GREEN GROWTH CHALLENGE THE BRAZILIAN ALUMINUM INDUSTRY Marco Antonielli Seyed MohammadReza Fahari Pablo Pero Cristina Rodríguez 2012

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 2 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 3 MOTIVATION

1. Aluminum production process 2. Aluminum markets: Brazil and the world3. Why should Brazil promote aluminum production? 4. Green growth strategy OUTLINE

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

1. Aluminum production process 2. Aluminum markets: Brazil and the world3. Why should Brazil promote aluminum production? 4. Green growth strategy OUTLINE

BRAZIL & WORLD RANKING Year 2010% GDP% Industry% Exports Brazil1 %4,5%2,4% Year 2010 Primary Aluminum Alumina and Bauxite Brazilian production 7 th 3 rd Brazilian exports22 nd 2 nd

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 world3. Why should Brazil promote aluminum production? 4. Green growth strategy OUTLINE

1.Potential for Comparative Advantage 2.World Interest: GHG emissions reduction  Production should be in the cleanest source 12 ECONOMIC AND ENVIRONMENTAL SUSTABINILITY

13 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

14 WORLD PRODUCTION OF BAUXITA

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

ELECTRICITY SOURCES 16 In primary production of aluminum

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

BRAZILIAN ELECTRICITY COST STRUCTURE (USD/MWh) 18

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

GHG = Energy Consump * Quality + PFC Emissions 20 Emissions (kg CO2e/t Al)EUBrazil Alumina Aluminum Recycling No Scope for Improvement Average 15 MW/h per ton ofAl 10% range in the World Brazil’s clean energy Matrix Provides the best in the world Big Scope for Improvement Europe reduced PFC by 50% in a decade Requires investment in R&D GREENHOUSE GAS EMISSIONS

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? 21 SUMMING UP

22 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 world3. Why should Brazil promote aluminum production? 4. Green growth strategy OUTLINE

POLICY RECOMMENDATIONS Externality of climate change No global price signal Not at hand A strategy for growth 24 Market failures and distortions Externality Tax on energy Goals Foster green innovation Reduce GHG emissions

BORDER ADJUSTMENT TAX What is: A trade policy measure aimed at offsetting adverse effects of domestic environmental regulation Non discriminatory  Allowed by GATT art. XX 25 Sustain competitiveness of clean aluminum against dirtier imports CONAMA Resolução No. 436/2011 New limits on emission intensity Compliance costs Tax on dirtier imports

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? 26 Conditional On expansion of capacity On adoption of cleaner technology Temporary Regular control on emission improvement Ex: matching EU standards SUBSIDIES AND ENERGY MARKET

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 27

CLEAN DEVELOPMENT MECHANISM (CDM) CDM in aluminium sector Concerns: 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 28

CLEAN DEVELOPMENT MECHANISM (CDM) Small model Participation condition: (x 1 -x 2 ) P CER + B > C X 1 : The current emission X 2 : Emission after undertaking CDM project B: Positive externality C: R&D cost of technology switching Data using european EU case: (x 1 -x 2 ) P CER = ( )*( )/2*12*15 = 183 M Euro C = (12*150)/2.9 = 620 M Euro  183/620 =  Covers around 30% of the total R&D cost. 29

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 30

APPENDIX 31

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

33

BRAZILIAN IMPORTS OF ALUMINUM ($US thousands)

TECHNOLOGY MIX BY REGION

SUBSIDIES AND ENERGY MARKET 2. Own production of energy: - prospected to reach 50% of total consumption by in absence of reduction of tax on energy, it should be boosted Allowing for trading of excess capacity of energy 2. Provide collateral in the financing of new plants

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 37