<article><p class="lead">The European Parliament yesterday voted for a carbon border adjustment mechanism. It will be the first time that a climate change measure has been inserted into international trade law and could impact battery metal trade as products move around the continent.</p><p>The carbon border adjustment mechanism (CBAM) will oblige companies that import into the EU to purchase CBAM certificates to cover the difference between the carbon price paid in the country of origin and the price of carbon allowances under the EU emissions trading system (ETS). </p><p>The initial scheme would include iron, steel, cement, aluminium, fertilisers and electricity and "certain precursors", which would mean the inclusion of battery precursor chemicals, although the EU was unable to confirm this.</p><p>"It is one of the only mechanisms we have to incentivise our trading partners to decarbonise their manufacturing industry. On top of this, it is an alternative to our current carbon leakage measures, which will allow us to apply the 'polluter pays' principle to our own industry," Durch MEP Mohammed Chahim said.</p><h3>Precursor producers under the spotlight</h3><p class="lead">A large share of the world's battery precursor chemicals is produced in China, South Korea and Japan. Ternary cathode active materials — predominantly produced in China — contain nickel, cobalt, lithium and manganese.</p><p>If these were to be targeted by the CBAM, Europe would need to find alternative sources of ternary cathodes, which are being built into most Gigafactory production systems in Europe. Finding alternatives to these would also require alternative sources of nickel, cobalt and manganese. Chinese precursor cathode active material producers are already well established, with supply chains in place for many of the crucial metals.</p><p>China produces almost all the world's manganese and accounts for most of Europe's imports. China also accounted for 74.58pc of total global refined cobalt production in 2021, with the next-largest being Finland, with 8.98pc. In the first half of 2022, China also provided 64pc of exports of global lithium hydroxide — the form of lithium predominantly used in ternary cathodes.</p><p>Nickel presents more of a challenge to the EU. It is not difficult to imagine that individual companies' ESG concerns plus CBAM impacts could see Europe cutting itself off from vital nickel supplies.</p><p>Much of the world's battery-grade nickel is expected to come from Indonesia in the coming years in the form of nickel mattes and mixed hydroxide precipitate (MHP), a heavily polluting process — both in terms of environmental degradation and carbon emissions. MHP is carbon-intensive to transport because of its high moisture content, large volume and the distance travelled between initial producer and refinery.</p><p>While CBAM does not yet include all base metals, nickel could become too polluting to ignore for EU politicians, depending on the success of the initial rollout. </p><h3>New primary and recycled materials required</h3><p class="lead">If EU battery makers want to future-proof their investments, they will need to source materials from recycling and less carbon intensive projects.</p><p>Such projects are sprouting up all over Europe and among allies, as the market looks to take advantage of upcoming legislation. </p><p>Argus Consulting forecasts that a large share of the world's cobalt needs could be met by recycling by 2032, with recycled cobalt production rising to around 65,000 t/yr based on current projections, or 28pc of the total 235,000t of demand projected globally.</p><p>Europe's largest battery recycling facility, Hydrovolt, started recycling its first battery packs this year. It aims to recycle 12,000 t/yr of battery packs and is exploring an expansion to 70,000t by 2025 and 300,000t by 2030. By 2030, the amount of recyclable battery materials available in the EU is expected to grow to 3.89mn t, according to automotive consultants P3.</p><p>Low-carbon primary materials will also be needed, and Europe has made supplies of battery metals a priority. Vulcan Energy Resources in the upper Rhine valley of Germany expects to produce lithium hydroxide using zero carbon, complementing existing commercial production of geothermal base-load energy. </p><p>At the end of 2021, Stellantis, which owns brands such as Peugeot and Fiat, signed one of five binding off take agreements for the year, joining Renault Group, Volkswagen, Umicore and LG. This year, Stellantis became a major shareholder in Vulcan Energy Resources — the first example of an upstream investment in a listed lithium company by one of Europe's largest automakers. </p><p>Similar geothermal brine projects hope to reach commercialisation in other parts of Europe and the UK, following the example of Vulcan. As yet there are limited new projects in Europe for nickel and cobalt production — notably the existing Norilsk Harjavalta nickel/cobalt refinery in Finland and Umicore's Kokkola cobalt refinery, also in Finland. Much of the low-carbon nickel and cobalt for Europe is expected to be recycled material rather than primary grade in the future.</p><p class="bylines">By Thomas Kavanagh</p></article>
