Photo by Mika Baumeister, Unsplash
How carbon prices reshape the economics of steel
2026 will mark the start of a new era of carbon pricing in the steel industry. Free emission allowances for European steel mills will be phased out. At the same time, CBAM introduces an equivalent carbon price for imported steel. Together, these two instruments narrow cost gaps, but they may not be sufficient for the transition to green steel.
By Ulf Narloch, CO2 IQ
Getting the incentives right
The business case for green steel is difficult. Even without financing risks and infrastructure gaps, BF-BOF steel remains more cost-competitive. The cost gap depends on production route and geography – with energy prices as main OPEX driver of H2-based DRI and scrap-based EAF. Without market premiums for low-carbon steel, the economics do not add up.
This is where carbon pricing enters the equation. It can narrow the cost gap. The EU is using it as a primary policy tool achieve its Green Deal ambition of cutting emissions by 55 % in 2030 compared to 1990 and to become the first carbon-neutral continent by 2050.
The idea of carbon pricing is simple: Add a carbon-based price to internalize the hidden costs of emissions from future damages caused by climate change. How much this price tag would be, is a matter for debate. Economists have argued it to be somewhere between EUR 100 and 300 per ton of CO2.
While a fixed carbon tax would offer the most reliable price signal, policy makers have opted for an alternative instrument: Emission trading systems( ETS). Here the market is let to find the price – with supply fixed by an emissions cap.
These so called regulated or compliance carbon markets are becoming increasingly relevant for steel-making all over the world. They are reshaping cost dynamics in the industry.
26 Green Steel World | Issue 17 | April 2025