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Greenwashing via CBAM: Loopholes Threaten European Green Products Market

The EU’s Carbon Border Adjustment Mechanism (CBAM) is a landmark tool designed to extend the carbon pricing in Europe to imported products. It’s meant to balance competition between EU industry and industry from countries with less ambitious climate policies. It is supposed to serve as a climate tool and protect European industries taking the leap towards a more sustainable future. 

However, a regulation under CBAM has a substantial loophole: It fails to account for all the carbon emissions of imported products. This opens the door for large scale greenwashing of carbon-intensive imports and endangers both Europe’s global climate efforts and our industries that are making the transition to a greener Europe. 

The Challenge

The commission suggests that when calculating the embedded emissions from imported aluminium, all re-melted scrap content is assigned zero emissions. However, this classification mixes carbon-intensive industrial scrap with recycled products such as old cans, old window frames and car parts. 

In the EU, primary aluminium producers pay for the emissions created in the production process. These emissions and costs follow the aluminium through the value chain all the way to the consumer. The suggested CBAM methodology fails to assign the same emissions and costs to imported aluminium based on process scrap as EU producers pay for under the EU-ETS. The result is a much lower carbon cost for imported aluminium compared to EU production of aluminium. 

More than 1/3 of all aluminium production at some stage becomes industrial scrap before it’s remelted and used to make final products. Everything is circled back, re-melted and used again. The emissions created when making the metal do not go away. However, because of how CBAM treats re-melted industrial scrap, it would be assigned zero emissions and escape carbon costs. 

This regulatory error creates a giant loophole in the CBAM system. It would encourage non-European companies to export remelted process scrap to Europe, falsely labeling it as "carbon-free" and outcompeting local low-carbon production.

Moreover, the loophole could compromise the EU's global climate change mitigation efforts, and may incentivize foreign companies to overproduce, remelt, and export process scrap to Europe under the same false "carbon-free" pretense, amplifying environmental and economic impacts.

This misleading representation not only deceives EU consumers but also undermines industries’ commitment to heavily invest in the green transition.

Striking the Balance

While remelting industrial aluminium scrap is both efficient and good business practice, the current legislation would erroneously categorize it as carbon-free. To rectify this, emissions attributed to remelted industrial and process scrap should match those for primary aluminium under CBAM. This adjustment would level the carbon costs between imported products and EU industry, enhancing CBAM's effectiveness, protecting European green markets, and limiting greenwashing.

Furthermore, during the trial period, importers must also be obliged to report on whether the claimed recycled content of their imported aluminium is based on either industrial scrap and cut offs or collected and sorted post-consumer scrap.

Our Call to Action

We strongly urge the EU Commission and Member States to address this regulatory gap in CBAM by aligning the emissions of remelted industrial and process scrap with those of primary aluminium. This alignment is essential for realizing the CBAM's initial purpose: to equalize the carbon costs for imported goods with those in Europe.

The Way Forward

Closing this loophole will not only ensure the effectiveness of CBAM in protecting European green markets but also increase Member State revenue, provide the right decarbonization incentives for foreign industries, and prevent attempts at greenwashing.

Together, let's take a stand for genuine sustainability, promoting and upholding the integrity of European green markets and the wider global environment.

Questions and Answers

For more detailed insights into this matter, please view the following comprehensive Q&A:

Our main concern is that it will undermine CBAMs effectiveness as a climate instrument for aluminium production in Europe.

The carbon footprint of the European aluminium industry is already much, much lower than the global average, and will continue to decrease because of the Green Transition. However, with this potential loophole, CBAM:

  • Will not protect the EU industry and consumers against import of carbon intensive materials at a much lower cost, which is a direct threat to the Green Transition;
  • will make it possible to export to Europe carbon intensive products as if they were carbon free, misleading the EU consumers;
  • will provide very low incentives for third countries to decarbonize, as they can just exploit this loophole; and
  • will not provide the EU Member States with the income that they expect from CBAM.

We urge the European Commission and EU Member States to fix this regulatory oversight by attributing the same emissions to remelted industrial and process scrap as CBAM does for primary aluminum.

This would make the carbon cost for imported products under CBAM equal to the carbon costs of EU industry under the EU-ETS. It would enable the CBAM to function effectively to protect the European green products markets and prevent greenwashing attempts.

In the trial period, importers must also be obliged to report on whether the claimed recycled content of their imported aluminium is based on either industrial scrap and cut offs or collected and sorted post-consumer scrap.

These changes must be implemented as soon as possible in the current version of the implementing act. Although it’s possible to change it later, the data gathered in the trial phase of CBAM must be applicable in when CBAM starts taking financial effect in 2026. There is no point in collecting trial period data that does not match the CBAM active phase.

For example, aluminium produced in China using coal-based electricity has a very high carbon footprint of about 20 tons of CO2 per ton of aluminium. Conversely, the average in Europe stands at around 6-7 tons of CO2 per ton of aluminium, while aluminium considered to be low carbon generally falls below 4 tons.

Picture the carbon intensive, coal-power based aluminium being processed in a Chinese aluminium rolling mill, producing body sheets for the Chinese car industry. Between 30 and 40 % will be cut off during the manufacturing process and re-melted. The re-melted metal is then used to make another sheet, but this time it is exported to Europe to be used in European cars.

Now, what is the carbon footprint of that aluminium imported to Europe? Still 20 tCO2/t, right? Not according to the CBAM implementing regulation. Upon import into Europe, the CBAM would not recognize the emissions from such re-melted process scrap, and it would be regarded as having zero emissions and thereby completely bypassing carbon pricing.

Due to this loophole, EU car manufacturers might find themselves using highly carbon-intensive aluminium in their vehicles without anyone paying the carbon cost that should come with this material.

Considering that between 25 and 50 % of all aluminium produced each year becomes process scrap at some point in the production process before it is remelted and made into a product, there is ample opportunities to exploit this loophole in CBAM. It might even become the norm.

Quite high, unfortunately. The aluminium value chain generates about 15 million tons of industrial scrap every year. All of this is re-melted and used to make products.

If imported to Europe under the current CBAM proposal, the discount of remelted industrial scrap compared to primary aluminium could amount to several hundred Euros. It could even exceed 1000 Euros if the aluminium was produced using coal-based electricity in countries like China, India, or Indonesia. With the global aluminium price at 2200 $/ton, who wouldn’t use this loophole?

Using industrial scrap is both efficient and good business, and industrial scrap has been a commercial product comparable to primary aluminium for decades.

We absolutely need to remelt and use industrial scrap; it’s a fantastic resource that should not go to waste. However, the industry is already making full use of it, and we don’t need CBAM to increase the use of it. Instead, CBAM will only re-shuffle remelted process scrap and cause more of it to be sent to the EU.

Unfortunately, no. If the implementing regulation is adopted as it is, the practice described is not circumvention. It would be an integral part of CBAM that would be perfectly legitimate to use. CBAM itself would allow for this practice.

Because now is the time when the EU decides on the technical details of CBAM.

The main CBAM Regulation has already been adopted, but we are now in the implementing phase, where the EU Commission is producing the CBAM secondary legislation. This secondary legislation determines essential technical details for how CBAM works.

Presently, an implementing regulation for calculating the carbon emissions from imported products is under development and open for public consultation. This legislation is anticipated to be finalized by the end of July.

As this is the first time these technical details are public, we must use this opportunity to get the details of it right, so that it can function as intended.

The overlooked technical detail could unintentionally create a greenwashing pathway, tempting non-European companies to export all their remelted industrial process scrap to Europe as “carbon free”, while in reality the carbon content is much, much higher.

  • This practice jeopardizes the credibility of the European green products market by making carbon intensive import products much cheaper.
  • It undermines the EU’s climate change mitigation efforts on the global arena, because foreign producers can just send batches of re-melted process scrap to Europe instead of decarbonizing.
  • European industry is investing heavily in the Green Transition. Carbon emissions from metals production are very hard to tackle, but there are a lot of very exciting initiatives in the industry right now. What is required for these initiatives to flourish is a predictable demand for greener products. However, if the CBAM policy permits the import of cheaper, carbon-intensive products, it could threaten Europe’s our own decarbonisation efforts. We need CBAM to protect our green markets, not undermine them.

Under the EU-ETS, European industry pays for the emissions of producing primary aluminium. These emissions and the correlated costs follow the creation of aluminium products and remelted process scrap. In one way or another, independent of the LCA analysis used for each end product, the consumer pays for the carbon emissions created in the production process.

An intention of CBAM is to mirror these EU ETS costs for importers. However, CBAM would neither identify nor price such emissions from imported products containing remelted process scrap (for example from China, Russia or India). It is particularly problematic that it incentivizes companies outside the EU to generate as much process scrap as possible for re-melting through ineffective processes.

Compared to the EU-ETS, this is a loophole that allows for large scale greenwashing of imported aluminium products. More importantly, it undermines the function of CBAM as a carbon leakage instrument for Europe at a time when EU ETS costs for European industry are expected to further increase (as free allowances are phased out and the ETS cap is tightened).

The technical flaws in the CBAM implementing regulation could significantly weaken its effectiveness, affecting the European industry and the EU's international climate change initiatives.

  • It will encourage companies outside Europe to send remelted process scrap to Europe under the false pretense of it being "carbon-free". Once imported, it will outcompete low carbon production in the EU.
  • This activity not only threatens the reputation of the European market for green products but could also compromise the EU’s efforts to combat climate change on a global scale.
  • It could also encourage companies outside Europe to overproduce process scrap, remelt it, and then export it to Europe under the false pretense of it being "carbon-free".

Exporters to Europe would naturally prefer to maintain the possibility of exporting aluminium to the continent without any additional charges imposed by the CBAM. They view this loophole as a competitive advantage

Also, within the European aluminium industry, there are differing views. There is unanimous agreement that CBAM must act effectively as an anti-carbon leakage tool, safeguarding European green markets.

However, the discourse on how the CBAM should calculate the embedded emissions from imported goods sometimes intertwines with disparate views within the industry regarding the Life Cycle Analysis (LCA) of carbon emissions. We believe that this overlap is unfortunate, as it obstructs the development of a unified stance on the need for an effective CBAM.

It is important to acknowledge that there are different methods of conducting Life Cycle Analysis (LCA) both in the aluminium industry and amongst our customers.

However, these different methods are not affected directly by the EU’s Emission Trading System (EU-ETS), and as CBAM is a part of the EU-ETS system, CBAM should not affect it either.

In our view, rather than concentrating on these different approaches to LCAs for carbon emissions, we should prioritize ensuring that the CBAM effectively supports the Green Transition.

It is also worth noting that regardless of LCA approach, the EU aluminium industry pays for the carbon emissions created in the production process of aluminium. We are only requesting that imported goods face the same carbon costs.

Hydro’s overarching perspective has been that if implemented, the CBAM should be phased in slowly and gradually to allow for continuous assessments of how it works as a carbon leakage and climate instrument.

The EU has devoted nearly 20 years to finetuning the system of Monitoring, Reporting and Verification (MRV) of Emissions under the EU-ETS. We must recognize that as we extend this system to products from the global market, we must proceed with care, adopting a measured and controlled approach that allows for course corrections as necessary.

The application of CBAM to scope 2 emissions (emissions from purchased or acquired energy used in the production process), in particular, might prove challenging in practice. A CBAM on scope 2 emissions would undermine European low carbon aluminium.

European producers face full indirect emission costs regardless of electricity source, even though they have a much lower carbon footprint than the global average. This is because in the EU, the cost is passed on through the electricity price, determined by the emissions of the marginal electricity producer – usually gas or coal power. This cost is much higher than what a CBAM fee would be.

A CBAM on indirect emissions combined with the phase-out of indirect cost compensation would therefore lead to substantially higher costs for low carbon aluminium products produced in Europe compared to imported aluminium products with no corresponding price increase in the market.

A CBAM on indirect emissions should be introduced only once the EU electricity system is decarbonized, and only after thorough assessments and review. Abrupt and premature removal of indirect cost compensation would in practice spell the end of EU primary aluminium production. Since European aluminium production is far less GHG intensive than the global average, it would also be detrimental to the climate ambitions of the EU.

At our Navarra facility in Spain, Hydro has demonstrated that zero carbon aluminium production, utilizing recycled scrap and green hydrogen, is achievable.

Alongside investments in research and development of our new emission-free smelting technology HalZero, Carbon Capture and Storage (CCS) and carbon dioxide removals technology for existing smelters, battery materials and renewable energy, we intend to do our part in fighting climate change and growing the European green economy.

However, if CBAM inadvertently creates incentives to import greenwashed carbon intensive materials, Europe’s climate polices become counterproductive. European consumers are misled, and the European industry pays the price.

Yes, we should, but there are different types of scrap. The one we are talking about here – industrial scrap – has always been re-melted and used by the aluminium industry.

In fact, the aluminium value chain generates about 15 million tons of industrial scrap every year, and all of this is re-melted and used to make products.

It’s both efficient and good business, and industrial scrap has been a commercial product comparable to primary aluminium for decades.

In fact, between 25 and 50 % of all aluminium produced each year becomes process scrap at some point in the production process before it is remelted and made into a product.

We have to use all this aluminium, but the aluminium value chain is already doing it, and we don’t need CBAM to increase the use of it. CBAM will only re-shuffle remelted process scrap and cause more of it to be sent to the EU.

For the other main category of scrap – post-consumer scrap – there is a large potential for increased recycling. This is aluminium that has already been in use, such as old can, window frames and car parts.

Aluminium companies worldwide, including Hydro, are targeting increased recycling of post-consumer scrap. The challenges here differ from those of industrial scrap, which is clean and sorted. Post-consumer scrap must be collected, sorted, cleaned and re-purposed. For post-consumer scrap, it makes sense not to levy a price on the embedded emissions, as the product has already reached its end-of-life stage.

To our understanding, the European aluminium industry is unified in its call for an effective CBAM.

However, the discussion on how the CBAM should calculate embedded emissions from imported products occasionally intertwines with divergent views within the industry on Life Cycle Analysis (LCA). We find this unfortunate, as it inhibits the formation of a unified stance on the need for an efficient CBAM.

We have to recognize that there are different methods of doing LCA both in the aluminium industry and amongst our customers. But these different methods are not affected directly by the EU’s Emission Trading System (EU-ETS), and as CBAM is a part of the EU-ETS system, CBAM should not affect it either.

We think that instead of focusing on the differing views on LCA’s for carbon emissions, we should focus on making CBAM work in favor of the Green Transition.

In our view, especially producers of low carbon primary aluminium and recyclers of post-consumer scrap should be concerned, both in Europe and abroad. If CBAM fails to adequately price high carbon products, then the low carbon products stand to lose out.

Simply put, we have two sources of aluminium scrap for reuse. The first source is the reuse of scrap that has lived a life being part of a product, called post-consumer scrap. This can be anything from a wrecked car to your soda beverage can.

The second source comes from the industrial production processes themselves. This includes offcuts, remnants from unsuccessful production batches, or the residual material of an aluminium sheet after a circular shape has been cut out. The reuse of these materials is resource-efficient and essential. This is called industrial, pre-consumer or process scrap.

It undermines production of low carbon input materials for the Green Transition.

Few sectors are more important for the Green Transition than the production of materials, and few sector emissions are harder to abate. The industry is making strides to reduce its emissions, and the lowest hanging fruit with the highest immediate climate impact is increasing circularity and reducing the need to produce more.

However, it's essential that the production of low carbon products is financially viable. Proper carbon leakage protection, increased transparency and avoiding greenwashing is key for success. If materials with misrepresented carbon footprints and costs can be imported and sold, it would undermine the entire EU market for authentic low carbon products.

Companies that invest in complex and costly emission reductions would be left with few economic incentives to pursue climate ambitions if exploiting administrative loopholes presents an easier path to similar economic benefits.

If CBAM makes it possible to import greenwashed aluminium free from carbon costs, what remains of incentives for the European aluminium industry to decarbonize their own processes?

Because industrial aluminium scrap is, in practice, a good equivalent to primary aluminum.

When you cut a piece of a material in two, each piece still carries the same carbon footprint. This is what happens in the production of aluminium products. Parts are cut off when forming the main product. The same is valid for failed batches or when a circle is cut from a square piece and the remainder is remelted and reused.

However, the aluminium itself stays unchanged. Aluminium with a high carbon footprint does not miraculously become carbon-free simply by remelting the cut-off parts. In fact, re-melting using fossil fuel for heating increases emissions by a small amount.

For post-consumer aluminium scrap that has live a full product life, such as old drinking cans, window frames and car parts, it’s generally accepted that it does not come with embedded emissions. The idea is that by re-using older products, you avoid the emissions of creating a completely new one.

 

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