Carbon taxes may manacle metals producers by 2024: analysts

Major metals-producing regions worldwide could start charging domestic carbon emissions taxes as soon as the first half of the current decade, according to analysts consulted by S&P Global Platts. This could be in line with the European Union's Emissions Trading System, and could help prepare exporters outside the EU for the EU's planned introduction of a carbon border tax, the analysts said.

Russian oligarch Oleg Deripaska advocates that a $100 tax should be levied per metric ton of carbon dioxide produced, in all countries and across all industries, his spokeswoman told S&P Global Platts.

The tax could be sanctioned by the United Nations, according to Deripaska, who believes that only a financial incentive accepted globally could make a change.

One analyst called the $100/mt figure" massively exaggerated," and designed simply to attract attention to the proposal. Another said such a tax could be "suicidal for the metals industries except for one company, Rusal" - the primary aluminium producer in which Deripaska is an indirect shareholder. The businessman owns 35% of Rusal's majority shareholder, Russian power company En+.

Thanks to being able to power up to 90% of its production by hydroelectricity, Rusal is understood to have an unparalleled low carbon footprint – emitting circa 4 mt of CO2 per mt of aluminium produced – against the world's average of 12 mt. In China, where over half of all power generation is coal-fired, carbon dioxide emissions in aluminum smelters may reach 20 mt per mt of metal produced.

Even for Rusal, a tax of $100/mt of CO2 mt emitted would turn into a $400 tax per mt of aluminum produced, eroding almost a quarter of the metal's $1,720/mt market price. Should the same tax be applied to steel, the fee would wipe off even a larger revenue slice. Even at a minimal 2 mt CO2 emission per mt of steel produced, the resulting $200/mt tax would be equivalent to just under half of today's rolled steel price, Platts calculates.

"No business worldwide will withstand such charges, but even if a modest carbon tax is introduced for both aluminum and other metals, steel especially [as costlier steel feeds into market interest in substitutes], Rusal will stand to gain from the move," Maxim Khudalov, senior director at Moscow-based analytical credit ratings agency ACRA, told Platts.

Rusal, with its captive hydroelectric power within the En+ group, is viewed as exceptional and on that ground its shareholders' recommendations on tax will not be taken as a guidance, according to analysts.

EU preparing carbon border tax

The European Commission has started devising a so-called carbon border tax that will be levied on EU imports of CO2 intensive goods and commodities. This is designed to equalize the cost of carbon emissions within the EU and those elsewhere, according to EC President Ursula von der Leyen.

The move aims to encourage non-EU countries to introduce emissions charges similar to those applied to EU manufacturers. It will hit hardest those industrialized nations with predominantly coal-fired power generation. China, Brazil, Russia, India and several Southeast Asian states could all face inflated costs for products produced domestically should the tariff apply, and their metals exporters will be among those most affected, several analysts opined.

"EU does not need steel as such but only as a material to make tools and machines," ACRA's Khudalov said. "Germany, being the main engineering hub, is concerned most and seems least supportive of the proposed tax: when demand is already weak and tax-burdened steel could make machines 1.5 times more expensive, it is enough to procrastinate over."

The new tax will certainly be introduced, around 2021-2022, but not only for the sake of climate: any policy providing extra budgetary income in light of the growing social commitments of EU state governments and businesses would be welcome and timely, according to one analyst.

"EU metal producers' expenses on curbing emissions will most likely be compensated by remissions in income tax, while their competitors from outside the union will not have the same benefit, so it is hard to believe the tax will be there to help a creating level playing field for all," Khudalov said.

A system of tax-free emission allowances could be introduced, corresponding to that achievable with the best available technology, according to the ACRA analyst. For instance, emissions of 1-1.5 mt CO2 per mt of steel produced could well be exempted, with the remainder charged potentially in line with today's EU carbon allowance of €25/mt ($27.63/mt), he said.

The US and major Asian economies will be next to embrace the initiative on taxation, according to Khudalov. Russia is likely to follow suit, although hardly before 2022-2023, he said.