The EU’s steel producers are making their positions known on their desired outcomes for the European Commission’s upcoming review of the Emissions Trading System (ETS), with relevant policy proposals currently scheduled for mid-July.
Challenges to the ETS – and the carbon costs it imposes on in-scope operators – have grown louder and more frequent as the instrument follows its scheduled development, imposing gradually higher costs on industrial producers as an incentive to decarbonise their operations. This is especially relevant to global steelmaking, which itself accounts for around 10% of global carbon emissions.
For a contingent of European industrials, represented heavily (but not entirely) by integrated blast furnace route steelmakers, these rising costs are argued to be beyond their capacity to bear, undermining the investment case for the future decarbonisation of their operations and existentially threatening their continued operation within EU borders.
On the other side are those producers that have already developed, defended, and started implementation of their decarbonisation strategies, now facing a potential undermining of their investment case and low-carbon competitiveness by ETS policy reversal.
McCloskey tracks global developments in steel decarbonisation through its Green Steel Profiles, demonstrating that the world’s producers are generally transitioning toward the replacement of integrated blast furnace route production with direct-reduced iron-fed electric arc furnace (DRI-EAF) steelmaking, including an increased decoupling of iron and steelmaking where green ironmaking components can be based closer to low-carbon renewable energy sources.
The ETS debate has also broadened its relevance beyond its incumbent in-scope industrial operators; as downstream consumers, industrial importers, and arguably the entire world’s energy-intensive production have recently become exposed to the EU’s carbon cost engine via the Carbon Border Adjustment Mechanism (CBAM), and its mirroring of ETS costs at customs.
July’s review is thus a very important point of contention for a core portion of European industry, be it via desired outcomes for direct carbon cost burdens, or indirect exposure to material price movements as EU carbon policy weathers this new volatility to a potentially new, softer form.
ArcelorMittal, thyssenkrupp and voestalpine urge ETS pause
In a rare joint statement, three of Europe’s largest integrated steelmakers last week called for “a temporary pause in ETS cost escalation,” recommending that EU authorities freeze current cost burdens “until the key enablers of economically viable decarbonisation are in place.”
ArcelorMittal Europe, Germany’s thyssenkrupp Steel, and Austria’s voestalpine see a non-adjusted ETS as potentially “destroying Europe’s industrial base,” requiring “urgent, pragmatic reform.”
For the group, these insufficiently developed enablers include: competitive electricity prices; affordable green hydrogen; Carbon Contracts for Difference; carbon capture and storage; and lead markets for low carbon steel.
ArcelorMittal’s executive chair Lakshmi Mittal also published an opinion piece in the media, describing the ETS as a “foundational pillar of the EU’s ambition to lead the world on the energy transition” and celebrating its role in driving down power producer emissions over its 20+ year lifecycle.
Mittal argues this incentive does not work for energy-intensive industries (EIIs), however, directly citing the European steel sector as an example of the incompatibility of carbon cost incentives with “commercially scalable” decarbonisation levers.
Mittal states “no company can afford to invest without a credible path to competitiveness,” which seems a bit of a generalisation considering the companies within Europe already investing in their transition to low-carbon production, and ArcelorMittal’s strong financial performance in the wake of protectionist efforts within the EU trade framework.
While the ETS is viewed as a positive for decarbonising the EU’s energy supply, EIIs have in many cases (in around half of member states, according to EU communications) been shielded from the passing on of these costs via indirect cost compensation: an EU state aid mechanism allowing member states to financially support their industrial energy consumers to cope with rising electricity costs.
Due to its intended mirroring of industrial ETS costs, the CBAM methodology also includes this accommodation, meaning the embedded emissions of nearly all in-scope CBAM goods are assessed exclusive of the indirect emissions of their production.
First-movers and greenfields – SSAB, outokumpu, Stegra, Hydnum
Separately, steelmakers primarily focused in North Europe and the Nordics that represent either greenfield projects due to enter the market in the coming years, or incumbent steelmakers further ahead in their investments have called to defend the ETS in its current framework. In a joint policy brief, these companies argue that weakening the system would likely undermine their existing investment case, which requires some certainty that low-carbon production eventually becomes more competitive than carbon-intensive equivalents within EU borders.
“In the worst case,” the brief argues that a relaxation of structured ETS costs would see investment flow to revitalising “old polluting” BF-BOF capacities, as opposed to supporting Europe’s industrial transformation.
Attacking the ETS also stands at odds with the geopolitical reality facing Europe’s industry, says the group – “intensifying global competition, mounting geopolitical uncertainty, and high energy costs provoked by reoccurring conflicts” – instead viewing the “credible long-term, technology-neutral price signal” that the ETS provides as fundamental to remedying the bloc’s climate and competitiveness problems.
The preservation of the existing 2026 phase-out schedule of free allocation allowances is considered particularly vital, which escalates to remove a significant portion of freely awarded EUAs in the early 2030s, before fully extinguishing free allocation in 2034. The ETS-supporting group highlights that “generous free allocations” in the past has often manifested as a lack of decarbonisation incentive, and also the link to CBAM, which phases-out equivalent import cost deductions in tandem with the domestic loss of free allowances.
Market Reaction
Where both sides agree is on the need to bring down the EU’s energy costs, and better dedicate ETS revenues to support industrial decarbonisation needs in that context.
Ultimately, McCloskey’s market and policy sources see the joint statement from ArcelorMittal, thyssenkrupp, and voestalpine as an attempt to secure what they can from the opportunity that the ETS review provides, potentially seeing attempts at reducing true cost drivers – the EU’s high energy costs – as a futile battle.
As described by Mittal, integrated steelmakers have long considered suggestions to relax the ETS as “something that previously would have been rejected as politically impossible” – with the July ETS review therefore like ‘blood in the water’ for those producers more heavily exposed to increasing carbon cost burdens.
Earlier this year, ArcelorMittal in its financial reports presented energy costs as the final barrier to competitive steelmaking in the EU (assuming an effective CBAM, and reduced import pressure from revised trade protections), yet now it is ETS reform that the trio of steelmakers reframe as the “final piece in the puzzle” required to realise a competitive low-carbon steel sector in Europe.
The EU’s electricity market operates on a merit order system that sets the relevant electricity price to the highest cost within the required generation mix. As renewable energy sources are inherently volatile; the EU energy market lacks strong supplies of alternative energy sources; and its energy grid and storage capacities are largely deemed as inefficient in accommodating the increasing share of renewable generation, no alternative framework has yet emerged to mitigate the impact this has on electricity bills at scale.
It is also a bit of a misnomer to refer to the ‘EU energy market’ at all, which operates more as a fragmented complex of interconnected national energy markets. Illustrating this friction, member states like Portugal and Spain have in the past effectively subsidised neighbouring French energy prices in their attempt to grant state support to national energy consumers via adjusting the merit order – the so-called ‘Iberian exception”.
A source at an Italian steelmaker said that the recent approval of EUR23bn of Italian state aid to support renewable energy production and prices, as well as the rising visibility of challenges to the ETS gave the integrated steelmaking trio confidence to call for a complete ETS cost freeze, viewing the statement as a “political move for cheaper energy.”
“Those steelmakers have gone nuts,” the source said. “They already enjoy comfortable margins, and aren’t struggling – they saw leniency toward Italy on the ETS and decided they need special treatment.
“You cannot have CBAM without the ETS,” the source continued. “These mills have new quotas, CBAM, state support – as soon as something is settled they ask for something else – its pure greed.”
The source cited Slovakia’s United States Steel Košice – to be restructured under the direct ownership of Japan’s Nippon Steel later this year – as an example of an operation unable to fully restart capacities due to the need to buy ETS emissions allowances, considering the positions of ArcelorMittal, thyssenkrupp, and voestalpine to be comparatively advantageous on their historical free allowance allocations.
A source at a northwestern steelmaker expressed a similar sentiment to McCloskey, believing the call to be “an energy cost, rather than ETS issue.”
“The timing of the statement is pretty bad, we just got new quotas and they cannot really demand more until these new measures come into place,” the source said. “It’s also unclear what they propose to do with CBAM [if the ETS is adjusted].”
A source at an incoming greenfield steelmaking project said that “these mills are attacking the ETS just to get cheaper energy for DRI production, and lower their costs – but CBAM was built to level those costs, so the request is excessive.”
As much of the positioning around the EU’s existing and incoming climate and trade protection regulations is focused on extending these measures to downstream manufacturing supply chains, the perception of these steel-consumers is also highly relevant in assessing any changes to the ETS framework, and its costs. For example, construction permitting at the local level (especially in Scandinavia) increasingly expects efforts toward low-carbon material sourcing, which upstream industry may not be ready to match without sufficient cost incentives. Response tracking from environmental think tank E3G finds more corporate voices in support of maintaining the existing ETS, than to weaken it, suggesting that EII’s attacking the ETS could be argued as a very vocal minority.
McCloskey tracks the emergence and status of low-carbon steelmaking projects globally via its Global Green Steel Profiles, and recently incorporated an assessment of the “likelihood” that a project successfully comes to market.
For Europe, McCloskey’s research estimates that European companies could add over 32 mt/y of DRI and more than 72 mt/y of green steel by 2045, with the majority of these volumes planned for the next five years. Steelmaking projects are considered as having a higher probability of realisation than DRI projects due to investment factors in line with the ETS challengers’ complaints around supportive market conditions.
As such, only 38% of currently announced DRI volumes in Europe are considered “certain” or “likely” – rising to 48% for steelmaking-specific projects such as BF-BOF replacements toward EAF-based decoupling of green iron and steelmaking. The majority of low-carbon development projects in both DRI and steelmaking fall into the “possible” category (56%/39%) with starting timelines beyond 2030, with the ETS review thus directly relevant to both the potential profitability of these future projects, and the survivability of their traditional operations in the meantime.
