China starts consultation for enrolling aluminum smelters into compliance carbon market

The Chinese government opened consultation for the emission accounting, reporting and verification guidance for aluminum smelters, paving the way to enroll another industry into its national compliance emission trading scheme, Ministry of Ecology and Environment said in a notice late March 15.

China owns the world's largest ETS, with 5.1 billion mt of CO2 emissions covered annually, MEE data showed. Nevertheless, since the ETS launch on July 16, 2021, it has only covered the power generation sector. This consultation for aluminum industry laid foundations for the long-awaited ETS expansion.

Such a move could increase costs for Chinese smelters that currently rely on thermal power but benefit those that consume renewable energy, market sources said. To reduce liable emissions under the ETS, primary aluminum smelters might be pushed to adopt green technologies and non-fossil fuels, they added.

Market sources said this policy will also indirectly benefit the secondary aluminum industry, which refers to aluminum production from recycled aluminum scraps.

The guidance required aluminum smelters to report their CO2 emissions from fossil fuel combustion, processing of raw materials, carbonate decomposition, as well as indirect emissions from electricity and heat consumption. It implied that smelters would need to pay for these emissions after being enrolled into the ETS.

Aluminum smelters also have to report carbon tetrafluoride (CF4) and carbon hexafluoride (C2F6) emissions from the anode effect, which means extra emissions incurred due to low alumina concentration in the electrolyte. This signaled the first attempt for China ETS to cover greenhouse gases other than CO2.

China's aluminum industry incurred around 550 million mt of annual CO2 emissions as of 2022, accounted for 5% of the country's total CO2 emissions, latest available data from China Non-ferrous Metals Industry Association, or CNIA, showed.

Based on the latest legislation, entities with annual emissions above 26,000 mt will be covered under the ETS. About 80 aluminum smelters touch this threshold and will be considered as eligible, according to CNIA.

Curbing emissions from China's aluminum industry is also expected to significantly accelerate global decarbonization. China is the world's largest aluminum producer, accounted for about 59% of global primary aluminum production in 2022, according to the International Aluminum Institute.

Caging the 'electricity-eating tigers'

Analysts highlighted that the guidance required aluminum smelters to report their indirect emissions from electricity consumption, which accounted for 85% of the primary aluminum industry's total CO2 emissions, data from the government's carbon peaking action plan for nonferrous metals industry showed.

Primary aluminum industry is commonly known as "electricity-eating tigers" due to its high electricity consumption. Notably, China's primary aluminum output rose 4.9% year on year to 41.59 million mt in 2023, which equated to 559.4 billion kWh of electricity consumption, or 6.1% of China's total power consumption, S&P Global Commodity Insights data showed.

Over 60% of China's aluminum production capacity is still powered by fossil fuels, official data showed.

Notably, the guidance released on March 15 for public consultation allowed smelters to report "zero emissions" from electricity consumption if they use captive non-fossil power generation units or purchase renewable electricity through power purchase agreements.

Such arrangement is likely to encourage investments in distributed solar PV facilities and push up the trade volume of renewable electricity in the power market, market sources said.

Meanwhile, in the longer term, aluminum smelters are likely to be gradually relocated to regions with abundant renewable resources, considering the lack of long-distance transmission channels, the sources added.

For instance, Chinese primary aluminum smelters have transferred some of their capacities to southwest provinces Sichuan and Yunnan with rich hydropower resources.

Before the ETS was introduced, the Chinese government has already required renewable energy to account for over 25% of the total energy used in primary aluminum production by 2025, and over 30% by 2030, in order to meet the country-level climate target of carbon peaking before 2030.

Other details

The guidance only provided instructions for companies to calculate and report their emissions and for provincial governments to conduct verifications. It did not specify how compliance emission allowances, namely CEAs, will be allocated to companies in the aluminum smelting industry after being enrolled into the ETS.

The consultation is open to all companies and individuals to comment and will close on March 31.

Based on MEE's earlier announcement, besides power generation and non-ferrous metals, the ETS will also cover iron and steel, building materials, petrochemical and refining, chemicals, papermaking and aviation in future. The eight industries jointly accounted for about 75% of China's total CO2 emissions, official data showed.

CEA price was at Yuan 80.50/mtCO2e ($11.34/mtCO2e) as of March 18, official exchange data showed.