Carbon tax impact on primary aluminium to be limited

Chennai: The European Union’s carbon tax will have limited impact on Indian primary aluminium producers, finds ICRA. However, if indirect emissions are also considered, there could be around 30 per cent impact on prices.

The present notification on the Carbon Border Adjustment Mechanism (CBAM) covers the financial impact on direct process-related emission from January 1, 2026, while excluding the indirect emission. As a result, CBAM impact would be moderate at 2-6 per cent of the current aluminium prices.

“Unlike steel, the CBAM is not expected to materially impact the export competitiveness of the domestic primary aluminium players, as the taxes arising from CBAM are likely to remain in the range of $50-140 per metric tonnes between 2026 and 2034, which would be 2-6 per cent of the current aluminium prices,” Jayanta Roy, Senior Vice-President and Group Head, Corporate Sector Ratings, ICRA.

However, in case the indirect emission, which accounts for 80 per cent of the total emissions, is also included in the future, then the impact would be severe, equivalent to 27-30 per cent of the current aluminium prices as domestic entities are significantly dependent on the coal-fired power plant for sourcing electricity. This is unlike the situation in the European Union, which has mostly switched to hydro power with almost 60 per cent lower carbon intensity.

India had exported around 0.7 million tonnes of primary aluminium to European countries in FY23, which was 24 per cent of the total exports. Domestic primary aluminium producers have sharpened their focus on reducing the carbon footprint by as much as 25-30 per cent through various technological interventions and achieving net zero status by 2050.

From January 1, 2026, the EU importers will have to buy CBAM certificates, corresponding to the embedded emissions above the EU Emission Trading System (EU-ETS) benchmark levels. The price of these certificates will be linked to the weekly average carbon prices at the EU-ETS.

The tax will be imposed on embedded carbon imports from six sectors, which includes aluminium, steel, cement, hydrogen, electricity, and fertiliser.