Paying the price for low-carbon aluminium

As the world works to fight climate change, the big economic blocs are introducing new measures to ensure that their industries aren’t disadvantaged by the costs of decarbonisation.  The US is luring green business with inducements via their ‘Inflation Reduction Act’. China is able to subsidise industries and control the price of exports.  The EU, on the other hand, is fighting to maintain its climate leadership role, whilst preventing homegrown industry from moving to areas where climate policy is weak. After much discussion, the EU is introducing the CBAM (carbon border adjustment mechanism) this year. So, what is the outlook for low-carbon aluminium in Europe and elsewhere? 

The aluminium industry faces both high energy prices and the extra cost of the ETS (Emissions Trading Scheme) in the EU.  In response to the challenges faced by the sector, European Aluminium has requested that aluminium be included in the recently published EU Critical Raw Materials and Net-Zero Industry Acts, which aims to protect EU’s access to critical raw materials.

Europe is struggling to retain local manufacturing capacity in carbon intensive industries as jobs migrate to countries where energy is cheap and there are no penalties for emitting carbon. The CBAM will, in effect, apply the EU ETS charges to carbon intensive imports, from countries where emitting greenhouse gases is cost free. It is being progressed in stages. The failure (so far) to include the whole aluminium supply chain in the CBAM, will surely just shift the leakage rather than counteract it completely. At the same time, free allowances to emit CO2 for European producers are being withdrawn. 

Europe’s approach has led industry insiders to express their frustrations. Others are in agreement. Recent modelling from the World Bank suggests that carbon pricing alone will not be sufficient to make new low-carbon smelters economic outside of China and India, unless prices rise ‘above historic levels.’ 

But what is the experience of companies who have already put low-carbon primary aluminium on the market?  Europe has aluminium smelted with renewable power in some locations. A report from last year, suggests that there is not sufficient demand from buyers for low-carbon aluminium to attract a significant price differential over conventional high-carbon material. Perhaps this will change when the CBAM takes effect in a few years. The recent news that BMW will source low-carbon aluminium produced with hydropower in Canada, is encouraging and other luxury carmakers have made similar announcements. But in other aluminium markets such as aviation, construction products, and packaging, there is silence.  These sectors are preoccupied with other sustainability priorities. Aviation has to find a way of paying for sustainable liquid aviation fuel, as electrification is a long way off. Construction has to tackle building insulation and emissions from heating. Packaging can rely on recycled aluminium which is also low-carbon.

European Aluminium is trying to emphasise how important aluminium is to the transition to net-zero. However, it is difficult to argue that aluminium is as critical as a rare earth, whilst simultaneously being abundant enough to use as packaging.  Aluminium is certainly used extensively in many new technologies critical to reaching net-zero, such as wind turbines, batteries and electrolysers. But if the price of decarbonised aluminium is too high, it could be at least partially substituted by other materials such as carbon fibre, polymer composites and other metals. 

All of these factors suggest that the industry cannot rely on either customers or carbon pricing to achieve net-zero.  European Aluminium has asked for support to access finance to  and reduced red tape to decarbonise existing smelters and to build new ones. In areas where renewable energy will be too expensive for smelters to operate economically, and subsidies are not sufficiently generous, the sector will need to change its business model. Many companies are looking for recycled content to become greener and align with the circular economy. One option, as I have previously proposed, is for these areas to switch to specialised aluminium alloy collection and recycling. 

The CBAM is projected to generate about 9 billion euros per year by 2030.  It is yet to be decided how this revenue will be spent. There will be calls for it to be used to help the transition to net-zero in Europe, as well as elsewhere. Subsidised finance to pay for industrial decarbonisation would be a good place to start. Without it, the future for new low-carbon aluminium in Europe does not look bright.

Published: 24 March 23

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