Steel Products Prices North America

CRU: EU Carbon Border Adjustment Mechanism—Impact to Aluminum

Written by Greg Wittbecker

By Greg Wittbecker, Advisor, CRU Analysis

The EU continues to move ahead on its plan to decrease greenhouse gases (GHGs). Here’s some historical context on emissions management in the EU.

The EU has been on a long journey to its current condition. Phase 1 of its decarbonization plan took place between 2005-2017. The Emissions Trading System (ETS) was established to trade carbon allowances, and the focus was on controlling emissions from power, steel and cement. There was little to no direct impact.

Phase 2 took place from 2008-2012 and power generators began to pay for some of their direct emissions.

Phase 3 was in effect from 2013-2020. Aluminum, among other heavy industries, came into scope with about 40% of total emissions covered by the ETS. The term “carbon leakage” became part of the vernacular, describing the consequences to EU-based industry that EU regulators needed to address. Carbon leakage referred to the risk of penalizing domestic producers (and emitters) while allowing imports from outside the EU to continue entering without penalty. Concurrently, consideration had to be given to the potential competitive disadvantage placed on EU exporters.

To minimize the harmful effects of carbon leakage, the EU provided for: (1) free carbon allowances to key industries; and (2) allowed direct state aid to affected industries.

The aluminum sector has experienced little impact from Phase 3 due to these allowances and state aid. CRU estimates that the impact from direct emissions is about $8 per metric ton. Were free allowances NOT provided, the cost would have been about $53 per ton. Total direct compensation is estimated at about 85% of exposure.

The subsidies to cover indirect emissions (effectively their power purchases) are more pronounced. Presently state aid covers about 75% of the indirect emissions exposure and represents about $130 per metric ton in 2020.

Phase 4 Launches…Direct Trade Taxation Looms

2021 sees the most dramatic step-up in emission control. This introduces a carbon border adjustment mechanism or CBAM. It’s a carbon tax. The idea is now working through the EU approval process and is expected to finalize by the end of June. Adoption would take place in 2023.

CBAM goes after the entire supply chain.

Importers would have the burden of proof to demonstrate their individual carbon footprint and would be taxed against global average CO2.

This would mitigate carbon leakage into the EU, but it will come at a cost. First, domestic aluminum smelters would lose all allowances and state aid. Second, exporters would have to push for export rebates to compensate for their higher carbon tax burden operating within the EU.

How Does This Matter to the EU Aluminum Market and the Rest of the World?

Western Europe runs a consistent deficit in primary aluminum. In 2021, CRU estimates the deficit at about 3,000,000 metric tons. The Gulf Region is a major exporter to the EU along with Canada, Iceland, Norway and Russia (the low carbon bloc).

Europe also has a substantial trade in semi-products, which generates net exports of about 625,000 tons. Substantial imports from China and Turkey are baked into this net number.

The EU proposes to set the baseline for applying the CBAM at 3.9 tons of CO2 per ton of primary metal output.

The low carbon bloc will love this. They are well under the threshold at 2 to 2.2 tons per ton of output. The Gulf producers face a more challenging path. The Gulf smelters emit about 8.5 tons/ton of production.

China’s carbon intensity is about 15 tons/ton of production. They will be price-cleared. India also faced a similar fate, being largely coal-based.

The Gulf smelters and rolling mills (Bahrain, Oman) could face headwinds based on the current ETS carbon pricing, which is 50 euros or $60 today. That would impose about $275 of higher costs to the region. Not a show-stopper, but clearly something that will need to be priced into the all-in duty paid metal price.

How much of this cost is embedded into the “carbon cleared price” will depend on each product:

• We believe that the EU’s dependency on the Gulf for melting ingot (P1020) is much LESS than its dependency on value-added products, hence we believe that the carbon cleared price for P1020 will NOT rise to reflect full CBAM cost.

• We believe the EU’s HIGHER dependency on the Gulf for rolling slab, extrusion billet and foundry allows WILL allow carbon cleared prices to rise near full CBAM costs.

• Semi-products may be a mixed bag with high recycled content semis imports potentially able to demonstrate a low(er) content to avoid a severe penalty. However origins such as China and India are likely to fall by the wayside.

Greg Wittbecker joined CRU in January 2018 after retiring from Alcoa, where he was Vice President of Industry Analysis and Managing Director of Alcoa Beijing Trading, based in Shanghai, China. His career spans 35 years in the aluminum industry, having also held senior commercial and management roles at Cargill, Wise Metals and Koch Supply and Trading. Greg brings perspective on the entire aluminum supply chain from bauxite to aluminum finished products and will be a regular contributor to SMU going forward. He can be reached at

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