Study of the integration of aluminium and carbon markets

Abstract

Aluminium is the most abundant metal in the Earth's crust but, because aluminium was isolated experimentally only in 1827 and produced in commercial quantities only after 1886, its production and use is many times less than that of iron. However over twice as much aluminium is produced as copper and the annual percentage growth in its consumption between 1985 and 1998 at 2.8% is significantly greater than that of iron and steel. The growth of the Aluminium industry is tied with the growth of several economies. In recent times, Aluminium industry has focused on developing energy saving and environment friendly methods of production to gain acceptance. To add to it, some of its unique features like lightweight, strength, recyclability, corrosion resistance, durability, ductility, formability and conductivity have proven to be conducive to many industries. It hence becomes important to study the factors impacting the Aluminium industry. The Aluminium industry is highly energy intensive and hence indirectly guided by the carbon markets. We have seen, many companies in the industry actively trade in the carbon market. In this study, we try to present a statistical relation between the returns of the Aluminium and Carbon prices and decipher the reason behind such active trading. We establish a causal relationship between carbon and aluminum industry by the use of Granger’s causality test and Johansson’s test. We conclude that Aluminium shares a sympathetic relationship with carbon markets and the carbon regulation indirectly affects the aluminium industry.