Ohio State’s Andersons Program in International Trade Offers New Research on How Carbon Taxes May Impact the North American Aluminum Industry

Feb. 25, 2015

With its energy-intensive production practices and competition from international producers, the U.S. aluminum industry is extremely vulnerable to international competition, recently noted Ian Sheldon in a policy brief highlighting new research from Ohio State’s Andersons Program in International Trade on the North American aluminum industry and how carbon taxes may impact it.

Professor Sheldon currently serves as the Andersons Professor of International Trade and spent considerable time in 2014 conducting research on the topic with Professor Steve McCorriston from the University of Exeter in the UK.

A carbon tax is a form of carbon pricing meant to reduce greenhouse gas emissions by taxing emitters. Carbon pricing has been heavily debated in international policy circles in recent years.

“Whether a carbon tax or cap-and-trade system is used, the expectation is that certain energy-intensive industries downstream from electricity production, such as the steel, aluminum, chemicals, paper and cement industries, will face increased costs of production,” Sheldon notes in the policy brief. “As a consequence, much of the unilateral climate legislation that has been proposed also includes some type of border measure, popularly termed ‘carbon tariffs’ (Paul Krugman, New York Times, November 14, 2014), to be targeted at energy-intensive imports.”

In the event of the introduction of a carbon tax, it is anticipated that due to increased costs of production, industries that have energy-intensive practices, such as the aluminum sector, will shift production to countries with less restrictive climate policies in a process known as carbon leakage. This market shift will result in a reduction in the competitiveness of firms in countries where climate policies are implemented, including reduced profits and a loss of the share of the market, Sheldon noted.

The process to manufacture aluminum is very energy intensive, using anywhere from 14 to 17 megawatts of electricity per tonne of aluminum. The process also results in the direct release of carbon dioxide into the environment, as well as the further indirect release of carbon dioxide due to the energy production needed for the production process. Thus, the aluminum industry is a prime-candidate for carbon leakage, were a carbon tax to be implemented.

In the U.S. two firms account for 73 percent of the aluminum production in the American marketplace. Additionally, there is significant import competition from producers abroad.

As Sheldon notes in the brief, “In 2008, U.S. production of aluminum was 2.66 million tonnes, which was almost exclusively for domestic consumption. Total imports of aluminum were 2.81 million tonnes, of which over 71 percent was accounted for by Canada, the other major suppliers being Russia and Venezuela with 10 percent and 4 percent shares of U.S. imports respectively.”

In regards to the North American aluminum marketplace, Canada is an active aluminum producer and, in 2008, the country exported 64 percent of its total production to the U.S. In Canada, there are two firms that account for 82 percent of the country’s aluminum production.

Of particular importance regarding differences in the American and Canadian industries, the Canadian aluminum industry relies on hydro-electric energy sources in its production processes, while in the U.S. production is centered around the use of fossil-fuel based energy sources. This accounts for a large difference in the amount of carbon emissions from the Canadian aluminum industry in comparison to the U.S. aluminum industry, Sheldon said.

In analyzing the effect of U.S. carbon pricing on the North American aluminum industry, Sheldon and McCorriston evaluated the potential economic impact of the U.S. and Canada implementing differing carbon taxes. In doing so, they included analysis on the impact of the U.S. implementing a border tax adjustment, which is a tax on imports of aluminum that accounts for a carbon tax being implemented in the U.S.

The researchers found that without a U.S. border tax adjustment on aluminum imports, U.S. carbon taxes result in a 16 percent decline in profits in the U.S. aluminum industry. Additionally, they found that in this scenario the U.S. aluminum producers faced a loss of market share with aluminum producers in other countries taking on production. Sheldon writes, “In the absence of BTAs [border tax adjustments], the U.S. would have little incentive to unilaterally implement carbon pricing due to the competitiveness effect.”

However, if the World Trade Organization’s rules on border tax adjustments are interpreted by policymakers to place an emphasis on maintaining U.S. firms’ current share of domestic aluminum production, the researchers found that global carbon emissions may actually be unaffected or even reduced due to there being no loss of U.S. firms’ market share to other international producers.

Sheldon notes that regardless of the carbon tax and border tax adjustment adoption scenario, implementation will impact consumers: “It should also be noted that in both interpretations of WTO rules on BTAs, users of aluminum actually suffer a loss due to prices increasing by more than they would in a competitive setting.”

Sheldon has presented the research at a number of locations, including the 2014 World Congress of Environmental and Resource Economists in Istanbul, Turkey, the 2014 annual meeting of the Agricultural & Applied Economics Association, the 2014 annual meeting of the Southern Economic Association, as well as at recent events at Ohio State’s John Glenn School of Public Affairs, Iowa State University, and Ohio Wesleyan University.

To read the full brief, “Carbon tariffs: What might they mean for the North American aluminum sector?” visit http://go.osu.edu/yPz

February 25, 2015