The missing carbon signal: How CBAM’s exclusion of scope 2 emissions undermines its climate/ trade objectives
Scope 2 emissions account for around 80% of primary aluminium's total emissions but are currently excluded from CBAM pricing, limiting its ability to reward cleaner electricity sources. Including indirect emissions would distinguish producers based on the carbon intensity of their electricity and strengthen the competitiveness of renewable-powered producers, such as Mozambique's Mozal smelter. With the EU reviewing scope 2 inclusion by 2027, the brief provides evidence on the environmental and competitive implications of extending CBAM coverage.
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Wolfram-Pereboom-Policy-Brief-July-2026.pdf
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- Scope 2 (indirect) emissions, from the electricity used in production, account for approximately 80% of total emissions in primary aluminium yet remain unpriced under the Carbon Border Adjustment Mechanism (CBAM), weakening the mechanism's environmental effectiveness.
- The exclusion stems from the European Union Emissions Trading System (EU ETS) Indirect Cost Compensation (ICC) mechanism, which compensates producers for the electricity cost pass-through of carbon prices on the power sector. Eligible industries have been expanded to additional sectors, including iron and fertiliser, at the end of 2025. According to the EU Commission, indirect emissions should not be charged a CBAM fee for goods “in respect of which financial measures apply in the Union that compensate for indirect emissions costs”.
- Without scope 2 pricing, CBAM fails to send a signal to reward clean electricity sourcing globally. An aluminium smelter on a coal-heavy grid will pay the same CBAM charge as one powered by hydroelectricity.
- Scope 2 pricing would improve the competitiveness of producers in countries endowed with renewable electricity. The Mozal aluminium smelter in Mozambique, powered by hydropower from the Cahora Bassa dam, would face CBAM costs of roughly EUR 140 /t versus EUR 800-1,100 /t for Indian, Chinese, or South African coal-dominated-grid competitors.
- The EU has committed to reviewing scope 2 inclusion for aluminium, iron and steel, and hydrogen with a report due in 2027. This brief provides the analytical and empirical basis for understanding the stakes of the review.