Scrutiny is building against steel sector challengers to the EU ETS, seeing additional steelmakers, and climate interest groups join in support of maintaining the integrity of the EU’s primary climate protection instrument.
As the European Commission’s 17 July deadline to review the ETS approaches, the EU’s steelmakers have formed ‘battle lines’ over their desired outcomes, generally split between larger carbon-intensive integrated steelmakers, and greenfield low-carbon steelmaking projects or those further ahead in their decarbonisation project timelines.
In short, ArcelorMittal Europe, Germany’s Thyssenkrupp, and Austria’s Voestalpine have called for a total freeze to further ETS cost escalation – a fundamental aspect of the system as emissions allowances (EUAs) are iteratively decreased, tightening EUA supply against increasing demand (via free allocation phase-outs) – until the investment case for low-carbon steelmaking is more certain, and supportive infrastructure like green hydrogen supply is fully in place. Against them include steelmakers SSAB, Outukumpu, Stegra, Hydnum – arguing that weakening the ETS would significantly undermine the carbon cost signal upon which their decarbonisation projects and investments are premised, as the ETS would no longer provide the same certainty that green steel will become more competitive than traditional steelmaking as on established carbon market timelines.
Following the launch of this most recent ETS debate, status-quo supporters Outukumpu and SSAB have been joined by German integrated producers Salzgitter and the SHS group, representing their subsidiary steelmakers Saarstahl and Dillinger.
In a renewed call to “defend the integrity of the ETS1”, these “European Steel Leaders” have sent a joint letter to member states backing a preservation of established ETS cost drivers until “at least 2035″; including maintaining the current free allocation phase-out via the inherently linked phase-in of Carbon Border Adjustment Mechanism (CBAM) costs.
Some of the EU’s leading independent secondary electric-arc furnace (EAF) steelmakers have also since signed on to an updated version of the letter sent to EU authorities this week, advocating for the preservation of the existing ETS framework in maintaining (and strengthening) effective CBAM protections.
McCloskey’s market sources were largely critical of the steelmaking trio’s statement, perceiving the ETS challenge more as an alternative and more realistic means of lowering industrial energy costs – what they see as the true driver of industrial non-competitiveness in Europe – amid a lack of visible alternatives to the EU’s ‘merit order’ electricity market design.
The latest version of the letter sent to member states from the ETS-supporting camp makes this point explicit:
“The primary pressure on competitiveness comes from high electricity costs due to fossil fuel dependencies, infrastructure gaps and global steel overcapacity, not from carbon pricing.”
Commentary from climate non-profit Carbon Market Watch (CMW) further suggests that blast furnace relining decisions and schedules – particularly relevant to ArcelorMittal, Thyssenkrupp, and Voestalpine as the EU’s largest integrated steelmakers – also premise the opposition to ETS cost escalation. CMW argues that when taking into account capacity relining completed by the steelmaking trio since 2020, and furnaces due for relining in the next decade; every euro spent on furnace relining risks generating an additional 2-5 euros in operational costs from the ETS on its established trajectory, leading the organisation to conclude that “investing in relining therefore means betting against the ETS.”
In reply to McCloskey’s inquiry on ETS costs and decarbonisation dynamics, a representative from Voestalpine clarified that while its projects were proceeding to schedule, wider steel sector decarbonisation in the EU is lagging behind the 2034 free allocation exhaustion deadline due to a lack of required supporting infrastructure, like affordable green energy, and competitive-at-scale hydrogen supply, as well as insufficient member state investment of ETS revenues back into decarbonisation projects. This chimes with comments from another integrated steelmaking source, arguing that free allocation cannot be seen as a climate benefit, but as fundamental cost support to maintain any degree of competitiveness: “free allocation helps firms to survive – and firms that survive can decarbonise.”
Free Allocation Impacts
For EU steelmakers, the primary lever to freeze their ETS burdens would indeed be to adjust the existing phase-out of free allocation allowances, which sees freely awarded EUAs initially decrease from 100% to 97.5% in 2026, then rapidly accelerate down from 77.5% to 39% 2029-2031, before fully extinguishing at a more gradual pace by 2034.
But softening the impact of the free allocation phase-out, for example by extending freely allocated allowances beyond 2034, or relaxing the intensity of the decline across the phase-out curve (especially between 2029-2031) would not only reduce carbon cost burdens for integrated steelmakers, but also reduce mirrored CBAM costs for those imports competing for EU market share. European steelmakers fairly unanimously attribute their global and domestic non-competitiveness to import pressures: be it the unlevel playing field created by global subsidized overcapacity, or the comparatively high energy and compliance costs of producing steel domestically in the EU, raising questions as to why steelmakers would now seek to weaken CBAM as a balancing mechanism.
Taking an example of Indian hot-rolled coil, the impact of free allocation is plain to see on effective CBAM and (theoretically mirrored) ETS cost liabilities, using McCloskey’s Iron & Steel ‘Actual Values’ CBAM calculator. Using inferred actual emissions data from published Indian steelmaker Environmental Product Declarations (EPDs), the below calculations demonstrate how CBAM costs more than double on the same embedded emissions from 2026 to 2034 via the removal of free allocation adjustments (SEFA).
Carbon cost escalation for traditional steelmaking is even more apparent when accounting for even a conservative EUA price for 2034 – limiting CAMIRO’s 2034 forecast to just below the 200 euro barrier – again more than doubling the CBAM cost to levels approaching the contemporary base price for the underlying steel.
CBAM calculates its costs by taking the specific embedded emissions (SEE) of an in-scope import, and deducting the specific embedded free allocation (SEFA). SEFA represents what deductions a third-country steelmaker would be entitled to from their total embedded emissions liability if they were producing within EU borders, attempting to equalise respective costs under the EU ETS when accounting for free allocation.
One might think, therefore, that those steelmakers opposing the existing ETS trajectory are shooting themselves in the foot somewhat if CBAM costs relax via a reduction of the free allocation phase-out (the ‘CBAM factor’). However, for many steelmaking origins – particularly those offering most aggressively in recent years – CBAM costs on default values are already prohibitively expensive, and can exceed the base cost of the material itself (as with Indonesian HRC) even on 2026’s CBAM factor of 97.5%.
Additionally, general steel import accessibility to the EU has been significantly reduced by the implementation of the bloc’s new steel trade protections, which replaces the existing safeguard system long-term to tighten tariff-rate quotas (TRQs) by an overall 47%, as well as double out-of-quota duties to a potentially very costly 50% tariff rate.
This is particularly impactful for recently destabilizing origins like Indonesia: when comparing its Q3 2025 imports to effective duty-free access under the old and new TRQ frameworks (accounting for origin volume caps, and keeping in mind developing country exemptions), analysis illustrates substantial cuts to Indonesia’s EU market access, with the result that excess cat 1A HRC volumes, for example, could become subject to both a 50% tariff, and additional CBAM costs approaching EUR600/t in order to reach EU demand.
For steelmakers, therefore, CBAM is arguably already doing its job in reducing import competitiveness on default values alone – even at 2026’s existing 97.5% CBAM factor (or free allocation phase-out rate) – giving some insight into why select steelmakers want to “freeze” ETS costs at their current level: even the highest SEFA deductions fundamentally cannot mitigate higher initial default value SEE costs, compounded by additional threat of 50% out-of-quota duties.
Those steelmakers in favour of blocking additional ETS cost escalations, if successful, would then have strengthened trade protections via both CBAM default value effects, and the revised TRQs, as well as limiting increases in their carbon costs. This could create a more stable foundation upon which to realise decarbonisation projects for the EU’s carbon-intensive integrated producers. On the other hand, many, including CMW and fellow climate campaigner Steelwatch, argue that free allocation has not historically acted as a sufficient decarbonisation incentive – especially when considered alongside steelmakers’ other shields from ETS effects, such as indirect cost compensation – and should therefore be phased-out as scheduled to introduce real cost incentives, and protect the business case of greenfield or incumbent steelmaker transformation projects disruptive of the carbon-intensive status quo.
From a domestic industry perspective, it could be argued that market fundamentals have indeed not been sufficiently supportive such to launch low-carbon steelmaking transformations at full scale, especially when considering the long time horizon of steel sector investment cycles, the slow pace of development of supportive low-carbon market infrastructure, pressure from lower-cost imports, and missing demand due to delays in establishing lead markets. After all, the EU is yet to decide what ‘low-carbon’ or ‘green’ steel even is, limiting consumer clarity that said material will effectively contribute toward corporate climate targets, as well as undermining distributor confidence in low-carbon liquidities, and thus what premiums steelmakers can actually achieve to (at least partially) fund the decarbonisation of their operations.
The climate perspective would argue that it is do-or-die time for one of the EU’s most carbon intensive industries – representing around 7% of total ETS emissions – and that the failure of some to account for the additional costs from the phase-out of free allocation, should not be allowed to undermine either those whose investments depend on the ETS in its current form, nor the EU’s climate targets as a whole.
The reality likely lies somewhere in the middle, as steelmakers are arguably justified in resisting being forced into a transition that is not ready for them – at least not without significant support – but are undermined in that position by expanding global blast furnace capacities, or locking in carbon-intensive European production via new blast furnace relining, beyond what is absolutely necessary.
Author: Benjamin Steven
