There are significant implications for Alcoa under the proposed Carbon Pollution Reduction Scheme and, this month, Alcoa will be submitting its response to the Federal Government’s Green Paper.  Here, Alan Cransberg answers the tough questions around the climate change challenge.

Q: You have recently been attacked by the WWF for not responding to climate change, they called you a 'dinosaur'.  How do you respond to that?

Alan: I found those remarks truly surprising and, frankly, irresponsible. Alcoa has been a front runner in tackling climate change for well over a decade and I think we are well recognised for that.

We have made enormous improvements in emissions reductions, down by 33% from 1990 levels, and we have the industry's leading research and development outfit in WA. We've developed carbon capture technology, we implement new suggestions and technological developments continually to improve our greenhouse performance, and it’s all publicly documented.  Apart from the need to operate sustainably for the environment, we need to do it for our bottom line. It is just naïve to suggest that any player has twiddled their thumbs and is not responding to today's operating environment.

Q: You are a big emitter and a large energy user, so why should Alcoa be excused from an emissions trading scheme?

Alan:  Let me start off by saying that Alcoa is fully supportive of the introduction of an Emissions Trading Scheme that supports greenhouse solutions and Australian jobs. 

I acknowledge that we, at Alcoa, are asking for recognition under what the Government is now calling the Carbon Pollution Reduction Scheme.  We are not asking to be excused under the scheme, but we, like other trade exposed companies, are asking for some assistance and there are a few reasons for that. 

First, it’s important to realise that implementing a carbon price scheme in Australia represents an international competitiveness challenge for Alcoa, as well as other companies that are emissions intensive and trade exposed.  So for companies which can pass on their costs to customers, the scheme might be manageable and not provide any significant issues.  For us though, we cannot pass on our costs and that is because we don’t set our own alumina or aluminium price.  The price is set globally by the London Metals Exchange (LME) which is independent of Alcoa.  This means that under an Emissions Trading Scheme we [Alcoa] would have to absorb the cost increases.  And if we are absorbing a significant cost that our competitors don't have, that places us at a big competitiveness disadvantage.

Q: Aren’t increased costs just something the aluminium industry will have to live with if we are to reduce greenhouse emissions, which is what emissions trading is all about?

Alan: Obviously the purpose of an emissions trading scheme is to reduce greenhouse emissions.  But it would completely defeat the purpose of emissions trading if important industries in Australia were forced offshore.  If industry here was not internationally competitive anymore, because of emissions trading, they would then close and the gap in the market would be picked up by overseas operations - including those with lesser environmental standards. The emissions would simply move overseas [carbon leakage] and ultimately the result of this could mean increased greenhouse emissions and worse outcomes for the environment.

Q: Why would the environment be worse off if businesses like Alcoa leave Australia?

Alan: Carbon leakage is a problem if we don’t get the scheme right.  To give you an example, Alcoa’s alumina refineries in Australia are amongst the most greenhouse and energy efficient in the world.  In fact, every tonne of alumina made by Alcoa in Australia produces less than half the greenhouse emissions and uses just over half the energy than alumina made in China.  So, if emissions intensive trade exposed industries are not recognised under the Carbon Pollution Reduction Scheme, it won’t solve the greenhouse problem, it could actually make it worse.  The problem will just be shifted to another part of the world, and possibly with increased environmental impact.

Q: The Green Paper would suggest that the Government will recognise emissions intensive trade exposed industries in the final scheme – doesn’t that mean you are off the hook?

Alan: Under the Green Paper proposals, emissions intensive trade exposed industries are provided with partial recognition. Aluminium smelters would initially receive permits for up to 90% of direct CO2-equivalent emissions and alumina refineries would receive permits for up to 60% of direct CO2-equivalent emissions. 

This may be reasonable for us as a starting point, but it is no free ride and the challenge does not end there.  These permit allocations will decrease over time and industry needs certainty that any erosion of permit allocations under the Carbon Pollution Reduction Scheme, does not happen at an unsustainable rate.  Key Australian industries would be in jeopardy if allocations are eroded, while key competitors overseas do not face an equivalent carbon cost.

What companies like Alcoa need as the scheme comes into force and progresses over the years, is for the recognition to continue until developing countries, like China, come online with emissions trading. Then, when we have a level carbon playing field across the globe, those permits can be wound back because everyone is in the same boat.

Q. Alcoa has been vocal against a National Renewable Energy Target – aren’t you avoiding responsibility?

Alan: We acknowledge that renewable energy has a really important role to play in the solution to climate change and we support the renewable energy industry.   

The challenge with renewable energy is that it currently comes at a significant cost increase above other sources.   We make no secret of the fact that we are a big energy user and so for us a badly designed NRET would add significantly to our cost.  Like the costs associated with emissions trading, we won’t be able to pass that cost on, for the reasons I have already described, and if our competitors in other counties are not paying the same cost it puts us at a great disadvantage. 

There is a very real chance that under a badly designed NRET Alcoa could be out-competed by companies overseas which are not paying for renewable energy. That leads to all the same implications that I described earlier.

We are not saying to the Government ‘scrap the NRET’, but what we are saying is that care needs to be taken with finalising the policy around the NRET to ensure that it’s not implemented in a way which damages high energy using companies in this country. 

For more information …
To understand more about Climate Change, the Carbon Pollution Reduction Scheme, the National Renewable Energy Target and what it will all mean for Alcoa, visit www.alcoa.com.au/climatechange.

Watch Alan Cransberg and Alcoa’s Manager of Environment and Sustainable Development, Tim McAuliffe, explaining these challenges to Alcoa employees. Click here.