-term electricity contracts; a high cycle for demand of aluminum and correspondingly high prices, which should alleviate concomitant increases in cost, including related to CO2; high levels of imports following an increase in consumption and no additional production capacity coming on-line in Europe; and finally, aluminum smelter direct emissions were not covered by the EU-ETS in this period.”

Yet even if the impacts of the EU-ETS are not yet observable, this should not be taken as definitive evidence that increased in electricity prices triggered by the EU-ETS have had no impact on aluminum smelting in Europe, the paper finds. “Some smelters have definitely suffered from increases in electricity prices following the end of their long term contracts. What remains unclear, however, is how quickly such phenomenon will develop and lead to an additional increase in aluminum imports, from what would have happened in the absence of the EU-ETS. Indeed, the study of the impacts of the EU-ETS on competitiveness is, and will remain for long, plagued by the difficulty to establish a proper counter-factual scenario (i.e., what would have happened in the absence of a CO2 cost).”

Growing demand in Europe has not triggered investment in local primary smelting capacity.The region is obviously less attractive for new capacity than regions that guarantee lower energy costs.

The carbon constraint is, nonetheless, only one element in this European picture, as higher electricity prices prevailed before the introduction of the ETS (with the exception of China and India).

The key question for the future competitiveness and sustainability of the European primary aluminum industry is the producers’ ability to secure baseload, possibly low-CO2 electricity contracts. Unless new business models develop to secure such contracts, it seems likely that their competitive situation will deteriorate.