Impact of the EU’s CBAM on the aluminium market

On the 14th of July, the European Commission (EC) released a proposal to establish a Carbon Border Adjustment Mechanism (CBAM) as part of the broader Fit for 55 policy to upgrade existing climate legislation . The implementation of CBAM on direct and very likely indirect (electricity) emissions will start impacting aluminium prices in the months preceding 2026 as premiums start rising to attract low carbon metal. Meanwhile, in the period between 2023 and 2026 , importers will be required to share information on direct emissions ( based on the definition within the CBAM proposal). We estimate that the ultimate CBAM cost will be equivalent to around 4 tonnes of CO 2 per tonne of aluminium ( € 204/t) . The market will be required to balance the cost of emissions certificates to be compliant with the CBAM with a premium attached to European prices that incentivises regional imports. We do not expect the implementation of the CBAM to impact the international price of aluminium. Market theory would suggest that countries and companies with the least carbon-intensive aluminium will be sending and diverting their production to Europe to benefit from the premium ( adjusted for freight ). The reality is more complex, and producers will still want to spread country and regional risk. Unless other countries follow suit in implementing similar policies, we expect a degree of carbon leakage to tak e place. Whilst s ome US politicians are already promoting the idea of a similar CBAM, the idea is still very much in its infancy . However, US implementation would disproportionately impact GCC countries , which rely heavily on those two markets. Significant regulatory hurdle s face the CBAM. Although it has been designed to be “ WTO compatible ”, it still has to be tested. Another question relates to the potential revenues generated by the CBAM. As it currently stands , “ revenues from CBAM will contribute to the EU's budget ” and this could prove problematic. If t he intention of the CBAM is to encourage the world to produce lower emissions, it would perhaps make more sense (and to be WTO compatible) to spend the revenues on efforts on greenification projects in poorer countries.