Europe’s aluminium industry is confronting a combination of high electricity costs, reduced primary smelting capacity and uncertain investment returns that carbon-border protection alone cannot resolve. Industry representatives argue that the European Union must address the economics of domestic metal production alongside its efforts to align the carbon costs of imports with those faced by European manufacturers.
Speaking at the FT Metals and Mining Summit 2026, James Watson, director general of European Metals, said that imposing carbon costs on imported aluminium would not remove the electricity cost disadvantage facing European smelters. “CBAM does not create a business,” Watson said, arguing that industrial competitiveness requires measures beyond carbon regulation.
The warning comes as the EU’s definitive CBAM regime, which began on 1 January 2026, progressively aligns the carbon costs of covered imports with those faced by European producers under the Emissions Trading System (ETS). For primary aluminium, however, electricity expenditure remains a central determinant of operating margins and investment decisions.
Power consumption leaves primary smelters exposed
European smelters consumed an average of approximately 15.5 MWh of electricity per tonne of primary aluminium in 2025, according to the International Aluminium Institute. At that level of consumption, differences in electricity prices can translate into substantial production-cost gaps.
A producer paying €50/MWh more than an overseas competitor would incur approximately €775 in additional electricity costs per tonne of aluminium, assuming comparable power consumption. For a facility producing 200,000 tonnes annually, the difference would amount to approximately €155 million a year.
These illustrative figures represent an electricity-cost disadvantage independent of the carbon charges addressed by CBAM. Industry estimates suggest that energy accounts for 30–40% of production costs at some aluminium facilities.
Because aluminium prices are largely determined by global markets, European producers have limited scope to pass higher electricity costs directly to customers. A smelter using low-carbon electricity can have a strong environmental profile while remaining commercially disadvantaged against facilities with cheaper long-term power contracts, subsidised energy or access to abundant domestic generation.
The effects are reflected in Europe’s production capacity. A European Commission assessment published in 2026 reported that more than half of Europe’s primary aluminium production capacity had been idled since 2021. The closures and production curtailments reflect a combination of energy shocks, import competition and structural costs, rather than CBAM itself.
Indirect electricity emissions complicate CBAM treatment
The current CBAM framework assesses imported aluminium principally on direct production emissions, excluding indirect emissions associated with purchased electricity from the aluminium carbon charge. This distinction matters because electricity generation accounts for a substantial share of aluminium’s total carbon footprint.
European Aluminium has argued that extending CBAM to indirect emissions without resolving the treatment of electricity-related ETS costs could further disadvantage European smelters. Carbon prices can influence wholesale electricity costs under the EU market structure, including for industrial facilities purchasing low-carbon power, depending on their contracts and market exposure.
European producers may therefore bear indirect carbon-related costs that overseas competitors do not face on equivalent terms. The industry’s preferred measures include maintaining compensation for indirect carbon costs, protecting eligible free ETS allowances during the transition and improving CBAM’s effectiveness against avoidance practices.
A different concern was raised by research published in August 2026 by the International Growth Centre. The research concluded that excluding electricity-related emissions weakens incentives for overseas aluminium producers to switch to cleaner electricity. Under the existing design, producers relying on coal-intensive power and those using hydropower can face similar CBAM obligations when their direct production emissions are comparable.
The EU is expected to review the possible inclusion of indirect emissions for aluminium and other sectors in 2027. The outcome could affect procurement agreements and long-term investment decisions, as well as the relative treatment of imported and domestically produced metal.
Including electricity-related emissions could reward cleaner production abroad. However, doing so without addressing the corresponding costs borne by European producers could create another competitive imbalance.
Industrial power support expands across the EU
Electricity prices and supply reliability are central to financing decisions for aluminium smelters, alongside processing margins, operational efficiency, environmental obligations and access to capital. A project can meet EU decarbonisation objectives but still fail a lender’s profitability assessment if projected power costs undermine its cash flow.
Long-term renewable power purchase agreements can improve price visibility, but wind and solar contracts alone do not remove the costs associated with balancing intermittent generation, securing reliable electricity supply or purchasing residual power from wholesale markets. Competitive industrial electricity arrangements therefore depend on coordination between generation investment, transmission networks, storage, firm supply and long-term commercial contracts.
The EU’s Clean Industrial Deal State Aid Framework permits targeted support for electricity-intensive industries, alongside assistance for clean energy investment and industrial decarbonisation.
In April 2026, the European Commission approved electricity price-relief schemes with budgets of €3.8 billion in Germany, €334 million in Bulgaria and €90 million in Slovenia. The schemes are not exclusively intended for aluminium producers but demonstrate the use of direct support to address industrial operating costs.
Differences in national fiscal capacity also raise questions about competition within the single market, as businesses in countries able to provide more extensive financial assistance may receive greater support than comparable producers elsewhere in the EU.
Aluminium decarbonisation requires €33 billion by 2050
Beyond immediate electricity relief, European Aluminium estimates that decarbonising the industry’s value chain will require at least €33 billion in investment by 2050. The estimate covers industrial electrification, recycling, new technologies and supporting infrastructure.
The ability to mobilise that capital depends on whether investors expect European production assets to generate sustainable returns throughout their operating lives. Power prices, supply reliability and financing conditions consequently remain central to investment decisions across smelting, recycling and downstream processing.
The issue extends beyond primary aluminium production. European manufacturers of aluminium sheets, extrusions, components and finished products also face input-cost pressures as carbon pricing affects imported and domestically produced metal.
Overseas manufacturers may process aluminium into finished goods outside Europe before exporting those products to EU customers, creating a separate competitive challenge for European downstream producers.
Proposed downstream CBAM extension remains under negotiation
The European Commission has proposed extending CBAM to selected downstream steel and aluminium-intensive products from 1 January 2028. The European Parliament adopted amendments in September 2026, but the legislation remains subject to negotiations.
Expanding product coverage could reduce incentives to relocate processing outside the EU, although it would not eliminate differences in electricity, labour, logistics and capital costs.
European exporters face a related limitation: CBAM primarily addresses competition in the EU import market and does not automatically compensate European manufacturers selling into third countries where competitors may face lower energy and carbon-compliance costs.
For suppliers in the Western Balkans and other neighbouring markets, the regime increases the commercial importance of verified emissions data, transparent production processes and reliable documentation of aluminium precursors. Access to low-carbon electricity can strengthen their position with European customers, although indirect electricity emissions do not directly reduce the current aluminium CBAM charge while they remain outside its scope.
European Metals seeks €10 billion for critical raw materials
The aluminium competitiveness debate forms part of a broader push for EU financing of non-ferrous metals production and critical raw materials processing.
In a letter to EU leaders dated 9 October, European Metals called for a dedicated €10 billion funding envelope for critical raw materials within the proposed European Competitiveness Fund.
The association said that meeting Europe’s 2030 strategic raw materials objectives would require restarting inactive facilities and developing an additional 10 mines, 15 processing plants and 15 recycling facilities across the non-ferrous metals sector. These targets cover the wider sector rather than aluminium alone.
European Metals also called for support for industrial modernisation, expanded production and competitive access to low-carbon electricity, rather than concentrating funding exclusively on decarbonisation technologies.
The funding debate has implications for industries that depend on aluminium, including electricity grids, renewable energy generation, automotive manufacturing, aerospace, defence and industrial machinery. A shrinking European production base would increase these sectors’ dependence on external suppliers while the EU seeks to reduce vulnerabilities in strategic supply chains.
Lower-carbon imports can contribute to Europe’s climate and industrial requirements, but replacing domestic production with imports does not necessarily strengthen economic resilience when refining and processing capacity is concentrated outside the continent.
For European aluminium producers, the investment challenge therefore extends beyond the carbon costs of imported metal. Electricity prices, financing conditions and the expected profitability of new smelting, recycling and processing capacity will determine whether manufacturers can maintain and expand production within the EU.
