Aluminium market participants are worried that the EU's carbon border adjustment mechanism (CBAM) will raise costs for buyers without successfully tackling carbon emissions.
They believe it will also further dent Europe's competitiveness at a time when imports are growing in both absolute terms and as a share of European consumption. The CBAM, which was announced in April, enters its transitional phase at the start of October before coming into full force in January 2026.
The CBAM aims to ensure that the carbon price of imported material is equivalent to the carbon price of domestic European production, so that growing imports of a number of industrial goods covered by the mechanism do not undermine the bloc's climate objectives. It will replace the EU's emissions trading system (ETS) — the cornerstone of the EU's climate policy since 2005 — for all covered goods, with the cost of CBAM certificates aligned with the weekly average auction price of ETS certificates.
Importers will be required to declare the carbon footprint of purchased material and purchase and surrender the corresponding number of CBAM certificates. ‘Green' suppliers or importers that can show the carbon price has already been paid before entering Europe will be able to deduct the corresponding amount.
The ETS is a cap and trade system that has been criticised for dampening investment in new green technology, both domestically and internationally. The EU hopes that the CBAM will have the opposite effect.
But since the CBAM announcement, aluminium market analysts have been sounding warnings that the carbon footprint information demanded under the CBAM will be difficult to attain for some buyers, particularly those not buying directly from manufacturers, and that many sources of material will simply be assigned a default CBAM emissions fee in lieu of that information.
This will add costs but provide no data for the EU, which sees the CBAM transition period between October of this year and January of 2026 as a trial period, whereby the bloc will refine its methodology before entering the CBAM's definitive phase.
There are also concerns that international suppliers are already looking for ways to work around the CBAM and continue selling into Europe without paying the costs. One way this could be accomplished is through the increased use of scrap metal. If aluminium is used domestically to make a product, and the offcuts in that process are remelted into ingots for export to Europe, they would qualify as recycled material and no longer fall under the CBAM's coverage, despite the heavy carbon cost of their original manufacture.
Another fear is that implementation of the CBAM could decimate aluminium industries in poorer countries that may be relatively less carbon-intensive than competitors, but which do not have the capability to prove their green credentials. One example is Mozambique, where aluminium is the largest industry and producer Mozal its largest employer, and where around 90pc of aluminium produced is exported, mostly to the EU.
Mozal uses hydropower from a plant on the other side of the country to its smelter, but it is unclear how much of the smelter's energy comes from the hydropower plant and how much comes through its connection to the South African power grid. Analysts have said that it is unlikely that any African producer will have the necessary infrastructure in place to bypass CBAM by the time of its full application.
For other major suppliers to Europe there is no such question. India exports almost a third of its aluminium production to the EU, and its industry is one of the world's most polluting, with the vast majority of smelter output fuelled by coal. Analysts have estimated that when the full CBAM scheme takes effect, Indian exports to Europe could incur extra charges in excess of $1,000/t. Supply from other predominantly coal-powered regions will see similar impacts.
But Europe is not in a position where it can eliminate large swathes of potential supply, given that the domestic industry has seen such heavy cutbacks in the past two years due to high energy prices and because Russian material has fallen from favour. Europe will need aluminium imports from many other sources, and the CBAM will introduce yet more costs for buyers.
"Europe is short of aluminium already, and a lot of lost capacity will not be reopening," an analyst said. "Europe will need imports, and the CBAM will drive up their premiums."
