How a filthy smelter can help clean up Alcan's books

PATRICK BRETHOUR
Globe and Mail
February 1, 2008

The creaking Rio Tinto Alcan aluminum smelter in Kitimat is one of the great greenhouse gas sinners of British Columbia, placing a close second for the title of the province's worst climate change offender.

That looks to be a perilous position as British Columbia moves to implement policies to back up its pledge to slash greenhouse gases by a third over the next 12 years. All those carbon dioxide molecules streaming into the air will soon have a price. For Kitimat as it exists, any price for carbon is all pain, a liability on the balance sheet.

But two events this week, just hours apart, point to a much different possibility - of Kitimat's greenhouse gases becoming an asset for Alcan, one that might just tilt the balance in favour of proceeding with a $2-billion (U.S.) modernization project.

The first event was the revelation from B.C. Premier Gordon Campbell that Ontario and Quebec are interested in joining his climate change crusade and are now sitting as observers in the talks to set up a regional trading system to cut greenhouse gases.

Later in the day, the B.C. Utilities Commission gave its approval to a deal between B.C. Hydro and Alcan to sell electricity from Kemano, the power plant associated with the Kitimat smelter. That approval was the last condition Alcan had laid out before proceeding with Kitimat, and means the company will now scrutinize its internal financials before its board issues its verdict in April.

Whatever the other merits of the modernization project, it comes with a conspicuous benefit in Gordon Campbell's British Columbia: Greenhouse gas output would fall dramatically with the upgraded smelter, as modern technology took the place of machinery that was barely up to speed when it was installed in the 1950s. Even by the least favourable measure, Alcan's emissions would tumble by 40 per cent in B.C.

The same is not true for much of the company's operations in the rest of the country, where it either already has modern technology or doesn't have active plans to upgrade other older facilities.

And that is why the emerging alliance between B.C., Ontario and Quebec could be a significant plus for Kitimat and Alcan, as the three provinces lay the foundation for a cross-country trading system for greenhouse gas credits. The essence of that system is that those who cut emissions more than expected can cash in by selling the difference as a carbon credit to those who haven't found a cost-effective way to reduce their carbon output.

For now, all that is being said publicly is that Ontario and Quebec are attending the sessions as observers. But a senior official with the B.C. government confirms that the two eastern provinces want to join the Western Climate Initiative, (which may want to consider renaming itself shortly).

The rules are still being written for the WCI, but the senior official said the entire reason for the regional initiative is to allow for the trading of carbon credits across jurisdictions. Add it all up, and it means that Alcan could absorb the cost of reducing emissions in Quebec by cashing in carbon credits from British Columbia.

Alcan's stated preference is for an intensity-based system, where the yardstick would be the amount of greenhouse gases generated for a unit of production (in Alcan's case, per tonne of aluminum). On that basis, Kitimat's refurbished smokestacks look like even bigger assets, since Alcan estimates it will be able to slash its intensity by nearly two-thirds.

But even using the most stringent measurement, an absolute reduction in emissions, a significant amount of cash could be in play. The company says emissions would fall by 500,000 tonnes a year under the expansion project, even with output rising. Using the current price of carbon in European markets, that results in a credit worth about $15-million (Canadian).

Set against a total cost of $2-billion (U.S.), that sum might seem like a pittance. But the Kitimat project is, like every other major construction project in B.C., feeling the strains of inflation as the cost of steel, concrete and labour soar by double digits annually. That $15-million could spell the difference between a marginal project that falls short of an acceptable return, or one that just makes it over the hurdle - a shade of green that any executive can embrace.
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