GREEN GROWTH CHALLENGE

THE BRAZILIAN ALUMINUM INDUSTRY

Marco AntonielliSeyed MohammadReza Fahari

Pablo PeroCristina Rodríguez

2012

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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

MOTIVATION

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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

MOTIVATION

1. Aluminum production process

2. Aluminum markets: Brazil and the world

3. Why should Brazil promote aluminum production?

4. Green growth strategy

OUTLINE

Bauxite Extraction

Alumina Production

Aluminum Production

ALUMINUM PRODUCTION CYCLE

Primary aluminum 2 main inputs: alumina and energy

Two main features of the production process:

• Energy use• Environmental impact

Bulk of energy use primary smelting (electrolysis): 73%

Energy cost 35%

ENERGY INTENSITY

Primary - Di-rect (PFC,

Carbon, Fuel for Alumina,

etc.)

Primary - Indi-rect Electricity

Supply

Recycle/ Remelt

Fabrication

Primary smelting is the most polluting stage of aluminum production

Primary – Direct (PFC, Carbon, melting, etc.)

Primary – Indirect (Electricity consumption)

FabricationSecondary smelting

GREENHOUSE GAS EMISSIONS

1. Aluminum production process

2. Aluminum markets: Brazil and the world

3. Why should Brazil promote aluminum production?

4. Green growth strategy

OUTLINE

BRAZIL & WORLD RANKING

Year 2010 % GDP % Industry % Exports

Brazil 1 % 4,5% 2,4%

Year 2010Primary

AluminumAlumina and

Bauxite

Brazilian production

7th 3rd

Brazilian exports

22nd 2nd

1997 1998 1999 2000 2001 2002 2003 2004 20050

200

400

600

800

1000

1200

Growth in aluminum, alumina and bauxiteExports in Brazil (1997=100)

Bauxita Alumina Aluminum

BRAZILIAN SPECIALIZATION

Forecasts for the Industry:

Limited production capacity

Competition from cheaper

& dirtier foreign

producers

Increasing domestic demand –

high growth rates

Should Brazil stay in this path of

specialization in alumina, or

adapt and specialize in

aluminum?

1. Aluminum production process

2. Aluminum markets: Brazil and the world

3. Why should Brazil promote aluminum production?

4. Green growth strategy

OUTLINE

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1. Potential for Comparative Advantage

2. World Interest: GHG emissions reduction Production should be in the cleanest source

ECONOMIC AND ENVIRONMENTAL SUSTABINILITY

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•Private Costs:▫Bauxite & Alumina ▫Energy

•Social Costs (GHG emissions):▫Indirect from Energy Consumption▫Direct emissions from smelting process

POTENTIAL FOR COMPARATIVE ADVANTAGE

On average 60% - 70% of costs

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WORLD PRODUCTION OF BAUXITA

15

Asia

Oce

ania

China

Latin

Am

erica

Wor

ld A

vera

ge

Africa/

Mid

dle

East

Wes

tern

Eur

ope

Nor

th A

mer

ica

Easte

rn E

urop

e0

50

100

150

200

250

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

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ELECTRICITY SOURCESIn primary production of aluminum

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ESTIMATED COST OF ELECTRICITY GENERATING TECHNOLOGIES – USA - (2009USD/MWH)

Hydro is consistently among the cheapest ones

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BRAZILIAN ELECTRICITY COST STRUCTURE (USD/MWh)

50

20

20

generation transmition distribution

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BRAZILIAN ELECTRICITY COST STRUCTURE (USD/MWh)

Tax makes for 60% for final energy Price

50

20

20

125

generation transmition distribution taxes

GHG = Energy Consump * Quality + PFC Emissions

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Emissions (kg CO2e/t Al)

EU Brazil

Alumina 638 1120

Aluminum 1993 2698

Recycling 205 213

No Scope for ImprovementAverage 15 MW/h per ton ofAl10% range in the World

Brazil’s clean energy Matrix Provides the best in the world

Big Scope for ImprovementEurope reduced PFC by 50% in a decadeRequires investment in R&D

GREENHOUSE GAS EMISSIONS

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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?

SUMMING UP

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IMPEDIMENTS

•Market Failure:▫No internalizing of the pollution externality

•Main Distortions:▫High distortionay tax▫Lack of availability of energy

1. Aluminum production process

2. Aluminum markets: Brazil and the world

3. Why should Brazil promote aluminum production?

4. Green growth strategy

OUTLINE

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POLICY RECOMMENDATIONSExternality of climate change

• No global price signal• Not at hand

A strategy for growth

Market failures and distortions

Externality Tax on energy

Goals

Foster green

innovation

Reduce GHG

emissions

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BORDER ADJUSTMENT TAXWhat is: A trade policy measure aimed at offsetting adverse

effects of domestic environmental regulation

• Non discriminatory Allowed by GATT art. XX

Sustain competitiveness of clean aluminum against dirtier imports

CONAMA Resolução

No. 436/2011

New limits on

emission intensity

Compliance costs

Tax on dirtier

imports

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Concern: Energy production is cheap in Brazil, but it’s highly priced.• First-best: General tax cut on energy consumption Political constraint• Second-Best: Reduce in tax Subsidy per unit of production

1. Subsidies: How do we want them?Conditional

On expansion of capacity

On adoption of cleaner technology

Temporary

Regular control on emission

improvementEx: matching EU

standards

SUBSIDIES AND ENERGY MARKET

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CLEAN DEVELOPMENT MECHANISM (CDM)

What is CDM?- art. 12 of Kyoto Protocol Win-win framework of investing in clean technology in developing countries with funds raised from developed countries:

-Firms in the developed country buy Certified Emission Reduction credits-Firms in the developing country makes a green investment & sells CER

Additionality Condition: • Emission additional to what would otherwise have occurred. •It is satisfied:

▫The biggest direct factor of emission: PFC▫EU case: From 3500 to 1900 KgCO2eq/ton by developing the edge technlogy

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CLEAN DEVELOPMENT MECHANISM (CDM)

CDM in aluminium sectorConcerns:•Complicated procedure•Assymmetry of information•Uncertainty at national and international level

What can the government do to tackle with these concerns?•Using the current CDM body to promote aluminium CDM projects•Contributing in information flow and negotioating•Reducing uncertainties

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CLEAN DEVELOPMENT MECHANISM (CDM)

Small modelParticipation condition:

(x1-x2) PCER + B > C• X1: The current emission

• X2: Emission after undertaking CDM project• B: Positive externality• C: R&D cost of technology switchingData using european EU case:(x1-x2) PCER = (3634-1941)*(1661+4420)/2*12*15 = 183 M EuroC = (12*150)/2.9 = 620 M Euro 183/620 = 0.295 Covers around 30% of the total R&D cost.

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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

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APPENDIX

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

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BRAZILIAN IMPORTS OF ALUMINUM($US thousands)

TECHNOLOGY MIX BY REGION

2004 2030

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SUBSIDIES AND ENERGY MARKET

2. Own production of energy:- prospected to reach 50% of total consumption by 2014- in absence of reduction of tax on energy, it should be boosted

1. Allowing for trading of excess capacity of

energy

2. Provide collateral in the financing of new plants

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Bonding all polices

•More funding▫Local ▫internation

•Pushing Global agenda•Fits with Brazilian general growth strategy•Non-discriminatory protection•Price?? Short run increase but if

succesfull lower long run