Will the EU's carbon levy prove ineffective? Wood Mackenzie's study raises doubts, advocates comprehensive approach

According to a recent report from Wood Mackenzie, the European Union's (EU) introduction of a Carbon Border Adjustment Mechanism (CBAM) in the primary aluminium market could have a disproportionate impact on European producers, potentially leading to increased prices for consumers.

The report "CBAM and aluminium: Unveiling the nuances" highlights a critical gap in the current CBAM framework: it solely accounts for direct emissions from smelters, neglecting indirect emissions from power generation. Consequently, this setup disproportionately affects older European smelters compared to newer facilities elsewhere globally.

Uday Patel, the Principal Aluminium Analyst at Wood Mackenzie, said, “The implementation of the CBAM in the EU will inevitably lead to higher aluminium prices for EU consumers.”

“As it stands, the CBAM will be ineffective and penalise domestic aluminium producers and consumers without achieving its main objective.”

The report underscores the stark contrast in energy sources for aluminium production between Europe and other regions. In Europe, a significant portion of aluminium production is powered by hydroelectricity, while newer smelters in other areas rely on gas and coal-fired power. This disparity in energy sources is crucial in understanding the potential impact of the Carbon Border Adjustment Mechanism (CBAM) on different aluminium producers.

As a result, the Carbon Border Adjustment Mechanism (CBAM) has the potential to lead to significantly divergent outcomes in carbon tax obligations for EU-based producers compared to those importing into the EU. The outcome is highly contingent on whether direct or indirect emissions are considered, adding a layer of complexity and uncertainty to the situation.

Wood Mackenzie states, "2023 trade data shows low-carbon aluminium imports represented 49 per cent of total EU imports. This figure includes Russia. Meanwhile, the share of imports from the Middle East and India was 26 per cent, up from 15 per cent in 2017. The continued inflow of metal from Russia was at risk of increasing sanctions. We expect European buyers to turn to other sources, including the Middle East and India."

The amendment to the CBAM, incorporating indirect emissions, would result in a significant impact, as highlighted in the report. Most aluminium smelters reliant on coal would likely become economically uncompetitive, while those utilising gas-fired power would face substantial cost escalations.

Patel said, “The dilemma facing the introduction of an emissions levy in the EU to what is essentially a global market is clear.” 

“It creates a bifurcated market where primary aluminium coming from coal and gas-fired power sources would seek alternative markets while aluminium with a lower carbon footprint would then be sold at a premium in the EU.”

The report suggests that indirect emissions must be factored into payment calculations starting in 2026. Failing to do so would diminish the motivation for importing producers to reduce their emissions. Additionally, it emphasises the importance of other nations adopting carbon pricing systems similar to the EU's to prevent European aluminium premiums from becoming disconnected from global trends.

“For the EU, the cost implications are clear. Whether it’s carbon taxes, reduced supply options or indeed both, the price of aluminium is likely to rise", Patel added.

For details on the global primary aluminium production and consumption in 2023, the forecast for 2024 and beyond, and the impacts of CBAM, download "Global Aluminium Industry Outlook 2024".