Translating Climate Change Issues Into Operational Reality

David ClarryMarch 5, 2008

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Climate Change

• Why is the world paying more attention to climate change

• What is the operational / technical “target” for CO2 emissions reduction

• What are the mechanisms that put a cost on CO2 emissions, and what might that cost be

• What are the implications in steel production costs

• What can we do

Clim

ate

Ch

an

ge

3

Wh

y

IPCC SummaryIntergovernmental Panel on Climate Change – Climate Change 2007: Physical Science Basis, February 2007

4

GHG Emissions by Type and Source

GHG Gas CO2e Warming Impact

(Relative to CO2)

Carbon Dioxide (CO2)

1

Methane (CH4) 21

Nitrous Oxide (N2O) 296

HFCs 120-12,000

PFCs 8,600-10,000

SF6 22,000

Wh

y

6

Reduce by how much ?From IPCC Fourth Report

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Changes in GHG & GHG Intensity (2.5C, 3.5% GDP Growth)

0

10

20

30

40

50

60

An

thro

po

gen

ic C

O2e

(G

igat

on

nes

)

0

0.2

0.4

0.6

0.8

1

1.2

Rel

ativ

e G

HG

Inte

nsi

ty

Total Emissions

Emissions / GDP

A very rough reduction scenario …

• Canadian target of 20% below 2005 by 2020• Bali non-binding agreement to 25% to 40% reduction in Annex 1

countries by 2020

35% intensity reduction by

2020

How

Mu

ch ?

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Some key jurisdictional actions

• Europe – ETS, system of hard caps on emissions

• United States – state initiatives aimed initially at energy sector

• Canada– Alberta – regulation in place as of July 2007

• 12% intensity reduction target by December 31, 2007• Achieved by reductions, purchasing offsets, or paying

$15/tonne– National - draft Clean Air Act

• 18% intensity reduction from 2006 levels by 2010• 2% annual intensity reduction every year thereafter

• Australia – state initiatives, potential for national initiative

How

Mu

ch ?

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A world of opportunities and/or regulation

Most of world is part of KyotoMany of our project countries are eligible for credits

Kyoto Annex 1 Countries (emissions targets)

Kyoto Annex 1 but no mechanism in place

Kyoto “Non-Annex 1” – credit opportunities

Non-Kyoto reduction regulation

How

Mu

ch ?

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Developing Country Credits are Real

• ~$2 Billion of CDM credits have been sold to date– ~ $200 million of this revenue has gone to Iron & Steel

projects

How

Mu

ch ?

StatusSum Of ktCO2/yr

Sum Of 2012 ktCO2

Sum Of 2030 ktCO2

Sum Of kCERs

Count Of CDM_Projects

In Validation 223,955 1,137,894 3,892,142 1,849 Registered 188,248 1,178,474 3,478,525 102,544 895 Other 21,329 107,010 366,776 - 139

Value of Registered at $25/t 4,706 29,462 86,963 2,564 ($ Millions)

Status (I&S Only)Sum Of ktCO2/yr

Sum Of 2012 ktCO2

Sum Of 2030 ktCO2

Sum Of kCERs

Count Of CDM_Projects

In Validation 18,773 92,994 248,071 86 Registered 6,184 41,556 85,974 7,256 33 Other 338 1,789 5,259 5

Value of Registered at $25/t 155 1,039 2,149 181 ($ Millions)

Ref: www.cdmpipeline.org (January 26, 2008)

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Carbon credits represent real projects

• Yangquan Coal Industry (Group) Co., Ltd. - Environmental Finance Magazine “Carbon Finance Transaction of the Year”– use of coal mine methane for power generation

and alumina production projects– reduce emissions of CO2 by 17.8 million tons

between 2007 and 2012– Also reduces SOx, NOx

• Iron & Steel– Combined Cycle Power Plant to generate electricity

from blast furnace and coke oven

– 6.6 MtCO2 reduction over 10 years

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Potential mitigation / trading costs• EU credit value has ranged from less than 1 Euro to more

than 20 Euros over the past year• A longer term view can be gained from costs of abatement

Abatement Costs - Representation of Cost Curve from McKinsey

-200

-150

-100

-50

0

50

0 5 10 15 20 25 30

Abatement beyond "business as usual"

Co

st o

f ab

atem

ent

(Eu

ro/t

CO

2e)

18 Gt / 550 ppm

26 Gt / 450 ppm

REF: McKinsey Quarterly 2007

Building Insulation

Fuel Eff iciency in Commercial Vehicles

Lighting & Air Conditioning Systems

Water Heating

Nuclear

Low Cost ForrestationCCS, New Coal

CCS, Coal Retrofit

Industrial CCS

How

Mu

ch ?

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Industry impact: example for integrated steel

• A “typical” integrated steel mill could experience carbon costs in the range of $17/t to $55/t steel

• If CO2 credits were $40/t (McKinsey curve) this would be higher

Existing Integrated Steel Coke Sinter BF BOF Slab Reheat HSM Other TotalProcess StepLow Gj/t stage product 3.5 1.7 13 -0.5 1.36 0.34

kg CO2e/t stage product 160 184 1300 24 111 28High Gj/t stage product 5.1 1.9 16 0.5 2.16 0.54

kg CO2e/t stage product 234 200 1600 40 176 44Yield t/t steel 0.38 0.73 0.90 1.02 1.00 1.00

Content in Finished SteelLow Gj/t hot rolled steel 1.32 1.25 11.67 (0.51) 1.36 0.34 1.8 17

kg CO2e/t hot rolled steel 60 135 1,167 24 111 28 145 1,670 High Gj/t hot rolled steel 1.92 1.40 14.36 0.51 2.16 0.54 3.3 24

kg CO2e/t hot rolled steel 88 147 1,436 41 176 44 256 2,188

GHG Cost RangeLow $10 0.60 1.35 11.67 0.24 1.11 0.28 1.45 16.70 High $25 2.20 3.67 35.90 1.02 4.41 1.10 6.39 54.70

How

Mu

ch ?

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Bauxite Mining

Alumina Refining

Anode Production

Primary Smelting

Primary Casting Mine to Ingot

kg CO2e / 1000kg Bauxite

kg CO2e / 1000kg Alumina

kg CO2e / 1000kg Anodes

kg CO2e / 1000kg Aluminum

kg CO2e / 1000kg Primary Ingot

kg CO2e / 1000kg Primary Ingot

Process - - 402 1,557 - 1,763 Electricity 1 64 66 5,225 42 5,529 Fossil Fuel 4 707 150 - 82 1,530 PFC - - - 970 - 989 Total 5 771 618 7,752 125 9,812 Factor 5.272 1.923 0.435 1.020 1.000 GHG Cost / 1000 kg Al 0 19 15 194 3 245 @ $/t CO2e 25Ref: Life Cycle Assessment of Alumium: Inventory Data for the Primary Aluminum Industry, Year 2005 Update

Industry impact: example for aluminum

• Cost of GHG emissions from “average” smelter is ~ $200/t • From recent concept study of “BAT” plant using hydroelectric power

– Smelter & anode emissions ~ 1,000 to 2,000 kg CO2e per 1,000 kg Al– Cost of emissions $25 to $50 at $25/t CO2e

• Actual cost of CO2e ? – Europe winter 2008 - $40/t CO2e

How

Mu

ch ?

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Impact on industry

• Regulatory changes and uncertainty– Regulation in Europe & Japan (and Alberta)– Pending regulation in many jurisdictions – Evolving global agreements will lead to more

regulation within plant lifespans• How to level playing field with developing countries

• Public scrutiny– Some EIA processes now require GHG analysis– Investors and stakeholders looking for GHG

responses

• Financial opportunities– Some Jurisdictions (South America, Russia, China, …)

offer projects the potential to sell GHG credits

Imp

act

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Impact on industry (cont.)

• A changing climate – Permafrost and ice roads less reliable– Anticipated trends in water availability, sea levels,

….– Warnings of more extreme weather variations

Imp

act

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Areas of response

• Abatement– Energy & GHG efficiency– Process technology (non-carbon reduction,

biomass reductants)– Alternative energy sources

– CO2 capture and sequestration / fixation

• Adaptation– Design standards– ESIA considerations– Retrofit

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Stages of response

• Planning / risk management

• Technology development / demonstration

• Operations / management action

• Capital investment

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What is happening now - Hatch Project Examples

• GHG Inventories & lifecycle analysis• GHG abatement planning• Energy efficiency studies with GHG component• Competitiveness studies• Clean coal technologies – studies and demonstration

plants– Coal Bed Methane liquefaction for transportation fuel

• CO2 capture / sequestration / fixation– Boiler flue gas CO2 capture for process use– Captured CO2 for enhanced oil recovery– Reducing bauxite residue PH through CO2 fixation (Alcoa)

• Development of GHG credits for project financing• Alternative Energy• Adaptation - Australia Western Corridor water recycling

Hatch

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Thank You