CBAM and Indian Aluminium: Scope 2 Electricity Exposure and What Smelters Must Do | Reclimatize.in
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Aluminium · CBAM · Policy AnalysisCBAM and Indian Aluminium: Why Electricity Source Is the Decisive Competitive Variable and What Every Smelter Needs to Know About Scope 2 Exposure
Aluminium is the sector where CBAM cuts deepest into Indian export competitiveness — not because India’s direct process emissions are exceptional, but because the electricity that powers Indian smelters is overwhelmingly coal-based and because CBAM for aluminium, unlike CBAM for steel, includes indirect electricity emissions (Scope 2) in the embedded emissions calculation. A hydropower smelter in Iceland or Canada exports aluminium into the EU with CBAM-relevant embedded emissions of approximately 1 to 2 tCO₂ per tonne. An Indian coal-based smelter exporting the same product carries embedded emissions of 12 to 18 tCO₂ per tonne. That is an eight to ten-fold difference — entirely driven by electricity source, not process chemistry. At EU ETS carbon prices of €80/tCO₂e, the gap translates to approximately €800 to €1,000 per tonne of primary aluminium in additional CBAM cost. India’s aluminium and steel exports to the EU had already fallen 24.4% in FY25 in anticipation of CBAM. From January 2026, with certificates now financially mandatory, the pressure intensifies. But unlike the steel situation, renewable energy procurement directly and immediately reduces CBAM exposure for Indian aluminium smelters — the financial case for RE investment is simultaneously a CCTS compliance case, a CBAM competitiveness case, and a cost reduction case.
CBAM for aluminium covers both direct (Scope 1) emissions and indirect electricity (Scope 2) emissions. This is the structural difference that makes aluminium far more CBAM-exposed than steel for coal-powered producers. Electricity accounts for approximately 60 to 70% of total embedded emissions for an Indian coal-grid smelter — meaning that the electricity source, not the smelting process chemistry, is the dominant driver of CBAM certificate costs.
Primary aluminium smelting requires approximately 14,000 to 15,000 kWh of electricity per tonne of metal produced. At India’s grid emission factor of 0.710 tCO₂/MWh (FY 2024-25 provisional), the Scope 2 contribution to embedded emissions is approximately 9.9 to 10.7 tCO₂ per tonne — before adding Scope 1 process and combustion emissions of 2 to 3 tCO₂/t. For smelters operating coal captive power plants at 0.9–1.05 tCO₂/kWh, the Scope 2 contribution rises to 12.6 to 15.75 tCO₂/t, pushing total embedded emissions well above 14 tCO₂/t.
For Indian aluminium smelters, unlike for steel producers, renewable energy investment directly reduces CBAM embedded emissions because Scope 2 is included. This creates a unique three-way investment alignment: each unit of renewable electricity procured reduces electricity cost (vs coal grid/CPP), reduces CCTS GEI (Scope 2 under the compliance mechanism), and reduces CBAM Scope 2 embedded emissions (directly lowering the EU importer’s certificate obligation and improving the smelter’s competitive position in the EU market).
India is the world’s second-largest aluminium producer. CBAM for aluminium could impact approximately 25% of India’s annual aluminium exports to the EU. The Big Four Indian smelters — Vedanta, Hindalco, NALCO, and BALCO — have collectively committed USD 5 billion and 20 GW of renewable energy by 2030. However, Vedanta’s current renewable share is only 5%, and NALCO’s CMD stated in January 2026 that the sector is not yet prepared for the green transition. The pace of RE adoption will directly determine CBAM competitiveness through the decade.
Anti-circumvention rules introduced under the Omnibus simplification package now require embedded emissions from pre-consumer scrap to be included in CBAM calculations for aluminium — closing the loophole through which producers could use pre-consumer scrap purchased from high-carbon production lines and falsely claim zero embedded emissions. Secondary aluminium producers (using scrap) generally have significantly lower embedded emissions than primary smelters, but the pre-consumer scrap rule requires their calculations to reflect the actual emissions of the scrap source.
The structural difference — why aluminium is not steel under CBAM
The most important analytical starting point for this article is the one structural difference between CBAM for aluminium and CBAM for steel that fundamentally changes the competitive dynamics for Indian producers. For steel, CBAM covers only direct (Scope 1) emissions — process emissions from the blast furnace and BOF, electrode consumption in EAF, and combustion of fuels. Indirect electricity emissions are excluded for steel under CBAM. For aluminium, CBAM covers both direct (Scope 1) emissions and indirect electricity (Scope 2) emissions.
This inclusion of Scope 2 for aluminium is not incidental — it reflects aluminium’s unique physical chemistry. The Hall-Héroult electrolytic smelting process that produces approximately 99% of the world’s primary aluminium is inherently electricity-intensive, requiring approximately 14,000 to 15,000 kWh per tonne of aluminium produced. Electricity consumption accounts for the single largest emission source in primary aluminium production — well above the direct process emissions from carbon anode oxidation (approximately 1.5 tCO₂/t) and PFC emissions from anode effects (approximately 0.3–0.5 tCO₂/t). The EU specifically included Scope 2 for aluminium (and also for fertilisers and cement) because excluding it would have meant excluding the dominant emission source — making CBAM structurally irrelevant for aluminium differentiation between coal-powered and hydro-powered producers.
The embedded emissions arithmetic for Indian primary aluminium
Understanding the actual numbers that Indian smelters face under CBAM requires working through the embedded emissions calculation for primary aluminium production in India’s specific electricity context.
The gap between India’s coal-based primary aluminium and hydro-based competitors is structurally enormous. At EU ETS carbon prices of €80/tCO₂e, the competitive disadvantage of Indian coal-grid smelters relative to Icelandic or Norwegian producers is approximately €800 to €1,000 per tonne of primary aluminium — on a commodity whose average global price is roughly €2,000 to €2,300 per tonne. This means CBAM costs for coal-based Indian smelters represent 40 to 60% of the product’s global market value. No pricing strategy, efficiency gain, or commercial negotiation can absorb a cost burden of this magnitude without structural change in the electricity source.
Why renewable energy investment is the only structural answer
For Indian aluminium smelters, the renewable energy procurement decision under CBAM is not incremental — it is existential for EU market participation. Every percentage point of electricity consumption shifted from coal (CPP or grid) to renewable energy directly reduces the Scope 2 embedded emission and therefore reduces the CBAM cost burden proportionally. This is the unique alignment that makes the aluminium sector different from steel under CBAM and creates the most powerful investment incentive in India’s industrial decarbonisation landscape.
The illustrative calculation above uses conservative assumptions: a CPP emission factor of 1.0 tCO₂/kWh (typical for coal-fired power), a 30% renewable switch (well below the Big Four’s 2030 commitments), and EU ETS prices of €80/tCO₂e. Even under these assumptions, the CBAM cost reduction alone — €174 million per year for a single 500,000 t/year smelter — justifies a very large renewable energy capital investment. The electricity cost saving (if renewable energy is genuinely cheaper than coal CPP operation) adds further economic return. The CCTS compliance benefit adds a third financial incentive.
This three-way alignment — CBAM reduction, electricity cost saving, CCTS compliance benefit — does not exist for any other sector or any other decarbonisation investment at the same scale and immediacy. It is the reason why the Indian aluminium sector’s USD 5 billion, 20 GW renewable target by 2030 is not aspirational sustainability signalling — it is a rational commercial response to three simultaneous financial signals pointing in the same direction. The sector that moves fastest on renewable procurement wins; the sector that delays loses EU market access progressively and permanently.
The Big Four’s RE transition — where each smelter stands
India’s primary aluminium production is dominated by four integrated producers, each with a very different starting point on renewable electricity transition and therefore very different CBAM exposure profiles.
| Producer | Capacity (MTPA) | Current RE share (~) | 2030 RE target | CBAM exposure (current) |
|---|---|---|---|---|
| Vedanta (Jharsuguda, BALCO) | ~2.5 MTPA | ~5% | 30% by 2030; 20 GW across sector | Very high — predominantly coal CPP |
| Hindalco (Renukoot, Hirakud) | ~1.3 MTPA | ~10–15% | Part of USD 5bn sector commitment; Renukoot near hydro catchment | High — coal CPP dominant; some hydro via grid |
| NALCO (Angul) | ~0.46 MTPA | <10% | MOU for 1,080 MW thermal CPP with NLCIL (February 2026) — does not improve CBAM position | Very high — CMD Jan 2026 stated sector not prepared for green transition |
| BALCO (Korba) | ~0.57 MTPA | <10% | Part of Vedanta group targets | Very high — coal belt location (Chhattisgarh) |
NALCO’s signing of a 1,080 MW thermal coal-based CPP MOU with NLCIL in February 2026 — just weeks after CBAM entered its definitive period — is a stark illustration of the sector’s transition readiness challenge. A new coal-based CPP commissioned after 2026 locks NALCO into a high-CBAM-cost electricity mix for the operational lifetime of that asset — 25 to 30 years. At CBAM certificate prices that are expected to rise from current levels to €100 to €150/tCO₂e by 2030 as EU ETS free allocations phase out, that lock-in becomes increasingly expensive. NALCO’s EU export strategy and its electricity investment strategy are moving in opposite directions.
Odisha — home to Vedanta’s Jharsuguda and NALCO’s Angul smelter — has one of India’s better-structured renewable open access frameworks for industrial consumers. The state’s RE Policy 2022 provides 50% CSS exemption and 25% wheeling exemption for in-state RE projects. Total open access landed cost for solar in Odisha (at utility scale): approximately Rs 3.5 to Rs 4.5/kWh including wheeling and reduced CSS, against coal CPP electricity cost of Rs 3.5 to Rs 5.5/kWh. This means new renewable open access in Odisha is cost-competitive with existing coal CPP electricity for smelters — and delivers simultaneous CBAM cost reduction of approximately €80/tCO₂e × the specific emission reduction per kWh switched. The arithmetic is compelling: every GW of solar open access at an Odisha smelter reduces annual CBAM costs by approximately €50–70 million at current EU ETS prices, with no net electricity cost increase. The business case builds further as carbon prices rise toward 2030.
Secondary aluminium — the structural CBAM advantage
Secondary aluminium — metal produced from scrap rather than bauxite reduction — has dramatically lower embedded emissions than primary aluminium from any electricity source. The remelting of aluminium scrap requires only approximately 5 to 7% of the energy needed for primary smelting, because the electrolytic reduction step is bypassed entirely. This means even a coal-powered secondary aluminium producer has embedded emissions of approximately 0.5 to 1.5 tCO₂/t — well below the 12 to 18 tCO₂/t of a coal-powered primary smelter and even below the 1 to 2 tCO₂/t of a hydro-powered primary smelter.
The anti-circumvention rule introduced under the Omnibus simplification package adds a constraint: pre-consumer scrap (off-cuts and industrial waste from manufacturing processes) that originates from high-carbon production lines must now include those upstream embedded emissions in the CBAM calculation. This prevents secondary producers from purchasing pre-consumer scrap from a BF-BOF steel mill or coal-based primary aluminium smelter and claiming zero embedded emissions. However, post-consumer scrap (end-of-life vehicles, appliances, construction materials) retains a more favourable treatment — its upstream embedded emissions have already been attributed to the original product lifecycle, and the secondary aluminium derived from it carries primarily the remelting energy emissions.
India’s secondary aluminium sector — which uses scrap for casting alloys, deox aluminium, and other applications — has a structurally advantaged CBAM position relative to primary smelters. The detailed article on secondary aluminium in the next section of this cluster explores this opportunity and the supply chain and quality challenges involved in scaling India’s recycling pathway.
Frequently Asked Questions
Why does CBAM include Scope 2 electricity for aluminium but not for steel?
The EU’s rationale is that aluminium production is inherently electricity-dominated — electricity accounts for approximately 60 to 70% of total embedded emissions for a coal-grid smelter. Excluding Scope 2 for aluminium would have made CBAM structurally irrelevant for the sector’s dominant emission source and would have eliminated most of the competitive differentiation between hydro-powered and coal-powered producers. For steel, the dominant emission source is Scope 1 (blast furnace and coke oven chemistry), so excluding Scope 2 still captures the major differentiating emission. The EU has indicated it intends to expand Scope 2 inclusion to additional sectors over time, and there is ongoing discussion about including Scope 2 for steel in future phases.
If an Indian smelter has a PPA for solar electricity, does that reduce CBAM embedded emissions?
Yes — but the documentation requirements are stringent. If a smelter has a green open access PPA for solar electricity and can demonstrate that the specific renewable electricity was physically consumed at the smelter, the emission factor for that portion of electricity is zero (or the actual facility-specific emission factor of the solar plant). This reduces the Scope 2 component of the SEE calculation proportionally. The documentation trail must show the volume of renewable electricity delivered per month, the emission factor of the renewable generating installation (verified), and the linkage between that delivery and the smelter’s production. RECs alone — without physical renewable electricity delivery — do not reduce CBAM Scope 2 embedded emissions for aluminium, for the same reason they do not reduce CCTS Scope 2.
What CN codes for aluminium products are in CBAM scope?
The main aluminium CN codes covered under CBAM from January 2026 include: 7601 (unwrought aluminium, primary and alloys); 7603 (aluminium powders and flakes); 7604 (aluminium bars, rods, profiles); 7605 (aluminium wire); 7606 (aluminium plates, sheets, strip); 7607 (aluminium foil); 7608 (aluminium tubes and pipes); 7609 (tube or pipe fittings); and 7610 (aluminium structures). Precursor alumina and certain processed products are also covered. The 2026 Omnibus simplification removed finishing processes from CBAM scope but retained embedded emissions from precursors. Exporters should verify their specific CN codes against the latest CBAM Annex I to confirm product-level scope.
How do PFC emissions from aluminium smelting affect CBAM calculations?
Perfluorocarbon (PFC) emissions — specifically CF₄ and C₂F₆ — are generated during “anode effects” in the Hall-Héroult cell, when the aluminium oxide bath concentration falls too low. Both gases have very high global warming potentials (CF₄ at approximately 6,630 CO₂e and C₂F₆ at approximately 11,100 CO₂e per IPCC AR6). Modern smelters equipped with point-feeder technology and continuous alumina feeding can reduce PFC frequency significantly — typically to below 0.5 anode effects per cell-day, resulting in PFC contributions of 0.2 to 0.5 tCO₂e/t aluminium. Older or less well-controlled smelters can have PFC contributions above 1.0 tCO₂e/t. Reducing PFC emissions is the highest-value Scope 1 decarbonisation lever for Indian aluminium smelters under both CCTS and CBAM, since PFC abatement costs are low relative to the carbon credit or CBAM cost reduction achieved.