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GREEN GROWTH CHALLENGE THE BRAZILIAN ALUMINUM INDUSTRY

GREEN GROWTH CHALLENGE THE BRAZILIAN ALUMINUM INDUSTRY. 2012. Marco Antonielli Seyed MohammadReza Fahari Pablo Pero Cristina Rodríguez. MOTIVATION. Project Definition: We justify and design a green growth strategy for the aluminum sector in Brazil Why Green Growth?

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GREEN GROWTH CHALLENGE THE BRAZILIAN ALUMINUM INDUSTRY

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  1. GREEN GROWTH CHALLENGETHE BRAZILIAN ALUMINUM INDUSTRY 2012 Marco Antonielli Seyed MohammadReza Fahari Pablo Pero Cristina Rodríguez

  2. MOTIVATION Project Definition: • We justify and design a green growth strategy for the aluminum sector in Brazil Why Green Growth? • climate change is global and increasingly costly • emissions on an unsustainable path • individual action: first mover advantage • an economic problem • reduction of greenhouse gases emissions • engine for growth: green technology innovation

  3. MOTIVATION Project Definition: • We justify and design a green growth strategy for the aluminum sector in Brazil Why Brazil? • huge scope for growing green Why Aluminum? • production is emission intensive • recyclable • lighter substitute for steel

  4. OUTLINE

  5. ALUMINUM PRODUCTION CYCLE Bauxite Extraction Alumina Production Aluminum Production • Primary aluminum  2 main inputs: alumina and energy • Two main features of the production process: • Energy use • Environmental impact

  6. ENERGY INTENSITY

  7. GREENHOUSE GAS EMISSIONS Fabrication Secondary smelting Primary – Direct (PFC, Carbon, melting, etc.) Primary – Indirect (Electricity consumption) Primary smelting is the most polluting stage of aluminum production

  8. OUTLINE

  9. BRAZIL & WORLD RANKING

  10. BRAZILIAN SPECIALIZATION Should Brazil stay in this path of specialization in alumina, or adapt and specialize in aluminum? Increasing domestic demand – high growth rates Limited production capacity Competition from cheaper & dirtier foreign producers Forecasts for the Industry:

  11. OUTLINE

  12. ECONOMIC AND ENVIRONMENTAL SUSTABINILITY • Potential for Comparative Advantage • World Interest: GHG emissions reduction • Production should be in the cleanest source

  13. POTENTIAL FOR COMPARATIVE ADVANTAGE • Private Costs: • Bauxite & Alumina • Energy • Social Costs (GHG emissions): • Indirect from Energy Consumption • Direct emissions from smelting process Onaverage 60% - 70% of costs

  14. WORLD PRODUCTION OF BAUXITA

  15. ALUMINA PRODUCTION COSTS BY REGION (nominal USD/t 2001)

  16. In primary production of aluminum ELECTRICITY SOURCES

  17. ESTIMATED COST OF ELECTRICITY GENERATING TECHNOLOGIES – USA - (2009USD/MWH) Hydro is consistently amongthe cheapest ones

  18. BRAZILIAN ELECTRICITY COST STRUCTURE (USD/MWh)

  19. BRAZILIAN ELECTRICITY COST STRUCTURE (USD/MWh) Tax makes for 60% for final energy Price

  20. GREENHOUSE GAS EMISSIONS GHG = EnergyConsump * Quality + PFC Emissions Brazil’scleanenergyMatrixProvidesthebest in theworld Big ScopeforImprovement Europereduced PFC by 50% in a decade Requiresinvestment in R&D No ScopeforImprovement Average 15 MW/h per ton ofAl 10% range in theWorld

  21. SUMMING UP Brazilian profile: • Sustainable Alumina producer • Cheap but highly taxed energy • Clean Energy production • Scope for improving technology • Why is Brazil is not specializing in Aluminum?

  22. IMPEDIMENTS • MarketFailure: • No internalizing of thepollutionexternality • MainDistortions: • Highdistortionaytax • Lack of availability of energy

  23. OUTLINE

  24. POLICY RECOMMENDATIONS Externality of climatechange • No global pricesignal • Not at hand A strategy for growth

  25. BORDER ADJUSTMENT TAX Whatis: A tradepolicymeasureaimed at offsetting adverse effects of domesticenvironmentalregulation • Non discriminatory AllowedbyGATT art. XX • Compliance costs • New limits on emission intensity • CONAMA Resolução No. 436/2011 • Tax on dirtier imports Sustain competitiveness of clean aluminum against dirtier imports

  26. SUBSIDIES AND ENERGY MARKET Concern:Energyproductionischeap in Brazil, butit’shighlypriced. • First-best: General taxcutonenergyconsumption Politicalconstraint • Second-Best: Reduce in tax  Subsidy per unit of production 1. Subsidies: How do wewantthem?

  27. CLEAN DEVELOPMENT MECHANISM (CDM) Whatis CDM? • art. 12 of Kyoto Protocol  Win-winframework of investing in clean technology in developing countries with funds raised from developed countries: • Firms in thedeveloped country buyCertified Emission Reductioncredits • Firms in the developing country makes a greeninvestment & sells CER AdditionalityCondition: • Emission additional to what would otherwise have occurred. • It is satisfied: • Thebiggestdirect factor of emission: PFC • EU case: From 3500 to 1900 KgCO2eq/ton bydevelopingtheedgetechnlogy

  28. CLEAN DEVELOPMENT MECHANISM (CDM) CDM in aluminium sector Concerns: • Complicatedprocedure • Assymmetry of information • Uncertainty at national and internationallevel What can thegovernment do totacklewiththeseconcerns? • Usingthecurrent CDM bodytopromotealuminium CDM projects • Contributing in informationflow and negotioating • Reducinguncertainties

  29. CLEAN DEVELOPMENT MECHANISM (CDM) Small model Participationcondition: (x1-x2) PCER + B > C • X1: The current emission • X2: Emission after undertaking CDM project • B: Positive externality • C: R&D cost of technology switching Data usingeuropean EU case: (x1-x2) PCER= (3634-1941)*(1661+4420)/2*12*15 = 183 M Euro C = (12*150)/2.9 = 620 M Euro  183/620 = 0.295  Coversaround 30% of the total R&D cost.

  30. CONCLUSIONS We justify and design a green growth strategy for the aluminum sector in Brazil 1. We found out that Brazil has a potential to be among the cheapest producers in the world, both from a private and a social point of view 2. Considering the distortions and the market failure hindering green growth in this sector we suggest three policies: • Border adjustment tax: to sustain our competiveness with dirtier foreign aluminum • Subsidies: to foster green innovation • Clean Development Mechanism: to reduce environmental impact of new smelters

  31. APPENDIX

  32. PRIMARY ALUMINUM PRODUCTION COSTS BY REGION (nominal USD/t 2002)

  33. BRAZILIAN IMPORTS OF ALUMINUM($US thousands)

  34. TECHNOLOGY MIX BY REGION 2004 2030

  35. 1. Allowing for trading of excess capacity of energy • 2. Provide collateral in the financing of new plants SUBSIDIES AND ENERGY MARKET 2. Ownproduction of energy: • prospectedtoreach 50% of total consumptionby 2014 • in absence of reduction of taxonenergy, itshouldbeboosted

  36. Bondingallpolices • More funding • Local • internation • Pushing Global agenda • FitswithBrazilian general growthstrategy • Non-discriminatoryprotection • Price?? Short runincrease butifsuccesfulllowerlongrun

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