An initial agreement between the European Parliament and Council on a Carbon Border Adjustment Mechanism (CBAM) to crack down on carbon leakage will have ramifications for aluminium trade, and possibly before the end of the year.
While the agreement still needs to be confirmed and adopted by EU member states and the European Parliament, the provisional agreement of a transitional phase could be in place by October.
The CBAM is designed to shore up the EU’s Emission Trading System (ETS) and aid the bloc’s goal of carbon emission reduction of 55% by 2030 compared with 1990, leading to net zero by 2050.
The European Commission describes CBAM as its “landmark tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries”.
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The CBAM agreement will impose a levy on goods imported into the EU based on their emissions footprint to be phased in from 2026 to 2034. It will initially apply to those imports with carbon intensive production – those with the greatest risk of carbon leakage. Those are cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. Although all imports will eventually be covered by the tax.
During a trial period, planned to start in October 2023, importers will need to report greenhouse gas emissions (GHG) embedded in their imports, both direct and indirect, but will not need to make any payments or adjustments. CBAM will come into full force from January 1, 2026. Then, each year importers will need to declare the quantity of goods imported into the EU in the preceding year and their embedded GHG. If suppliers are unable to give the required data, default emission data will be used. This could be considerably more punitive, pointed out strategists at ING. “This is obviously a risk to some countries/suppliers who simply do not have this level of data,” said Ewa Manthey, commodities strategist, and Warren Patterson, head of commodities strategy, at ING.
Trade flow implications
In an analysis, ING noted that for aluminium, Norway and Iceland were the largest and third-largest suppliers of aluminium to the EU in 2022 and that imports from those countries will not be subject to CBAM. Of the other key suppliers of Russia, Turkey, the UAE, China and India, the latter two “have the highest emission intensity by some distance”.
ING’s analysts explained that what really drives differences between direct emissions from aluminium smelters is whether they source their power from the grid or have a captive power plant. “For those with captive power, their direct emissions are significantly larger,” they said. Additionally, the feedstock used in captive power is important: the carbon footprint of aluminium imports mostly comes from the electricity used in the electro-intensive smelting process.
The primary fuel for many captive power plants is coal. ING gave the example of China, where 88% of Chinese primary aluminium production is based on coal-fired electricity generation, while the remaining 12% is based on hydropower.
China does have a domestic ETS, but only for power generators and it trades at a significant discount to the EU ETS. “Therefore, the additional cost to move this product to the EU will be significant,” said ING. “As things stand, it would be difficult not to see Chinese aluminium flows to the EU falling. The import cost of Chinese aluminium products into the EU could increase by around 17% as a result of CBAM.”
That said, ING said that the market will need to watch how China’s ETS develops. If prices increase – which is expected – and the scope of the scheme is extended to include heavy industry, these will help to decarbonise China’s aluminium industry and consequently reduce the impact of CBAM. Add to this China’s trend of moving smelters to its Southern provinces and hydropower, which will improve the carbon intensity of its aluminium industry.
However, the outlook for Indian flows is “a bit more worrisome”, ING said. Unlike China, India does not have a carbon tax or ETS. It does have a coal tax, but ING believes that this is unlikely to be used as a partial offset for the CBAM.
“Emission intensity from Indian aluminium producers is not only the highest among suppliers to the EU, but the highest globally,” the analysts said. “These high emissions are driven by coal captive power plants. The additional cost per tonne of Indian aluminium going into the EU will be significant, and without robust decarbonisation efforts it is difficult not to see these flows being impacted.” ING calculates that the import cost of Indian aluminium products into the EU could increase by more than 40% due to CBAM.
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Of the other suppliers, Russia’s aluminium has a relatively low carbon footprint and while Russia does not have a carbon tax, CBAM is likely to have a limited impact on these flows. “We estimate an additional cost in the region of 6%.” The bigger risk, in ING’s view, to Russian aluminium flows to the EU is the self-sanctioning being seen as a result of Russia’s invasion of Ukraine.
For Turkey, emission intensity is close to that of the EU, and Turkey is considering its own ETS system, which will help the country to decarbonise.
The UAE, meanwhile, is described as a “fairly large supplier” to the EU and its smelters use captive power. But instead of being coal-fired, the smelters burn natural gas, making emission intensity significantly lower than in India and China. “However, given the use of captive power, direct emissions are still higher than those seen in the EU – although the UAE is starting to increase the use of renewable power in its aluminium industry,” ING said.
Source: Baltic Exchange