Three reasons why a Carbon Border Adjustment Measure will not work for aluminium

European Commission President Ursula von der Leyen committed to introducing a carbon border adjustment measure (CBAM) to protect the most exposed industries from carbon leakage.

Extending carbon pricing beyond Europe by obliging product carbon content declaration could have beneficial effects on the climate and industrial competitiveness.

However, after carefully assessing all design options, we concluded that a CBAM cannot provide carbon leakage protection for aluminium. Consequentially, it will not contribute to emission reductions in Europe or globally.?The energy transition will need more, not less, low carbon aluminium produced in Europe.

Therefore, aluminium must remain under the current carbon leakage framework, at least in the initial phase. At the same time, we must work with the Commission and broader stakeholders towards an effective CBAM post-2030.

But let me give you the three reasons why:

Indirect emissions and carbon costs?

Aluminium primary production is fully electrified compared to other sectors like steel or cement. Our exposure to indirect emissions carbon costs from electricity production is significant, with electricity representing up to 40% of our total production costs. But indirect carbon costs and indirect carbon emissions are two different things: while a CBAM could cover the indirect emissions embedded in import products, it cannot effectively mirror the indirect emission costs, which are a Europe-specific cost depending on regional power markets.

Because of the Emissions Trading System (ETS) in Europe, producers will still face higher electricity prices even when using 100% low carbon electricity. This means that European low carbon aluminium producers will be put at a direct disadvantage compared to similar products from outside the EU. In some cases, they even face higher costs for indirect CO2 emissions than foreign aluminium made with fossil fuel-based electricity.

A CBAM cannot be designed to provide the same level of protection as the new EU ETS State Aid Guidelines, which address the variety of CO2 costs passed through to aluminium producers by electricity providers in each region in Europe. The Guidelines allow for the compensation of these indirect costs until 2030. If the CBAM amends this framework, it will remove regulatory certainty without ensuring adequate carbon leakage protection. This translates into a perfect storm: higher global emissions, loss of jobs and increased import dependency.

The Commission's experts have so far not been able to explain how to address such a problem. Also, assessing indirect emissions of imported products at the border based on regional averages or default values will lead to free-riding behaviours because of the lack of transparency of electricity sourcing in third countries. More importantly, this would still not reflect the indirect costs faced by European producers.

Circumvention & source-shifting

The carbon footprint of European aluminium production (EU27, UK + EFTA) decreased by more than half since 1990, while we have increased import dependency. Today, Chinese exports of aluminium products account for more than 1 million tonnes, primarily carbon-intensive semi-manufactured products.

So couldn't the CBAM effectively stop the import of such carbon-intensive products from China and other regions that do not have the same climate regulations we have in Europe? The answer is no.

In Europe, the total primary production last year amounted to only 4.2 million tonnes compared to a Chinese subsidized capacity of around 50 million tonnes, of which more than 85% is based on coal-fired electricity. Only 10% of Chinese capacity is produced from hydro-powered smelters located in the Yunnan region, close to their downstream plants. So China is ready to export its low carbon aluminium products to Europe while preserving its coal-fired-based production to export higher carbon products elsewhere, leading to no decrease in global emissions. Circumvention will happen as we gain experience with the CBAM.

Chinese producers benefit from a range of subsidies, including energy subsidies and below-market finance. The OECD documented this, with the majority of them receiving support ranging between 4% and 7% of their annual revenue. The CBAM will therefore have no real cost impact on Chinese subsidised production because of source-shifting, while our producers will face higher costs due to the loss of existing EU protection measures.

Another example is the announcement by Russian aluminium producer Rusal that it will demerge its high carbon and low carbon production assets into separate companies. Again, we can see the inception of potential source-shifting practices by one of the biggest global aluminium producers outside the Union.

Disruptive cost increase down the value chain?

Aluminium is a global commodity, priced on the London Metals Exchange (LME). European?aluminium producers are price-takers on the market. The product price is set for all producers, which cannot pass their ETS indirect costs onto customers. Therefore, replacing the existing compensation mechanisms with a CBAM will only generate more carbon leakage.

Furthermore, if the CBAM will not cover the entire value chain, from the primary commodity down to the final product containing it, there will always be leakage. A recent study showed how a CBAM can lead to additional costs faced by European producers of semi-finished aluminium products that source primary aluminium from outside the EU, for an increase of more than 5% of the total value, ranging from window frames to car parts. Moreover, today there is no method that can verify aluminum's actual carbon content in complex products from more than one plant and different countries. European producers will re-locate to produce CBAM-free products and third countries will export carbon-intensive products further down the value chain to Europe.

Border adjustments could be perceived as attractive tools to leverage global climate action and decarbonise energy-intensive industries. But the devil is in the detail. The challenges above make us not ready for the CBAM, at least until 2030. In the meantime, we are fully committed to working with the Commission and broader stakeholders on designing an effective CBAM for aluminium after the first pilot phase, alongside new tools to accelerate our contribution to the EU's climate neutrality objective.

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