EU ETS Reform to Increase Aluminium Smelting Costs

13 April 2018

Reforms of the EU Emissions Trading Scheme (ETS) for the years 2021-2030 will lead to higher carbon (CO2e) prices and rising Aluminium smelting costs. The reduction of free carbon permit allowances to smelters will raise smelting costs for the average smelter by $10-$25/tAl depending on final EU policy decision. The increasing permit price will also drive indirect carbon costs higher, but the effect varies greatly from smelter to smelter.

The EU Emissions Trading Scheme (ETS) has directly included aluminium production since 2013. Before this the aluminium industry had only faced added costs from the EU ETS in the form of higher power costs, this is known as indirect emissions costs. I.e smelters were forced to pay more for power due to emissions costs associated with power generation. In 2014 EU leaders agreed a binding target to reduce GHG emissions by 40% from 1990 levels by 2030. To achieve this objective the EU announced planned reforms of the ETS stage four from 2021-2030. The major change of the policy is the increasing rate at which permits will be removed from the carbon market, rising from 1.7% to 2.2%.

Aluminium producers receive an allowance of free emissions permits per year. Free allowances are provided to protect the industry from substantial cost increases and avoid production moving overseas to regions without carbon pricing, a process known as carbon leakage. There are a different number of free permits for anode plants, reduction potlines and casthouses. Here we only consider the reduction process, as emissions costs from the other two processes are minor on a per tonne of aluminium basis. Anode production and casthouse emissions account for 15% and 3% respectively of direct emissions at a smelter, but the benchmark for Anode production is relatively stringent and thus the cost is minimal on a per tonne of Aluminium basis. The free permits a smelter receives is based on a benchmark amount across the industry set by the EU. For phase 3 (2013-2020) this was set at 1.514tCO2/tAl based on the top 10% of EU installations in 2008.

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