The government’s expenditure on CO2 compensation for power-intensive industry, i.e. companies such as Elkem, Norsk Hydro and Alcoa, is estimated to reach NOK 100 billion over the next seven years.
The purpose is to prevent so-called carbon leakage – this means that industry that uses a lot of electricity, flags off to countries without the same emission costs. Already in 2023, the scheme costs NOK 4.7 billion.
The companies that receive the subsidies make a good profit. There are three industrial giants who run away with the lion’s share of the funds.
The Norwegian businesses to Norsk hydro, Chinese-owned Elkem and American-owned Alcoa got a combined 2.5 out of a total of 2.8 billions NOK which was distributed in 2021. They had a total profit of NOK 9.4 billion in the same year.
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– Equivalent to a tax cut of 2 percent
There is broad political agreement on the scheme, but from the academic side it meets resistance. The Tax Committee, which submitted its report with a number of proposals for tax changes before Christmas, is in favor of abolishing CO2 compensation.
– The scheme is very expensive, says the head of the Tax Committee Ragnar Torvik, professor of social economics at NTNU.
The Tax Committee has calculated that the CO2 compensation will result in an annual cost of NOK 12.3 billion on average.
– This corresponds to a reduced tax on employment and business income for everyone in Norway of 0.7 percentage points. In pure money, this means that the tax bill would have been reduced by two percent. It is a very high cost to protect some workplaces that are very capital and energy intensive, in companies that have been granted an exemption from the principle that polluters must pay, says Torvik.
The Tax Committee unanimously agreed to discontinue the scheme. Ragnar Torvik has this comment on the beneficiaries’ billion profit:
– It is good that business is making a profit. But when part of the profit is based on not having to pay for pollution, this is bad news. It will be a socio-economic mistake, because this is an important principle in the years to come, says Torvik.
– Too much incentive to pollute
In its report, the Tax Committee writes that it is doubtful that the scheme prevents carbon leakage.
It is justified, among other things, by the fact that many other factors affect location, such as access to natural resources and expertise, transport and transaction costs, prices of input factors, demand, laws, regulations and political stability.
The committee also points out that several competitors have other facilities in Europe that are also covered by the quota system, and that many other countries do not have a similar compensation scheme.
– Hydro, Elkem and Alcoa all argue that CO2 compensation makes it possible for them to keep their businesses in Norway, develop them further and invest in “green innovation” even though power costs are rising sharply. Isn’t that a good argument for keeping the scheme?
– Green innovation becomes more profitable the more expensive it is to pollute. It is not an effective way to stimulate green innovation to use large public funds to support technology that gives too little incentive to save energy, and too much incentive to pollute.
– Does not work as intended
Statistics Norway (SSB) is also critical of the CO2 subsidy. It will be costly for the state, which spends far more on this than the EU directive indicates, Statistics Norway points out in a consultation response to the revision of the scheme.
According to the directive, EU member states must not use more than 25 percent of the auction income from allowance sales for CO2 compensation.
– The compensation scheme applies to all EU countries, but the amount paid out in Norway is very high, compared to other countries, says research leader Cathrine Hagem at the Department of Environmental, Resource and Innovation Economics at Statistics Norway.
Statistics Norway estimates that the government’s expenditure on the CO2 compensation scheme in the next period will exceed the auction income by around 170 per cent.
– The scheme is unfortunate because it does not stimulate energy efficiency and stimulates more energy-intensive production. The more you produce or the more electricity you use, the more compensation you get. It weakens the incentives for energy saving and energy-efficient production, says Hagem.
– The companies that receive the support claim that compensation precisely makes it possible to invest in greener production?
– If it is desirable to support green investment, it can be done more efficiently than through CO2 compensation, says Hagem.
– Then the future becomes uncertain
Elkem is one of the three companies that runs away with the lion’s share of the CO2 compensation. It is absolutely necessary, argues communications director Fredrik Norman.
He emphasizes that 2021/2022 has been a record year, and that not all years are equally profitable in a “cyclical” industry. How the support works should therefore be assessed over several years, believes Norman, who is satisfied that the government is clear that the scheme should be continued:
– The decisive factor for Elkem’s investments in existing and new green industry in Norway is that they are competitive against the corresponding investments we can make in other countries and in other parts of the world.
Elkem competes globally with Norway as its starting point, Norman points out:
– There is increasing global competition to attract value chains for critical raw materials for the green shift, including minerals and metals. China is dominant in most areas, while the USA has come on strongly with support schemes through President Biden’s “Inflation reduction act”.
The EU and Europe are under increasing pressure to be able to have competitive framework conditions for green industry, at the same time that power prices are increasing as a result of the EU’s quota system for CO2 emissions. Therefore, the CO2 compensation scheme is an important climate-based reimbursement scheme, argues the Elkem director.
He also claims that the Norwegian authorities practice the CO2 compensation scheme in a stricter way than other European countries.
– It gives our competitors in these countries an unfair advantage. Therefore, we believe that, on the contrary, the Norwegian authorities should look at how Norway can ensure at least as active use of the scheme as other countries in Europe.
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– We are under pressure
– Would Elkem’s Norwegian operations have had to flag if there was no CO2 compensation?
– The competitiveness of Norwegian industry is already under pressure as a result of increased price contagion Norwegian hydropower receives from Europe. It contributes to unnecessary cost increases and uncertainty for the future. Without this arrangement, there is no doubt that it will be more difficult to defend investments in Norway compared to other countries.
Despite the fact that Norwegian industry uses clean renewable power, the power price is now increasingly set by gas and coal power producers on the continent, including high prices for CO2 quotas, Norman points out. The CO2 compensation helps to reduce costs. New development in Norway requires that the framework conditions are competitive and predictable, emphasizes Norman.
– Statistics Norway researchers as well as the Tax Committee believe that the scheme does not work as intended and suggest that it be discontinued. What is your comment on that?
– There is cross-party agreement in Norway to continue the CO2 compensation scheme. We are happy about that. This is an important part of the framework conditions that ensure the competitiveness of Norwegian industry.
– Had to close aluminum works
The Norwegian companies in Norsk Hydro received a total of NOK 1.7 billion in CO2 compensation in 2021. Despite a total profit in the same companies of NOK 4.5 billion, these subsidies are needed to be able to invest, modernize and develop the industry, says information director Halvor Molland:
– An example is the technology pilot at Karmøy, with investments of over NOK 4 billion and that we are now investing in aluminum recycling. We are also investing in research and development of new electrolysis technology without CO2 emissions and CCS technology for aluminum production, says Molland.
According to Molland, the indirect CO2 costs for power-intensive industry have meant that around half of Europe’s capacity for aluminum production has been shut down in the past year.
– In September 2022, Hydro closed the partly owned plant Slovalco in Slovakia. The direct cause was high electricity prices and a lack of CO2 compensation in Slovakia, which has meant that Slovalco has not had the opportunity to enter into long-term power contracts. The existing power contract was about to expire, and with today’s power prices there was no basis for continuing to operate the plant, says Molland.
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– Important also in profit years
American-owned Alcoa, which operates smelters in Mosjøen and at Lista, made a profit of NOK 2.5 billion in 2021, and received NOK 434 million in CO2 compensation in the same year.
Despite this, the company is dependent on CO2 compensation to compete in the international market, claims energy manager Ole Løfsnæs:
– CO2 compensation is an arrangement that partially mitigates the impact of a major competitive disadvantage and which gives us a certain predictability when the CO2 price drops. That is why it is important, even this year we are making a profit. Alcoa’s operating results vary from year to year, it is, after all, a cyclical market we live in. They are affected by a number of factors. Power is a very important one, but things like aluminum prices and raw material costs also have a lot to say. The Alcoa group filed for bankruptcy in 2022, partly due to high electricity prices.
Alcoa has aluminum works in several countries, most of them outside Europe, and these countries do not have a CO2 price surcharge in the electricity price, Løfsnæs points out:
– This speaks against the Norwegian works, especially when we have relatively demanding years, says the energy manager.