Aluminum feels the heat of EU carbon tariff

SONG CHEN/CHINA DAILY

The 河南省三门峡市区新闻网European Union's Carbon Border Adjustment Mechanism began functioning on Jan 1. It is a policy tool that encourages cleaner industrial production in non-EU countries by putting a price on the carbon emissions caused to produce goods entering the EU. The development is worrisome for China's aluminum industry, one of the sectors covered by the EU CBAM because it would mean higher costs at the border.

But what is driving the anxiety across the entire non-ferrous metals industry is not merely the higher cost but the uncertainty about the future path of the EU CBAM. Three questions dominate industry discussions: First, whether the indirect emissions of aluminum products will be included in the accounting. Second, whether EU CBAM will cover other non-ferrous metals as well. And third, whether China's national carbon market can offset the impact of the EU CBAM.

The indirect emissions of the electricity consumed by aluminum processing units account for roughly 80 percent of the overall emissions of the products. However, under the EU CBAM policy, indirect emissions are not included in the accounting scope. The main reason for not including indirect carbon emissions is that the EU gives subsidies for electricity prices, allowing some of the indirect emissions of aluminum products within the EU to remain unregulated. It would therefore be unfair to include the indirect emissions of aluminum products, when there is a subsidy on electricity.

Whether indirect emissions are eventually included in the EU CBAM accounting scope depends on whether the EU ends its subsidies for domestic electricity prices. But, given the complexities of those subsidies and the EU's need to maintain industrial competitiveness, completely abolishing the subsidy system is not practical. Though reforms are gradually being implemented, it is unlikely that the indirect emissions of aluminum products will be included in the accounting scope.

It is not clear whether the EU CBAM will cover other non-ferrous metal industries. It is necessary to understand the EU CBAM's legislative logic here. The EU CBAM is built on the foundation of the European Union Emissions Trading System (EU ETS), its operational mechanisms and decades of industry emission data.

The EU ETS has clear criteria for sector inclusion: enterprise-level emissions, total sector emissions, emissions intensity and exposure to international trade. Apart from aluminum, other non-ferrous metals have not been included because of the particularities of each industry. Copper smelting was not included because copper smelting capacity in the EU is limited, and the carbon intensity per unit of output is relatively low. Magnesium smelting was left out because the EU has limited domestic production capacity.

The EU CBAM largely follows the same framework. Therefore, whether it will cover other non-ferrous metals depends on the industrial development in the EU and whether those industries meet the ETS criteria for inclusion. Given the relatively stable development of industries in the EU, it is unlikely that the EU CBAM will cover other non-ferrous metal categories in the short term.

The EU CBAM allows companies to use the carbon pricing mechanism to offset the carbon costs already paid on the products in the country of origin. If an aluminum manufacturer has paid a certain cost in China's national carbon market, that amount can be adjusted against the EU CBAM charges. Many enterprises therefore consider this a practical way to reduce costs.

However, carbon prices in the EU ETS are nine times higher than in China. In 2025, the average carbon price of the EU ETS was€75 ($88) per ton, while the price in China's national carbon market was around 70 yuan ($10) per ton.

Also, although electrolytic aluminum has been included in China's national carbon market, trading has not yet begun. So, it will not be possible to offset part of the EU CBAM costs for aluminum products through trading in China's national carbon market. In the medium term, even if trading in electrolytic aluminum begins in China's national carbon market, due to the huge gap in carbon prices between China and Europe, the EU CBAM costs that can be offset will still be insignificant.

In the long term, China's national carbon market will develop steadily, gradually reducing free quotas, enriching carbon financial tools, expanding the scope of compliance industries to enhance the constraining power of the carbon market and gradually increasing the carbon price, narrowing the gap with the EU ETS. This will ultimately neutralize the impact of the EU CBAM on aluminum products.