Europe's metals sector is gearing up for talks with the European Commission on plans to start taxing its carbon emissions but at the same time prevent factories and smelters from shutting shop or moving abroad.
Metals lobby group Eurometeaux, which is meeting with the commission at the end of January, wants to persuade it to grant the sector full exemption from the indirect carbon costs embedded in electricity prices.
Under the European Union's emissions trading scheme (ETS), power plants have to submit tradeable permits, called EU allowances, for every tonne of carbon they emit. These carbon costs, currently at record lows of around 7 euros a tonne, are then passed on to clients.
The metals sector will be included in the ETS next year, but has already secured exemption for its direct carbon costs, meaning it will get free EUAs to cover the CO2 it emits in its daily operations, as long as these fall within a benchmark.
But Eurometeaux says if the sector does not get aid to cover all the indirect carbon costs present in electricity prices, carbon leakage will occur, meaning smelters and fabricators will shut down or relocate and net global emissions will rise.
To face global challenges we have to maintain the most efficient production. If the ETS causes de-industrialisation in Europe what will this mean for overall CO2 emissions? said Eurometeaux president Oliver Bell.
Bell is also head of rolled products at Norwegian aluminium producer Norsk Hydro, overseeing consumption of the most energy intensive base metal which stands to lose most from failing to secure full state aid for energy costs next year.
The aluminium industry is already under pressure because of a credit crisis in Europe that threatens global economic prospects, and because the metal is priced on a global exchange so producers cannot pass on cost increases.
What is currently proposed by the Commission is compensation for 85 percent of the CO2 content of energy costs decreasing to 75 percent. What we need is 100 percent against a benchmark to continue our efforts to produce with the best available technology, said Bell.
He said Hydro has reduced capacity to 20 percent at a smelter in Germany specifically because of carbon costs in electricity prices, and that more such shutdowns will simply hurt Europe's innovative industry and growth prospects.
The European Commission is keenly aware of this risk, but it says state aid should be limited to the minimum necessary, because it leads to subsidy races and destroys a CO2 price that is meant to signal to industry to change its operating patterns.
The EU is not located on top of oil fields and has mostly chosen not to accept the risk of nuclear accidents. Therefore, it will have to be more expensive to produce some things in Europe than elsewhere, said Cristina Arigho, European Commission spokesperson for competition.
State aid distorts competition and can never be the solution for Europe to strengthen long term global competitiveness. State aid can address carbon leakage but at a high cost.
The commission will make its final decision on guidelines for state aid to industries like metals in February. It will then be up to EU members to implement the guidelines and determine state aid to industry as they see fit from 2013.
A key concern for EU members and for the Commission is to avoid the mistakes made in dealing with the steel sector, which was granted so many free EUAs it was able to actually make money from the ETS by selling its surplus permits.
But nor does it wish to push jobs out of Europe at a time when budgets are being slashed, austerity reigns and a solution to the intractable debt crisis remains out of reach.
In the aluminium sector, there is large variation in production processes, age of the facilities, fuel mixes, and, thus, in emissions and the need for emission allowances, said Lucas Bergkamp, a Brussels-based lawyer, and head of Hunton & Williams' European regulatory practice.
A policy designed to prevent carbon leakage in this sector would have to be much more individualized, or at least much more differentiated, to be successful.