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Why Big Alumnium's Backing A Carbon Cap

Jim Tankersley of the Los Angeles Times has an useful piece today asking why companies like Alcoa are rallying behind a cap-and-trade system for greenhouse gases. After all, Alcoa is one of the world's largest alumnium manufacturers, and it relies heavily on fossil fuels: Its 9,000-acre smelter in southwestern Indiana uses as much coal power each year as a city of 200,000. A carbon cap would likely raise energy prices for the company in the immediate term and put it at a disadvantage against competitors in China and elsewhere. Why would its executives support this? Well, they seem to be confident they can adjust:

Alcoa's aluminum operations across the U.S. generated 23 million metric tons of greenhouse gas in 2007. The cost per ton of emissions permits hasn't been determined yet, but if it starts at $20—a number that falls in the middle of recent Environmental Protection Agency projections—then cap and trade might add $460 million a year to Alcoa's annual operating costs.

Under an approach favored by industry, the government could soften the blow by giving companies like Alcoa nearly enough free permits in the early years of cap and trade to cover emissions.

The aluminum manufacturer has already cut emissions by a third from 1990 levels. If it continued to reduce emissions—through such measures as replacing petroleum lubricants in its rolling mills with advanced vegetable oils—while keeping its full quota of free permits, it would have surplus permits that it could sell to other emitters. Those profits could help pay for greener technology.

In effect, a cap and trade system designed that way would stimulate the drive to reduce emissions, advocates say.

And Alcoa officials see another benefit: Government pressure for cleaner air would increase consumer demand for lightweight cars and more efficient buildings—boosting the market for aluminum.

Obviously the calculus will be different for every company, but here's one view. Note that Alcoa's sunny outlook hinges mainly on the company's ability to shape climate legislation in certain ways—to have pollution permits doled out for free rather than auctioned off by Congress. The company seems to have long ago made the decision that cap-and-trade was inevitable, and it could wield more influence by scooting up to the table than by opposing the bill from the back corners. Seeing as how, for now, Waxman-Markey in the House is going to hand out a lot of free permits to aluminum companies, Alcoa may just win that bet...

--Bradford Plumer