Steel and Chemicals Want Brussels to Rethink the ETS. Here’s What Should Actually Happen
A significant bloc of European heavy industry — steelmakers including ArcelorMittal, thyssenkrupp, and voestalpine, joined by chemicals majors BASF, Evonik, and Covestro, and roughly forty companies in total — is pressing the European Union to fundamentally reconsider the trajectory of its Emissions Trading System. The timing is not incidental: the European Commission is due to publish a comprehensive ETS revision proposal around 15 July 2026, and industry wants its concerns locked into that package before it is finalised.
The headline argument is one the EU has heard variations of for years: tightening carbon pricing on the power sector worked, because cheaper, cleaner substitutes for fossil generation became commercially available at scale; it has not worked nearly as well for heavy industry, where the substitutes — green hydrogen, carbon capture, low-carbon electricity at competitive prices — remain expensive, immature, or simply unavailable at the volume industry needs. That distinction is broadly defensible. European power and heat emissions fell by roughly 49% between 2005 and 2023, in a period when wind, solar, and gas flexibility were already commercially mature. Steel has no equivalent ready substitute. Green hydrogen still costs roughly three times its grey, fossil-based counterpart, and the pipelines, electrolysis capacity, and long-term offtake structures needed to deliver it at industrial scale remain immature across most of the EU.
The quantitative case is more pointed, and worth examining rather than simply repeating. ArcelorMittal’s own modelling assumes a scenario in which free CO2 allowances disappear entirely and the carbon price reaches €150 a tonne by the early 2030s — under those assumptions, the cost of EU-made steel would rise by roughly 50%, with knock-on effects put at a 30 to 40% decline in steel-intensive manufacturing activity and risk to as many as five million value-chain jobs. That precision is worth sitting with, because it is also where the case is most exposed to challenge. A carbon price of €150 a tonne by the early 2030s sits above most independent forecasts, which tend to cluster in the €90–140 range and place the higher end of that range in the mid-2030s rather than the early part of the decade. The assumption of zero free allowances by the early 2030s is itself an acceleration of the actual legislated timetable, under which free allocation for steel phases out gradually through to 2034 — meaning current law would still be distributing some free allowances at the point this model assumes none remain. None of this makes the underlying mechanism implausible: a rising carbon price layered on a shrinking free allocation will, mechanically, raise costs. But the 50% figure describes a stress-tested worst case arriving several years ahead of schedule, not a straightforward read of where today’s legislated trajectory actually leads.
The complaint that Europe is “virtually acting alone” on carbon pricing carries real substance but needs sharpening. It is true that no major steel-producing economy prices carbon anywhere close to EU levels — China’s national scheme, extended to steel only in 2024, trades at a small fraction of European prices and remains output-based rather than a genuine cap in its current phase. But the EU has already built an instrument specifically to address this: the Carbon Border Adjustment Mechanism, in force since January, charges importers the equivalent carbon cost that EU producers already pay, closing the import-side gap. What it does not yet do is protect EU exporters facing the reverse problem in third-country markets that impose no comparable carbon cost. The more precise complaint is that a proposed export rebate — working on the same logic that already lets exporters reclaim VAT, so a domestic tax doesn’t handicap them abroad — has been floated by the Commission but never implemented. That is a real, specific, and fixable gap, considerably narrower than the broader framing of Europe acting entirely alone.
It is also worth noting how much the Commission has already moved in industry’s direction. Preliminary work on the 2026–2030 benchmark update kept free allocation levels for steel and refining essentially unchanged rather than tightening them further. The revision extends free allocation to cover indirect electricity emissions across fourteen product categories, worth an estimated €4 billion to industry through 2030. A €30 billion Investment Booster, funded through allowance sales, has been earmarked for industrial decarbonisation. The Market Stability Reserve is being amended to retain surplus allowances as a buffer rather than cancelling them, reducing the price volatility that complicates industrial investment planning. Internal preparatory work reportedly suggests the July package may go further still, extending free allocation specifically in exchange for verified investment commitments within the EU. Tellingly, even ArcelorMittal’s own public case credits Brussels for delivering two of the three structural fixes it says industry needs — CBAM in January, and tariff-rate quotas due on 1 July — describing ETS reform as the final, outstanding piece rather than the whole of what is required. That is a considerably more measured framing than “decisive intervention,” and it suggests Brussels is not starting this negotiation from zero.
The most analytically interesting wrinkle in the whole campaign is the division it has exposed within industry itself. Saarstahl, which has already committed capital to upgrading towards lower-carbon production, has reportedly raised concern that a weakened ETS trajectory would disadvantage exactly the companies that did what the policy was designed to encourage. IG Metall has made a related point from the labour side, warning that rolling back the transition risks the jobs tied to the cleaner production capacity that decarbonisation investment is supposed to create. This is not a footnote. It identifies the central design flaw in any blanket response to industry’s central ask — a pause in cost escalation applied uniformly across the sector. Freeze the carbon price trajectory or relax free allocation indiscriminately, and the EU does not simply ease pressure on laggards; it actively erodes the competitive advantage that first movers were promised in exchange for capital they have already spent. thyssenkrupp’s own chief executive has made exactly this point, framing the current system as risking real disadvantage for “first movers” like her own company — a fair complaint about design, but the answer to it is not removing the incentive structure altogether. It is ensuring that whatever relief is granted is conditional on continued decarbonisation effort, so the companies doing the work are protected and the companies doing nothing are not rewarded for waiting.
What Should Actually Happen
A wholesale freeze of ETS cost escalation, as industry is effectively requesting, would be a mistake, for the reason the Saarstahl and IG Metall interventions illustrate. It would penalise commitment and reward delay, undermining the incentive logic that has made the ETS one of the few genuinely effective instruments in European climate policy, and it would damage the investment certainty that energy-intensive industry says it actually needs: a five-to-eight-billion-euro hydrogen direct reduction plant is a fifteen-year bet, and nothing destroys the case for that bet faster than a precedent showing Brussels will suspend the carbon price whenever industry applies sufficient pressure. A “temporary” pause granted under this kind of pressure has an unfortunate tendency to become a permanent one, because the conditions used to justify it rarely disappear on a fixed timetable.
But the underlying complaint about missing enablers deserves to be taken seriously, because on this point industry is largely correct, and the Commission’s own preparatory work already implicitly concedes as much. The most useful response is not to weaken the price signal but to fix the three things actually standing between today’s carbon cost and a viable transition. CBAM should be completed, not abandoned, by closing its most obvious gap: a structured, time-limited export rebate or compensation mechanism for EU exporters facing carbon costs with no equivalent abroad is a far more surgical fix than touching the ETS cap itself. Lead markets for low-carbon steel should be built deliberately rather than left to emerge from a voluntary green premium that has not materialised at scale: public procurement quotas for low-carbon steel in EU-funded infrastructure, and minimum content requirements in automotive and construction, would create the demand-side pull that carbon pricing alone cannot manufacture. And any relief that is granted — extended free allocation, the Investment Booster, Carbon Contracts for Difference — should be explicitly conditional on continued decarbonisation investment, mirroring the logic already built into the Commission’s decarbonisation audit compliance requirement, which cuts free allocation further for companies that ignore the recommendations of their own efficiency audits. That conditionality is the correct template for the whole reform: support paired with obligation, not relief granted unconditionally to whoever applies the most pressure.
There is also a harder point that industry’s case doesn’t fully engage with. Part of the asymmetry it complains about is real and will not be solved by EU policy alone; it reflects where the rest of the world currently stands on carbon pricing, and closing that gap is as much a trade and diplomatic challenge as a domestic regulatory one. The EU cannot unilaterally price away that asymmetry without either abandoning its own climate architecture or accepting that genuine structural protection has to come from instruments aimed outward — CBAM’s expansion and enforcement, trade negotiations, pressure on major trading partners to develop their own carbon pricing — rather than instruments that simply soften the EU’s own price signal.
The Commission’s July package will be judged on whether it can hold this line: protecting genuine first movers and closing CBAM’s remaining gaps, without conceding that lobbying volume, rather than decarbonisation investment, should determine who receives support. The early signs — benchmark stability for steel, conditional free allocation tied to investment, an Investment Booster aimed at decarbonisation rather than blanket relief — suggest the Commission already understands this distinction. Industry is right that the current trajectory needs adjustment. It is wrong, or at least premature, in suggesting that adjustment should mean a pause rather than a more intelligent form of acceleration. The companies that have already spent the capital to decarbonise are the ones whose interests should anchor whatever Brussels decides next.