* Carbon costs can be added to aluminium production costs -WoodMac
* Initial "green" aluminium premium could be up to $240/T -Citi
By Pratima Desai
LONDON, Sept 16 (Reuters) - European proposals to neutralise the carbon emitted by aluminium's energy-intensive production process mean consumers wanting to use the metal will eventually, albeit indirectly, have to pay a "green" premium.
Consumers are reluctant to pay extra for aluminium smelted using hydropower, which makes it low carbon, produced by companies such as Russia's Rusal 0486.HK and Rio Tinto 's RIO.L RIO.AX Canadian operations.
Electricity is a major component -- typically between 30% to 40% -- in the production of primary aluminium, used widely in the transport, construction and packaging industries.
To offset those emissions, the European Union from 2021 is planning a "carbon border adjustment mechanism", which could involve companies that import aluminium having to buy carbon allowances. Local smelters already have to buy these under the EU Emissions Trading System.
"Regulation is going to be important on the demand side," said Edgardo Gelsomino, analyst at Wood Mackenzie.
"Carbon can be priced and added to the cost of producing aluminium. Prices are likely to go up, which means companies already producing low carbon aluminium will benefit."
Recycled aluminium using only about 5% of the energy deployed for primary aluminium and emitting less than one tonne of CO2 per tonne of recycled metal is an option.
But this may not always be possible, particularly with demand expected to grow at a healthy pace over coming years.
Primary aluminium production on average emitted 16.5 tonnes of CO2 a tonne or more than one billion tonnes in 2019, according to the International Aluminium Institute.
If the EU sets the threshold of zero tonnes of carbon per tonne of aluminium, it will attract all the low carbon aluminium produced globally. However, importers will still need to buy aluminium which at the margin emits 6 to 8 tonnes of CO2, said Citi analyst Tracy Liao.
This would create an initial "green" premium between $180 to $240 a tonne, using EU carbon permit CFI2Zc1 costs of around $30 a tonne.
"The costs of shipping "green" aluminium that doesn't attract carbon surcharges, made with hydropower from Canada and China are estimated at $45 and $175 respectively, which would set the range for premiums over the longer term," Liao said.
Benchmark aluminium CMAL3 prices on the London Metal Exchange are currently around $1,800 a tonne.