European aluminum industry readies for CBAM

The European aluminum industry is preparing for the EU's Carbon Border Adjustment Mechanism, due to take effect in 2026, with some concerns it may lead to further primary aluminum production capacity closures.

European Aluminium Director Climate Change & Energy Emanuele Manigrassi told S&P Global Commodity Insights that the industry was working on complying with the emissions reporting requirements and engaging in the planned review of CBAM, scheduled by end-2025.

Producers and importers of primary and semi-fabricated products had to report emissions data for imported products and from installations producing aluminum products inside and outside the EU.

"We are facing significant challenges with regard to double-reporting requirements for European plants and a substantial administrative burden, which is clearly an unintended effect of CBAM," he said.

The review involved collecting evidence to support keeping indirect emissions out of scope for aluminum products under CBAM, expanding the product scope to include more complex goods down the value chain and implementing stronger anti-circumvention measures, he said.

"To ensure transparency and prevent circumvention, we are calling for robust third-party verification, with industry involvement and compliance checks," Manigrassi said, adding that these were essential for the industry to meet CBAM requirements efficiently while reducing administrative complexity.

Aluminium Dunkerque told Commodity Insights that CBAM's tax on imported goods according to embedded carbon emissions means non-EU aluminum producers, especially those with high Scope 1 emissions, would no longer be able to price products artificially low in the European market.

"Industry stakeholders are currently seeking to ensure protection of the European market against high-carbon intensity products ...allowing a level playing field for the EU and non-EU producers," it said.

In its final phase, it said CBAM was expected to serve as an alternative to the Emissions Trading System's free allowance scheme, although questions remain about CBAM's ability to fully replace the free allocation model.

"There are some issues to tackle to make it work properly, like the inclusion of the entire aluminum value-chain, the accuracy of the data collected from abroad, the treatment of scraps and exports to name a few... We emphasize the need for a supportive regulatory environment that allows us to transition without compromising our competitive position in the global market," Aluminium Dunkerque said.

Hydro said in its "Making CBAM work for the EU aluminium industry" presentation that the scrap loophole was a challenge, saying emissions from imported, re-melted industrial and process scrap must be recognized, as scrap was currently assigned zero emissions.

It added that CBAM on scope 2 emissions would hurt EU smelters running on low carbon electricity, and called for the product scope to be expanded to more aluminum products and other materials, saying thta products outside CBAM scope were at clear risk of carbon leakage.

Industry closures

According to Commodity Insights calculations, around 1.18 million mt of European primary aluminum smelting capacity has closed since 2021.

Manigrassi cited high electricity costs and regulatory pressures, compounded by rising competition from countries with no comparable carbon costs.

"Electricity costs for smelters outside Europe are between two and three times lower compared to European smelters. European smelters are electro-intensive, with electricity costs representing up to 40% of their production costs," he said.

"They are uniquely affected by the cost of indirect emissions under the EU's ETS, as well as additional extra costs passed on in electricity prices, making it challenging to compete globally."

He noted that during the EU energy crisis 50% of primary capacity was curtailed, with carbon-intensive imports increasingly filling the gap, counteracting climate goals.

This was not new, with Europe having lost 30% of its primary aluminum capacity since 2008 due to uncompetitive electricity prices, Manigrassi said.

Karen Norton, Commodity Insights' principal aluminum analyst, said the high energy price situation had been exacerbated in Russia's invasion of Ukraine in 2022.

"At the peak we estimate that around 1.4 million-1.5 million mt/year of European primary aluminum smelter capacity was idled and while we have seen some restarts, some of the region's production capability looks to have been lost for good," she said.

Many operations were rendered economically unviable, with Aluminium Dunkerque temporarily shutting down 74 pots, and some other producers closing operations and never reopening.

"In France [in 2022], we experienced prices that were five times the historical average. Forward prices rose as much as twenty-fold, creating an unsustainable environment for producers," Aluminium Dunkerque said.

Aluminium Dunkerque president Guillaume de Goys said: "Without access to low carbon and competitive power, aluminum producers struggle to maintain their operations against global competitors who may not face the same constraints. Three years later, there remains an urgent need for a stable and competitive energy landscape in the EU."

German baseload year-ahead power settled at Eur86.52/MWh on the EEX exchange Nov. 6. The French equivalent was at Eur71.75/MWh. Both are more than twice current spot power prices across many US networks, Platts data shows.

A Hydro spokesperson said it had closed its Slovalco smelter due to the lack of sourcing for long-term power contracts, in addition to CO2 compensation.

"We also have around 130,000 mt primary capacity out at our Norwegian smelters, but that is on the back of low demand (we are currently fully covered on power for those assets) -- and this capacity is expected to come back on stream," he said.

Further closures?

"If CBAM is poorly implemented and designed for aluminum -- given there are still many elements that need adjustment -- it could lead to further closures," Manigrassi said, adding that CBAM was an inadequate tool to protect against carbon leakage.

"This is why we advocate for keeping indirect emissions out of scope and retaining existing ETS indirect cost compensation schemes under allowed EU State Aid rules," he said.

Manigrassi said removing existing protections, such as ETS allowances, too quickly without adequate replacements would leave European producers exposed to unfair competition from regions with lower environmental standards.

"We advocate for a carefully managed rollout of CBAM, including a reassessment if the mechanism fails to prevent carbon leakage in our sector, to avoid undermining the European aluminum industry's sustainability and competitiveness," he said.

Norton said there was uncertainty over the impact of CBAM on Europe's aluminum smelters.

"With the finer details still to be ironed out it will take some time yet for the full implications to become clear," she said.

Aluminium Dunkerque said CBAM's implementation presented significant challenges.

"How can we protect and develop the European industry if we allow it to face competition that is not subject to the same regulatory standards? It would be counterproductive to aim for the decarbonization of the European industry if, in the process, we undermine its competitiveness to the point of risking its very existence," it said.

However, the company said a well-designed and well-implemented CBAM also presented long-term opportunities to invest in greener technologies and enhance competitiveness.

"If designed to level the playing field and reward low-carbon production, CBAM could be a key factor in driving innovation and sustaining European aluminum in the global market," it said.