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Aluminium: EU ETS reform raises cost risks – Commerzbank
Commerzbank analysts warn that EU ETS reform will raise carbon costs for aluminium smelters, compressing margins and potentially weighing on the euro via industrial-growth headwinds.
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Commerzbank analysts flagged in a recent note that the European Union’s overhaul of the Emissions Trading System is layering a new cost liability onto aluminium smelters. The reform sharpens the annual emission cap and brings forward the phase‑out of free allowances, forcing the carbon premium in industrial power prices higher. When electricity can be 35–40% of total smelting cost, that structural change hits the P&L directly.
The simple read frames this as a supply curtailment story: cost‑pressured European capacity idles, global balances tighten and London Metal Exchange prices rise. A more precise read tracks how the Carbon Border Adjustment Mechanism alters the landed price of every tonne of aluminium that enters Europe. Starting in 2026, importers must buy CBAM certificates priced at the weekly average of EU Allowances. The carbon cost that European smelters bear through their power bill will also be applied to foreign supply. The consequence is not a one‑time charge for a few marginal plants; it is a reset of the benchmark price floor for aluminium delivered into the EU.
EU ETS Reform and the Aluminium Cost Equation
The EU ETS cap falls each year under the Fit for 55 package. Free allowances for industry are on a path to zero by 2034. Electricity generators pass allowance costs through to consumers. Primary aluminium smelting requires about 14–15 megawatt‑hours per tonne, so even a modest rise in carbon prices feeds through to the cost of smelting. Industry calculations suggest that each €10/tonne move in EUA prices can add roughly $40–50 per tonne of aluminium for a smelter drawing from a carbon‑exposed grid.
The CBAM transitional period began in October 2023. Importers must report embedded emissions, and starting in 2026 they will purchase certificates that equalise the carbon price faced by domestic and non‑EU suppliers. A coal‑fired smelter in Asia will no longer ship into the EU at a discount that excludes the carbon cost. The landed‑price benchmark rises across the board.
The most carbon‑intensive acceptable supplier now sets the marginal tonne, after the CBAM levy is added. If a European smelter curtails output because its carbon‑adjusted power bill runs too high, the import alternative no longer arrives cheaper on an all‑in delivered basis. The incentive to cut stays intact unless LME prices and regional premiums climb enough to clear the new cost floor.