Carbon Border Adjustment Mechanism (CBAM), a European Union (EU) regulation which is designed to put a price on carbon emissions in certain imported goods to subdue emissions, mirroring the EU's Emissions Trading System (ETS), will launch the definitive phase on January 1, 2026. With the launch, CBAM shall expand the market, especially between the domestic producers who are already subject to the EU's ETS, along with the international producers who are not under this. Hydro states certain loopholes to be looked at before CBAM comes into force.
CBAM: Why take the plunge?
CBAM aims to implement a carbon price on the emission of industrial products like aluminium, iron, cement, steel and fertilisers penetrating the EU. All importers of these products are deemed to undertake the CBAM certificate, which correlates to the average EU ETS allowance for the auction price, post which the goods can be sold. However, purchasing a CBAM certificate is possible after 2027.
One of the major aims of CBAM is to implement a price on emissions for critical products that are entering the EU, aiding in eliminating the scope of carbon leakage and indirectly moving the production to the international realms to avoid environmental regulation.
In all, CBAM will advance decarbonisation in the EU with high protection for the domestic industries. However, Norsk Hydro, the Norwegian aluminium producer and recycler, highlighted specific fundamental issues within the policy, restricting the achievement of the set objectives and creating a disadvantage for the people who are in the process of decarbonising their supply.
Scrap loophole: Ready, set, exploit
One of the greatest obstacles could be related to the "scrap loopholes" as under the policy, remelted aluminium scrap has a zero-emission allocation rating. Nonetheless, Hydro believes there is a potential to exploit the scrap loophole as the non-EU producers can avoid CBAM costs while EU producers are subject to ETS. The company further highlights that phasing out ETS free allowances and implementing CBAM on primary aluminium is set to drive up aluminium scrap costs in the EU.
The price of the processed scrap received during the production is almost similar to the price of the primary aluminium, indicating that the scrap is likely to generate carbon costs identical to the virgin production.
Also read: European solar manufacturers push for CBAM extension to expand their portfolio
According to Hydro, the non-EU producers are likely to gain "super profits", mainly because of the loophole exploitation by the ex-EU producers with surged exports of the aluminium produced after remelting of scrap, making a great substitute. This makes the current EU producers subject to higher carbon costs.
Hydro stated, "Super profits are waiting for those who use the loophole. European companies will sell their products on the European market, with the same CBAM markup on the European premium as everyone else. The difference is that while this markup will be an implied regulatory cost on both primary and secondary aluminium produced in Europe, recyclers outside the EU can make a super profit."
Moreover, it is estimated that nearly 4 million tonnes of aluminium per year can reach EU territory via the scrap loophole alone, omitting roughly 35 per cent of European recycling out of the market, creating a structural disadvantage. Nonetheless, it is crucial for the European recyclers to stay ahead of the competition to meet the target set for circularity around critical raw materials.
Downstream products loophole: An influx
Apart from the scrap exploitation, the firm identifies a serious concern related to downstream products, creating an exponential cost for the aluminium extruders, manufacturers and rollers from the ETS. This loop is not an issue for the international downstream producers who are exporting within the EU, as they are not liable under CBAM.
CBAM is implemented mainly on the primary and the semi-finished aluminium, such as the billets, ingots, slabs, flakes, rods, sheets, pipes, powder, bars, wire, foil and so on. Yet, all the value-added downstream products are swiftly excluded.
Hydro highlighted that EU-produced car wheels could see an added cost of USD 240 per tonne following the removal of EU free allowances, whereas non-EU car wheels fall outside CBAM's scope and would face no such additional charges. This can result in a higher risk of carbon leakage, creating wider competitive disadvantage, and creating further loopholes in the downstream market.
Also read: India-UK FTA sparks aluminium growth but CBAM threatens to reverse it
Elimination of direct emissions from CBAM
Hydro urges that indirect emissions (Scope 2 and Scope 3) remain outside CBAM's scope to safeguard Europe's aluminium industry, warning that extending CBAM to cover these emissions could likely lead to the phase-out of ETS cost compensation for indirect carbon in power prices.
The firm further noted that the assumption is based on the fact that the electricity grid will become more decarbonised than it is in the current scenario, making the cost higher than USD 270 per tonne by exempting the direct emissions. This is also applicable to the Russian or the Malaysian smelter who is making use of similar power but is not subject to the added tax imposed on the indirect emissions.
The firm's analysis indicates a competitive disadvantage, leaving Europe 95 per cent reliant on aluminium imports. Concerning the "green premiums," the European low-carbon aluminium premium would remain unaffected under the current policy, as it accounts for indirect emissions.
Fastmarkets defines low-carbon aluminium as metal produced with a maximum of 4 tonnes of CO₂ equivalent per tonne of aluminium under Scope 1 and 2 emissions. On August 1, Fastmarkets assessed the Europe low-carbon aluminium differential P1020A at USD 0–20 per tonne, which is stable since the start of the year due to ample regional availability.
Policy reforms uphold CBAM's success.
The company states a successful EU CBAM hinges on policy reform, including the inclusion of scrap, an expanded product scope and keeping indirect emissions outside the policy. Until such changes are made, the company warns that CBAM risks failing to provide sufficient decarbonisation incentives while threatening the competitiveness of European industry.
With just three months to go before implementation, the feasibility of achieving CBAM's objectives remains uncertain. On August 28, the European Commission opened a call for evidence on its methodology for calculating embedded emissions in CBAM goods, rules for adjusting CBAM certificates to account for ETS free allocations, and guidelines for deducting carbon prices paid in third countries.
In response, the European Association of Non-Integrated Metal Importers and Distributors (EURANIMI) called on August 29 for a six-month grace period during which importers would be exempt from surrendering CBAM certificates.
For more information on primary and recycled aluminium, read this report.
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