Europe’s aluminium sector is facing high electricity costs, reduced primary smelting capacity and uncertain returns on new investment, according to industry representatives. They say the European Union also needs to address the economics of domestic metal production as it aligns carbon costs on imports with those borne by European manufacturers.
Speaking at the FT Metals and Mining Summit 2026, James Watson, director general of European Metals, said that carbon charges applied to imported aluminium would not remove the electricity cost disadvantage faced by European smelters. Watson said CBAM does not create a business and argued that industrial competitiveness requires measures beyond carbon regulation.
The EU’s definitive Carbon Border Adjustment Mechanism regime started on 1 January 2026, progressively aligning carbon costs for covered imports with those paid by European producers under the EU Emissions Trading System (ETS). For primary aluminium, the role of electricity spending remains central to operating margins and investment decisions.
Electricity price gaps drive cost pressure for primary smelters
In 2025, European smelters used an average of about 15.5 MWh of electricity per tonne of primary aluminium, according to the International Aluminium Institute. At that consumption level, differences in electricity prices can widen production-cost gaps between producers.
The figures cited by industry indicate that paying €50/MWh more than an overseas competitor would add roughly €775 in electricity costs per tonne of aluminium. For a facility producing 200,000 tonnes annually, the annual difference would be about €155 million.
The same estimates place energy at 30–40% of production costs at some aluminium facilities. With aluminium prices largely set by global markets, European producers have limited ability to pass higher electricity costs directly to customers.
A smelter using low-carbon electricity may still face commercial disadvantages compared with competitors benefiting from cheaper long-term power contracts, subsidised energy or access to abundant domestic generation. Industry links these pressures to changes in Europe’s production footprint.
Capacity idling since 2021 reflects multiple pressures
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 assessment attributed closures and curtailments to a combination of energy shocks, import competition and structural costs.
The same reporting said these developments were not driven by CBAM itself. The electricity-cost disadvantage described by industry therefore remains separate from the carbon charges addressed through border adjustment.
Direct-only CBAM treatment raises questions over indirect emissions
The current CBAM framework assesses imported aluminium mainly on direct production emissions, excluding indirect emissions tied to purchased electricity from the aluminium carbon charge. This distinction is relevant 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 how electricity-related ETS costs are handled could further disadvantage European smelters. The group said carbon prices can affect wholesale electricity costs under the EU market structure depending on contracts and exposure for industrial buyers.
The industry position is that European producers may face indirect carbon-related costs that overseas competitors do not bear on equivalent terms. Preferred measures mentioned include maintaining compensation for indirect carbon costs, protecting eligible free ETS allowances during the transition and improving CBAM effectiveness against avoidance practices.
An additional concern was raised in August 2026 research published by the International Growth Centre. It concluded that excluding electricity-related emissions weakens incentives for overseas aluminium producers to switch to cleaner electricity when direct emissions are comparable.
EU review of indirect emissions expected in 2027
The International Growth Centre research said producers relying on coal-intensive power and those using hydropower can face similar CBAM obligations under the existing design when direct production emissions match. The EU is expected to review whether indirect emissions should be included for aluminium and other sectors in 2027.
The outcome could affect procurement agreements and long-term investment decisions, as well as how imported and domestically produced metal are treated relative to each other. Including electricity-related emissions could reward cleaner production abroad, but doing so without addressing corresponding costs borne by European producers could create another competitive imbalance.
Power support measures expand under EU state aid rules
Electricity prices and supply reliability are described as key inputs into 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 cash flow.
Long-term renewable power purchase agreements can improve price visibility, but wind and solar contracts alone do not remove balancing costs for intermittent generation or the need for reliable supply. Competitive industrial electricity arrangements are therefore linked to coordination across generation investment, transmission networks, storage, firm supply and long-term commercial contracts.
The EU’s Clean Industrial Deal State Aid Framework allows 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 were not exclusively designed for aluminium producers but were presented as examples of direct support aimed at industrial operating costs. Differences in national fiscal capacity were also noted as a factor affecting competition within the single market.
Total investment needs for aluminium decarbonisation reach €33 billion by 2050
beyond immediate relief measures, 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 capital depends on whether investors expect sustainable returns from European production assets over their operating lives. Power prices, supply reliability and financing conditions remain central across smelting, recycling and downstream processing decisions.
The pressure extends beyond primary production as manufacturers of aluminium sheets, extrusions, components and finished products face input-cost challenges linked to carbon pricing affecting both imported and domestically produced metal. Overseas firms may also process aluminium into finished goods outside Europe before exporting into EU markets.
Downstream CBAM extension from 2028 remains under negotiation
The European Commission proposed extending CBAM coverage 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.
An expanded product scope could reduce incentives to relocate processing outside the EU while not eliminating differences tied to electricity prices, labour costs, logistics or capital availability. Exporters were also described as facing a limitation because CBAM primarily addresses competition in the EU import market rather than compensating firms selling into third countries.
The regime increases reliance on verified emissions data, transparent production processes and reliable documentation of aluminium precursors for suppliers in the Western Balkans and other neighbouring markets. Access to low-carbon electricity can strengthen their position with European customers even though indirect electricity emissions do not directly reduce the current aluminium CBAM charge while those suppliers remain outside its scope.
European Metals calls for €10 billion funding envelope for critical raw materials
The competitiveness debate is linked to broader efforts around EU financing for non-ferrous metals production and critical raw materials processing. In a letter dated 9 October, European Metals asked EU leaders for a dedicated €10 billion funding envelope for critical raw materials within the proposed European Competitiveness Fund.
The association said 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. It said these targets cover the wider non-ferrous metals sector rather than aluminium alone.