Putting a price on carbon: a case study of aluminium

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Disruption in the aluminium market dramatically illustrates the urgent need to integrate CO2 prices into production costs in order to effectively fight against global warming.

Les Echos | 24 nov. 2015 | Philippe Chalmin and Yves Jégourel

Disruption in the aluminium market dramatically illustrates the urgent need to integrate CO2 prices into production costs in order to effectively fight against global warming.

In the run up to COP21, observers are wondering about what concrete results we can hope for beyond the facade of commitments. In reality, there is only one constraint which would guide humanity towards a more favourable climate future – pricing CO2 at a high enough level so as to encourage industries to change their energy mix.

The dream scenario would be the introduction of a sufficiently high fee (USD 50 or USD 100 per tonne) in order to motivate major technological developments. However, any fee must be truly universal, and therefore be applied to emerging countries, whose energy choices are often limited to coal and oil. India and China for example have both made undeniable efforts to greater utilise non-carbon energy, but still depend on more than 70% of their energy from coal. It is now clear that in order to encourage nations to curb their use of fossil fuels, the introduction of a mechanism giving carbon a prohibitive price would create a better balance across industry.

A recent report by the AluWatch group demonstrates that from this point of view, aluminium is a fascinating case study. The aluminium price has rarely been lower, and at USD 1,600 per tonne it is estimated that two thirds of world production does not cover its production cost: the issue is massive overcapacity, particularly in China, which produces 30 million tonnes annually, and accounts for 58% of world production.

Of all the metals, aluminium production is by far the most energy intensive: to produce one tonne of aluminium requires an average of 14,000 kilowatt hours (kWh), a figure that despite falling (this figure was 17,000 in 1980) still means that in 2014  world aluminium production consumed 690,000 GWh. Historically, aluminium smelters were built near sources of hydroelectric power: Alpine and Pyrenean valleys in France, Switzerland, Norway, Canada and Russia. However in China, 90% of the energy used by smelters originates from coal. Within twenty years, the amount of coal consumed by the Chinese aluminium industry increased from 20,000 to 350,000 GWh!

We can understand China’s strategy to take advantage of its own industry in order to ensure its industrial independence. However, one can question the rationality of this choice: what is, in fact, China’s interest in developing an industry which is consumes such large amounts of polluting energy, especially as environmental protection is at the top of Xi Jinping’s agenda?

A tonne of aluminium produced using fossil fuels  emits on average 14 tonnes of CO2 (the aluminium industry contributes 1% of global CO2 emissions). Presently, China’s development, which weighs on world prices, is causing production facilities that use ‘clean’ energy sources such as hydro or nuclear to close.

Assigning a price on carbon would completely change this situation. If a tonne of CO2 cost USD 50, the Chinese cost price would increase by USD 700 per tonne, which would redirect aluminium production on a new basis… a little further from coal. It would also be doing a favour for the Chinese authorities, who are otherwise having a very difficult time regulating the success of their companies!

Philippe Chalmin, Yves Jégourel

Philippe Chalmin is a professor of economic history at the University Paris-Dauphine, president of Cyclope, Chairman of the Scientific Board of AluWatch. Yves Jégourel is a lecturer and director of the Master 2 programme in banking, finance and international trade at the University Montesquieu-Bordeaux IV.

Source: Les Echos