The European Commission proposed a number of support mechanisms and regulatory reforms in an attempt to better align its net zero goals with industrial realities in July, with primary changes affecting the EU’s flagship climate instrument, the Emissions Trading Scheme (ETS).
Contained in the 17 July proposal is the Commission’s long anticipated reform proposal for the ETS, as well as the Electrification Action Plan, which together aim to “make Europe the world’s first electro-powered continent,” according to Commission President von der Leyen.
McCloskey previously reported how the bloc’s steelmakers had formed battle lines surrounding the ETS debate, with the two camps generally split between larger integrated steelmakers most exposed to regulatory carbon cost escalations on their existing higher-carbon operations; and greenfield, secondary EAF, and first-mover producers that risked devaluation of their investment case should the ETS’ role as a ratcheting carbon price signal be weakened.
In many ways, the July package can be considered something of a sequel to 2025’s European Steel and Metals Action Plan (ESMAP), which sought to recover the general competitiveness of domestic steelmaking amid global overcapacity pressures.
Viewed retroactively, ESMAP implemented its commitments to varying degrees, with trade restrictions receiving the most attention: the EU’s new tariff-rate quota (TRQ) regime implemented from the start of July has been described as a “new era” for the EU’s steel market by McCloskey’s sources for its impact on international steel accessibility to the bloc, compounded by the definitive stage of the Carbon Border Adjustment Mechanism (CBAM), which introduces significant administrative burdens – and financial costs – for domestic steel importers and foreign exporters alike.
However, policy support for domestic production under ESMAP has had a rockier go of it, with the EU’s first official green steel definition – taking the form of a ‘voluntary low-carbon label’ – cut from its scheduled implementation as part of the Industrial Accelerator Act (IAA), as well as ‘Made in EU’ content thresholds for low-carbon steel in the bloc’s public procurement mandates.
Indeed, the European Commission argued that ‘Made in EU’ content requirements for steel were no longer necessary given the strength of the new TRQ framework (with CBAM providing further limitation) in boosting domestic market share, which seems to indicate a presumption that trade-related competitiveness pressures have been sufficiently alleviated, allowing the Commission to look ahead to support steelmakers in actually getting on with decarbonisation efforts.
The proposed ETS reform, and Electrification Action Plan (EAP) therefore makes a number of changes to the existing carbon cost framework, and aims to rebalance the cost structure of industrial production to benefit industrial electrification.
In that context, the Commission has proposed to continue the practice of ‘free allocation’ – a mechanism that awards free emissions allowances to select energy-intensive industries – beyond its current 2034 exhaustion deadline; introducing a 15% EU Allowances (EUA) buffer across the phase-out curve from 2028, and effectively extending domestic carbon leakage protection until exhaustion in 2038.
According to the Commission, this adjusted trajectory maintains the ETS’ role as an “investment engine” via a strong and predictable carbon price signal, but one better aligned to the real pace of domestic industrial decarbonisation.
Author: Benjamin Steven
