Emissions linked to electricity consumption in aluminium production are currently not included in the Carbon Border Adjustment Mechanism's calculations, writes Juliette de Valence
By omitting emissions tied to the electricity consumption in the aluminium electrolysis process — a carbon-intensive phase — questions arise regarding the effectiveness of Carbon Border Adjustment Mechanism (CBAM) as a decarbonization instrument for the aluminium industry. However, this reprieve granted to European aluminium producers is crucial to preserve their economic viability.
As of 2026, the CBAM will gradually replace the system of allocating free allowances through a systematic carbon tax to imported aluminium comparable to the carbon price associated with domestic production (EU ETS). However, as a first step, indirect emissions linked to electricity consumption in primary aluminium production (9.3 tCO2/ton of aluminium, 62% of total emissions), primarily created in the electrolysis process, are currently excluded from the carbon cost calculation scope.
It seems, at first glance, counterintuitive. However, two concerns, when taken together could have profound implications for the competitiveness of European aluminium, necessitating careful examination and quantification: the repercussions of discontinuing financial compensation for European aluminium producers, and the potential for non-European producers to exploit loopholes in the mechanism.
European aluminium producers, purchasing electricity for the electrolysis process (15,481 kWh/ton of aluminium), face the pass-through of the carbon price paid by electricity producers under the EU ETS.
This additional cost is exacerbated by the marginal cost pricing model that governs the European electricity market. According to this model, prices are set at the cost of production of the last kWh produced to maintain a balance between supply and demand. In 2023, as over 33% of the European electricity mix relies on fossil fuels, the marginal cost includes the carbon costs borne by fossil fuel producers, even in regions heavily dependent on renewable energies.
Member states can provide strictly regulated state aid to compensate for the indirect costs borne by electricity-consuming industries such as aluminium producers. Although this mechanism constitutes a "mystery box", posing a risk of under/overcompensation, the fact remains that it constitutes a significant source of revenue for European aluminium producers, the absence of which could jeopardize their competitiveness.
Indeed, compensations apply to electricity purchased:
- on the spot market (where the indirect carbon cost is more obvious to estimate according to the plants called in to cover demand),
- via long-term contracts, or
- produced on site.
It is on these last two sources of supply that all the uncertainty lies. While the carbon cost has certainly been considered when negotiating long-term contracts, it is very difficult – not to say impossible – to quantify its impact on the cost paid over the life of the contract. It is therefore unlikely that this additional cost and compensation balance each other.
With regard to the compensation applicable to the electricity produced and consumed, the rationale lies less in the indirect carbon cost than in the desire to reward/subsidize renewable electricity capacity developed on site, which could be resold on the market at a price increased by the carbon cost of the fossil power plants called upon to cover demand.
In view of these elements, there is a strong uncertainty about what the compensations cover and therefore it is unlikely that removing them to impose an equivalent carbon cost on the Scope 2 emissions of imported aluminium will make it possible to achieve a situation of equilibrium.
The reprieve given to electricity emissions is fundamental to avoid putting European producers at risk. It should allow for a thorough examination of the feasibility of such equivalence and two years of transitional period will not be too much when we see the work involved in collecting and verifying emissions data.
Another issue lies in the potential bypass of the mechanism by non-European producers such as China, for whom European aluminium exports represent a small portion of their aluminium exports.
China could export low-carbon aluminium products to Europe, preserving its fossil fuel-based production for higher carbon exports elsewhere, as 10% of its capacity is generated from hydro-powered smelters in the Yunnan region (aluminium-making capacity of 5,25 Mtons, with 70% of hydropower, bearing in mind that China's exports to the EU are less than 1 Mtons).
To prevent such bypass, one solution would be to apply the emission factor of the average electricity mix of the exporting country to export data. It is a divisive option, as on one hand it favours a uniform view of domestic production without rewarding producers who would develop new on-site renewable capacities to decarbonize their processes. On the other hand, there is cause for concern among European aluminium producers when we observe other industries, such as steel, organizing to reserve their decarbonized products for European export without pursuing a comprehensive decarbonization strategy.
Juliette de Valence, ESG Research Analyst - Metals & Mining, Infrastructure & Private Assets, BNP Paribas Asset Management.
