Europe’s planned Carbon Border Adjustment Mechanism (CBAM) will have a big impact on the aluminium sector when it begins to focus on reducing scope 2 emissions, according to the president and chief executive of the Aluminium Association of Canada (AAC).
That, in turn, will widen divisions among producers based on which energy sources they use, he said.
Initial versions of CBAM will focus on scope 1 emissions, which are direct greenhouse gas (GHG) emissions that occur from sources controlled or owned by an organization, such as fuel combustion in boilers or furnaces, CEO Jean Simard noted.
CBAM is being rolled out in 2023 by the European Union as a means of putting a price on carbon and forms part of its ambitious decarbonization roadmap, which aims to achieve net zero carbon emissions by 2050. It’s one of the first macro-economic and environmentally-driven policy instruments being used between trading countries or regions, with Europe being a first mover, Simard said.
“Basically, right now we’re in discovery mode, trying to figure out where the devil hides in the detail of the EU proposal,” he told the Fastmarkets International Aluminium conference on Friday September 3.
Producers have worked hard over the past decade to reduce scope 1 emissions to around two tonnes equivalent carbon dioxide emissions per tonne of metal through modernization programs and technology, he noted.
“Very early on the [aluminium] industry reduced its GHG footprint by addressing perfluorocarbon (PFC) emissions, previously its highest source of GHG emissions. The first years of CBAM will probably have less of an impact on the industry,” he said.
“But as we move through time, and allocations that have been granted to the EU industry to protect its competitiveness on world markets are reduced, that’s where it’s going to start hurting. This is especially more so because CBAM will move to scope 2 emissions, which are the big differentiator where you compare coal to hydro to natural gas-based production,” Simard told delegates.
“That’s where we [aluminium producers] stop being born equal, and we’re all differentiated by the area of the world where we are [based]. That’s one of the key notions we have to try to factor into our strategic analysis,” he added.
Scope 2 emissions are indirect GHG emissions associated with the purchase of electricity, steam, heat or cooling. The energy-intensive nature of producing aluminium means that companies that operate using hydroelectric power have an advantage in GHG emissions terms compared to fossil-fuel based producers.
From the perspective of Canada, the world’s fifth largest producer and a net exporter of metal produced using hydroelectric power, the creation of a CBAM-type system by its government would not provide benefit to domestic producers given the country’s lack of imports.
“Canada’s system will have to be tailored to and driven by the US one, not by the EU one. The problem is the United States doesn’t have a domestic-producing carbon policy,” Simard said.
“If you go by World Trade Organization rules, you need your own internal pricing mechanism for carbon in order to set up a system for incoming products,” he told the conference.
“Right now, carbon pricing is an investigation in discovery mode rather than anything else. It’s going to be a very important policy mechanism for the industry given the energy-intensive nature of aluminium production,” he added.