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CBAM will enter its definitive phase on January 1, 2026, and is intended to level the playing field between domestic producers that are exposed to the EU’s Emissions Trading System (ETS) and international producers that are not under the same requirement.
The mechanism will put a carbon price on embedded emissions in iron, steel, cement, fertilizer and aluminium products entering the EU. Importers will be required to purchase a CBAM certificate that correlates to the average EU ETS allowance auction price, and the goods will then be free to circulate within the European market. But CBAM certificates can only be purchased from 2027 onward.
CBAM is intended to put a fair price on emissions related to products entering the EU and to prevent ‘carbon leakage’ (the process of moving production internationally to avoid environmental regulations).
At its heart, the policy is intended to advance decarbonization in the EU, while also protecting its domestic industry. But in the opinion of Norwegian aluminium producer and recycler Norsk Hydro, fundamental issues with CBAM will prevent it from achieving these objectives, and will disadvantage those that are already decarbonizing their supply.
One of the biggest challenges for Hydro is the so-called “scrap loophole,” whereby remelted aluminium scrap is allocated a zero emissions rating under CBAM.
In Hydro’s view, the scrap loophole is ripe for exploitation because non-EU producers can avoid CBAM costs, while EU producers are still subject to the ETS.
“We see it as inevitable that it will be exploited,” Røynesdal told Fastmarkets. “There is simply too much to gain for non-EU producers. It’s like a ‘cheat code’ that lets them easily evade carbon costs that our recyclers in Europe cannot avoid.”
Hydro argues that the eventual removal of ETS free allowances, and the introduction of CBAM on primary aluminium, will increase the cost of aluminium scrap in the EU.
The cost of process scrap – material discarded during the production process – closely tracks the price of primary aluminium. This means that scrap will probably face a comparable carbon cost to its primary counterpart in the EU.
According to research done by Hydro, EU recyclers producing low-carbon aluminium could face the highest carbon costs, while non-EU recyclers using remelted scrap will not be affected.
Hydro noted the loophole can be exploited by ex-EU producers through shifting scrap-based aluminium exports into the European market as a substitute for primary aluminium.
In such a scenario, Hydro said, non-EU producers could make “super profits” through the loophole.
“Super profits are waiting for those who use the loophole,” he said. “As European companies, they will sell their products on the European market, with the same CBAM markup on the European premium as everyone else. The difference is that while this markup will be an implied regulatory cost on both primary and secondary aluminium produced in Europe, recyclers outside the EU can [simply take] it as a super profit.”
Hydro estimates that 4 million tonnes per year of aluminium could enter the EU through the scrap loophole by 2035, pushing 35% of European recycling out of the market.
“This is a very conservative estimate,” Røynesdal said, “meaning that the consequences for European competitiveness could be much larger. It creates a structural disadvantage for our recyclers, which must stay competitive if we are to reach European targets for circularity and strategic autonomy on critical raw materials.”
Another loophole identified by Hydro concerns downstream products. Aluminium extruders, rollers and manufacturers will all face incurred costs from the ETS, while international downstream producers exporting material into the EU will have no CBAM liability.
CBAM covers primary aluminium (billets, ingots, slabs, etc) and semi-finished aluminium (powders, flakes, bars, rods, wire, sheets, foil, pipes, etc), but value-added downstream products are excluded.
“Our analysis shows that products with a high aluminium content and low [added] value are facing the highest risk. The primary example is aluminium wheels,” Røynesdal said.
Hydro noted that car wheels made in the EU could incur an additional cost of $240 per tonne after the removal of EU free allowances, while a non-EU car wheel will not be included in CBAM’s scope and thus will incur no additional costs.
As a result, Hydro argues that there is a high risk of carbon leakage from the significant competitive disadvantage that the downstream loophole creates.
“For every aluminium product where the cost of carbon embedded in the input material is big enough to affect profitability, we will lose competitiveness if that product remains outside CBAM,” Røynesdal said.
Consequently, the very goal of CBAM – to promote decarbonization and protect European industry – is under threat.
Hydro argues for indirect emissions (Scope 2 and Scope 3) to remain outside the scope of CBAM, to protect Europe’s aluminium industry.
If CBAM were extended to include indirect emissions, Hydro argues that the ETS cost compensation for indirect carbon emissions in power prices would probably be phased out.
For instance, Hydro estimates that a Norwegian smelter could face an additional implied tax of around $270 per tonne in 2035 even if using a renewable Power Purchase Agreement (PPA), because of Europe’s unique marginal pricing system, which sees gas- and coal-based producers set the price.
Hydro noted, however, that this analysis presupposes that the electricity grid will be more decarbonized than it is today. Plus, if CBAM were to extend to include indirect emissions, the implied cost would probably be significantly higher than $270 per tonne.
On the other hand, Hydro says that a Russian or Malaysian smelter using a similar power source would have no added tax on indirect emissions.
“The current system would allow non-EU aluminium to easily avoid a cost that producers buying electricity in the European market must internalize,” Røynesdal said.
According to Hydro’s analysis, the competitive disadvantage that would arise from this could see Europe become 95% dependent on aluminium imports.
As for “green premiums,” Hydro noted that the European low-carbon aluminium premium will be untouched if the policy applies in its current form, because it covers indirect emissions.
Fastmarkets currently defines low-carbon aluminium as metal produced with a maximum of 4 tonnes of CO2 equivalent per tonne of aluminium produced under Scope 1 and 2 emissions.
Fastmarkets most recently assessed its aluminium low-carbon differential P1020A, Europe, at $0-20 per tonne on August 1, largely rangebound since the beginning of the year amid ample availability of units in the region.
A successful EU CBAM, in Hydro’s view, would depend on policy reform. Scrap should be included, the product scope should be expanded and indirect emissions ought to remain squarely out of the policy’s ambit, the company believes.
Until that happens, the policy will not only fail to provide adequate incentives for decarbonization, but will also threaten the competitiveness of European industry, the company says.
“The good thing is that these flaws in CBAM are created by the system itself. This means that they can be fixed. We know how to do it,” Røynesdal said.
But how realistic this goal is, with the policy only three months away from implementation, remains to be seen.
On August 28, the European Commission launched a call for evidence on its methodology for calculating emissions embedded in CBAM goods, the rules on the adjustment of CBAM certificates to reflect the ETS free allocation, and the rules on the deduction of the carbon price paid in a third country.
In response to this, the European Association of Non-Integrated Metal Importers and Distributors (EURANIMI) published a statement on August 29 calling for a six-month grace period during which importers would not be required to surrender CBAM certificates.
“With no fewer than three new public consultations on CBAM launched on August 28,” EURANIMI said, “it is clear that the Commission is nowhere near prepared for the implementation of CBAM.”
Fastmarkets provides leading economic analysis to help market participants understand the cost of the EU CBAM, and navigate its impact on trade flows, supply chains and decarbonisation strategies. This is complemented by news and insights into policy developments (EU and non-EU) and policy scenario analysis, to keep you well informed in a fast-changing regulatory landscape. Find out more.