Cap and Trade or a Carbon Tax will they completely kill industry?
Ontario’s announcement that it will join Quebec and California in a carbon cap and trade regime will impact several components of the construction sector, notably cement and steel.
The Liberal government is sketchy on details so far, promising to reveal more in the fall but the intent hasn't come as a surprise. While the government denied it was contemplating a carbon tax or cap and trade system during the 2014 election, it has been studying the issue for seven years, says steel stakeholders.
The bottom line, however, is no matter how it is structured, it will add to the cost of steel components. That cost will be passed along to contractors, owners and ultimately, end users.
In concept the system is simple enough, said Ron Watkins, Canadian Steel Producers Association (CSPA) president, but the devil, as always, is in the details and in practice it's a complex mechanism.
"Certainly we anticipated it," said Watkins. "And we've all been working on climate change programs and planning ultimately for legislation. What we didn't know was whether it would be cap and trade or a carbon tax. So far the government documents are not detailed enough to give us a real sense of exactly how this would work."
Cap and trade works by assigning limits by industry on how much carbon dioxide can be emitted. Companies either invest in technology to reduce those emissions and stay under the cap or they have to buy credits on an open market. Those credits are sold by companies whose emissions are under their assigned caps and therefore surplus.
Over time, the caps are reduced, further incenting industry to keep investing to emit less carbon dioxide or be forced to buy credits at market rate. At the same time, with fewer credits available as those caps shrink, the price of those credits will rise.
California's system was effective Jan. 1, 2013 and is being applied to large electric power plants and industrial plants this year.
Quebec signed in Jan. 1 2014 and will give credits to industries which are vital to the economy such as cement and aluminum manufacturers. The steel industry is hoping for the same treatment in Ontario.
Implementing the scheme is not simple. The European Union brought in its system, the European Union Emission Trading Scheme (EU-ETS) a decade ago and it was rife with issues.
Most notably, critics charged, large companies in the steel and cement sector lobbied furiously to get free cap credits, claiming they would otherwise be forced to shut down their plants. As a result, it's claimed, some companies actually ended up with a surplus of credits which were sold at profit.
There are other allegations of market irregularities and some critics fear the system is vulnerable to manipulation and needs stringent oversight, much like the stock and bonds markets which were implicated in the global meltdown of 2008.
Steelmaking is an energy hungry process, said Watkins, involving high heat to melt iron and bond it with other components. More energy is also expended reheating and shaping steel slabs into I-beams, sheet metal and other components.
However, he said, on the credit side, some steel plants recycle scrap as part of their mix which should be recognized in the cap quota, while other plants use only virgin ore.
There's also the issue of where that energy comes from.
"Three of our Ontario producers do use metallurgical coal (coke) in their steelmaking process along with iron ore and other raw materials in what's called the 'integrated' method," he said.
"They use natural gas, not thermal coal, as a heat source. The other method of making coal is the electric arc furnace."
As it stands now, Watkins said, there are no steel foundries in either Quebec or California so there are no clues as to how the quotas will be assigned.
Three of CSPA's Ontario members make steel using the integrated method — ArcelorMittal Dofasco (Hamilton), Essar Algoma (SSM) and U.S. Steel Canada (Lake Erie, Hamilton). Three others make steel using an electric arc furnace – ArcelorMittal Dofasco (Hamilton), Gerdau (Whitby, Cambridge) and Ivaco (LOrignal).
As it stands U.S. Steel in Hamilton and Gerdau in Cambridge are not melting primary steel. Two other mills in Ontario, Hamilton Specialty Bar (Hamilton) and ASW (Welland) also make steel.
What the steel industry wants, he said, is a level playing field. If other provinces and jurisdictions in the U.S. and overseas don't impose similar cap and trades systems or carbon taxes, then Ontario producers will be at a disadvantage.
Also, with steel production and global business — like cement — it's opportune for corporations to switch production to plants they operate elsewhere where there are no carbon caps or taxes.
This will further complicates things with border duties and taxes for imported steel, Watkins said.
Ultimately, however, steel buyers will see prices rise to accommodate the cost of cap and trade in Ontario and carbon taxes in other jurisdictions.
In California, for example, one steel industry executive complained of already investing $1 billion in advanced manufacturing equipment at their reheating and rolling plant to make it more efficient. Then it had to pay carbon taxes on the energy and now work with cap and trade, something his competitors in the eastern U.S. and Asia don't face.
Brett Smith of the American Iron and Steel Institute echoed Watkins' concerns and those of European steel makers, saying a level playing field is essential if cap and trade or even carbon taxes are going to have any effect other than damaging the domestic steel industry — which is a vital creator of jobs.
"Even with a carbon tax on energy, 20 per cent of the cost of steel is energy costs whether that's electricity, natural gas or coal," he said.
"The issue is trade exposure. Both Canada and the U.S. are in competitive global markets."
Unless limits are placed globally, he said, other jurisdictions without regimes will have a distinct price advantage which limits competition and will only shift carbon emissions from one geographic location to another.
Proponents of cap and trade, however, say similar arguments were made in Europe and thus far no steel makers have pulled up stakes and left.
Daily Commercial News - Ontario carbon cap and trade could impact steel producers