Is carbon your competitive advantage?
As the EU carbon price pushes above €50/mt, extractive industries such as metals and mining will be increasingly motivated to move to carbon neutral. The consumers will ultimately pay the bill, but can they be sure what they buy is truly zero carbon?
As more and more corporates pledge to be “net zero” by 2030, the race is on to either find innovative ways to reduce emissions, or to buy carbon credits as an off-set.
In the metals and mining industry, traditional cost advantage could be thrown out the window and replaced with a “carbon advantage”. Normally, when investing in a mining company you will assess their reserves, extraction costs, and processing fees. Once you know the basics, you can measure where this company is on the global cost curve and how it is likely to fair during the ups and downs of the commodity cycle. But as the cost of carbon surges, the incentive to move to lower carbon increases dramatically.
Let’s look at something familiar — Tesla.
We can see that Tesla’s net operating profit is almost matching its’ sale of regulatory credits. As carbon prices go up, so does its’ profit. Income from carbon credits for Tesla in 2021 are estimated to be circa $2 billion — not a small contribution to the bottom line!
So let’s take the example of aluminium; one of the most energy intensive metals. At present, the global average of CO2 emission for the production both virgin and recycled aluminium is 11.5 tons of CO2 per ton of aluminium.
With carbon at €50/mt, the carbon value is €550/mt of aluminium. (The current price of aluminium is approximately €2100/mt). Rusal, the large Russian aluminium producer, are advertising their low carbon brand “Allow” as 4mt of carbon per ton of aluminium — yes 7 mt less than the global average. Could this give them advantage of €350/mt or 16% of the total price?
Alcoa Corporation, Apple Inc., and Rio Tinto Group have teamed up on a process called Elysis that emits pure oxygen rather than carbon dioxide, eliminating the latter entirely from the production equation. Norsk Hydro ASA have introduced a number of low carbon products, either from the amount of CO2 emitted from the production of virgin metal, or alternatively made from recycled materials.
European metals and steel manufacturers have been granted carbon credits which they can sell in the market subject to them meeting (or beating) carbon emission targets. So just like Tesla, they can benefit significantly from selling carbon off-sets. So linking investment to low carbon production is really starting to make sense from both a social and economic perspective.
Of course policing this system is becoming increasing important. There are already many accusation of “green washing” where companies are accused of portraying their products as environmentally friendly when they are not. Or worse still “green fraud” or falsely reporting (or duplicating the reporting) of carbon off-sets along the production process. Carbon is already a multi-billion dollar industry and there is no doubt that accurately measuring carbon emissions and tracking supply chain provenance is of crucial importance.
Simon Collins is the CEO and Co-Founder of TradeCloud
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