EU steel ETS costs could hit €8.2bn by 2031

Europe's steel industry could see annual carbon costs rise from around €3.4bn ($3.9bn) in 2026 to €5.7bn in 2030 and €8.2bn in 2031 under proposed changes to the EU emissions trading system (ETS), European steel association Eurofer said on 24 September.

"Free allocation should support decarbonisation investments and, in combination with an effective carbon border adjustment mechanism [CBAM] provide effective carbon leakage protection," the association said.

It is seeking changes to the EU's CBAM, calling for a significant slow down in the CBAM factor — the rate at which free allowance allocation is phased out — over the next five years (see table). This would compensate for the mechanism's flaws, such as the lack of an export protection solution and resource reshuffling risks, alongside the lack of enabling conditions for decarbonisation investments in the current European and global macro-economic environment, Eurofer said.

The lobby group is also calling on the EU to extend beyond 2030 a provision under which the main steel benchmark, hot metal, is based on prevailing blast-furnace technology rather than being reduced significantly under assumptions of a larger share of the low-carbon direct reduced iron (DRI) technology in overall production capacity. Without an extension, the hot metal benchmark value for 2031-35 could fall by as much as 50pc, Eurofer said. The benchmark is used to calculate each sector's free allowance allocations under the ETS.

Eurofer is also calling for a structural solution to protect exports from CBAM-covered sectors and downstream industries.

"Withdrawing carbon leakage protection too quickly risks undermining the very investments needed to decarbonise," Eurofer director-general Axel Eggert said.

Eggert said investment decisions have been taken on around 35mn t/yr of low-carbon steel capacity initially planned to become operational between 2027 and 2032. But projects covering more than 10mn t/yr of steel capacity have stalled as the business case has weakened.

The group also proposed that all revenues generated from the phase-out of free allowances for CBAM sectors should be reinvested fully in those sectors.

Eurofer estimates carbon costs for conventional blast-furnace steel could reach around €100/t by 2030 and exceed €200/t from 2031, levels it says would render the production route economically unviable.

This assumes emission allowance prices at €100/t CO2 equivalent (CO2e) in 2026-30 and at €150/t CO2e in 2031-35, an annual reduction rate of heat and power benchmarks at 2pc, and cross sectoral correction factors in line with scenario "CL 90_50" in the commission's impact assessments from the July ETS review proposal. The association estimates a free allocation shortage of 50pc in 2030, and 76pc in 2031, under the same proposal.

The carbon cost estimations also assume that EU steel production is at 130mn t — on par with 2024 levels, and decarbonisation investments are commissioned by 2030 and fully operational as of 2032 — with a capacity of 17mn t of DRI and 36mn t of electric arc furnace steel production capacity.

By Dafydd ab Iago