The EU Emissions Trading System (EU ETS) and the accompanying Carbon Border Adjustment Mechanism (CBAM) have been reshaping the landscape for European steelmakers since 2026. For years, the sector was shielded from carbon costs through free allowances granted under the risk of carbon leakage. From 2026, these allowances are being phased out – a 2.5% reduction in 2026, 5% in 2027, and accelerating to nearly 50% by 2030, with complete elimination by 2034.
Since the start of the EU ETS in 2005, the iron and steel industry has been considered at high risk of carbon leakage – the relocation of production outside the EU to jurisdictions with looser climate regulations. To prevent this, steelworks received free CO₂ emission allowances for years, covering a significant share of their actual emissions. This system kept climate policy costs relatively low for the steel sector, even as secondary-market allowance prices rose steadily.
From 2026, the situation changes radically. Under the ETS reform linked to the introduction of CBAM, free allowances for sectors covered by the border mechanism are being gradually withdrawn. The timeline sets a 2.5% reduction in 2026. In 2027, the reduction increases to 5%.
The pace then accelerates – 10% in 2028 and 20% in 2029, reaching nearly 50% by 2030. Allowances are to disappear completely by 2034, when the last free allocations are abolished and the full weight of emission costs falls on European producers.
For the steel industry, this means that costs which were largely neutralised by free allocations will become a real financial burden from 2026 onwards. As free allowances shrink, each successive year will require the purchase of a growing number of emission permits on the open market, at prices ranging from €75 to as much as €150 per tonne of CO₂, depending on forecasts. Consequently, emission costs for an average steel mill will rise from near zero in previous years to several tens of euros per tonne of steel produced – for plants with low energy efficiency and high emissions, this could destroy profitability.
Emission costs in practice
To grasp the scale of the threat, regulatory mechanisms must be translated into concrete amounts. According to the Polish National Centre for Emissions Balancing and Management (KOBIZE), in the first quarter of 2026 the average price of EU emission allowances (EUA) was about €75.36 per tonne, although in the first quarter of 2025 prices peaked locally at around €83 per tonne in early February. Some market forecasts predict that in 2026 the allowance price could break through the €100 per tonne level, and according to longer-term projections (CRU), real carbon costs could exceed $150 per tonne of CO₂ by 2030 as a result of tighter reduction targets under the Fit for 55 package.
For the iron and steel industry, the key fact is that blast furnace‑basic oxygen furnace steelmaking is extremely emission‑intensive. Each tonne of steel produced in this process generates on average 1.8 to 2.0 tonnes of CO₂, though depending on the charge mix (including scrap share) and plant energy efficiency, these values can range from 1.6 to as high as 2.4 tonnes of CO₂ per tonne of finished product. This means that at an allowance price of, say, €75 per tonne, the pure emission cost per tonne of steel is between about €120 and €150.
At a projected price of €100 per tonne, that cost rises to €160–200, and at €150 per tonne – to €240–300. For comparison, in the first quarter of 2026 the average price of hot rolled coil (HRC) in Europe was about €660 per tonne, meaning that emission costs can account for 18–23% of the finished product price at €75/tonne CO₂, and as much as 36–45% at €150/tonne CO₂.
According to market analysis data, in 2025 a typical European steel producer paid an average of about €26 per tonne of semi‑finished product (billet) in emission costs, representing about 3.4% of the total price. Forecasts indicate, however, that these costs will rise systematically as free allowances are reduced and EUA prices increase, reaching a significantly higher share of the product price by the mid‑2030s. For specific European steelmakers subjected to ETS compliance risk analysis, the potential annual financial burden in a no‑reserve scenario ranged on average from 1.5% to 3.6% of sales value, depending on the emission profile and production structure of each company.
A protection mechanism against carbon leakage that raises costs for buyers
The CBAM mechanism was designed as a tool to prevent carbon leakage by equalising emission costs between EU production and imports. Under the rules, importers of steel and other covered goods (cement, fertilisers, aluminium, hydrogen, electricity) are required to purchase CBAM certificates covering the CO₂ emissions generated in producing those goods outside the EU. The certificate price is directly linked to the weekly auctions of EU ETS allowances. This means that imported steel faces the same emission costs as steel produced inside the Union – in theory protecting European producers from unfair price competition.
In practice, however, CBAM carries several significant risks for European steelmaking that cannot be ignored. First, until 2028 CBAM does not directly cover derivative products and finished goods made of steel, such as steel structures, machinery parts, cars, household appliances or pipes. This means that non‑EU companies can export finished goods to Europe that contain steel produced at minimal emission cost, without incurring CBAM charges at the final product stage.
As Piotr Sikorski, president of the Polish Steel Distributors Union, warns, the annual CBAM charges on steel in fact encourage the import of finished steel products, because the carbon fee is applied to semi‑finished products (sheets, profiles) but not to the final product. This creates an artificial competitive advantage for importers of finished goods. Only from 2028 will CBAM be extended to derivative products, but by then several years will have passed during which European steel producers lose market share to cheaper, low‑emission (in cost, not technology) goods from outside the Union.
Second, even where CBAM applies fully, the mechanism for calculating the charges is highly complex and may lead to unpredictable price swings in the early years of its application. In 2026, CBAM certificate prices are set quarterly – for the first quarter of 2026, the European Commission set the price at €75.36 per tonne of CO₂e, matching the average EU ETS allowance price for that period. From 2027, prices will be set weekly.
The volatility of allowance prices (in 2025 alone they ranged from about €60 to over €81 per tonne) means that importers and buyers of steel have no certainty about costs in the medium term. For highly emissive products, such as steel from Taiwan or China, the CBAM cost is estimated to reach as much as €590 per tonne of product at an allowance price of €70. Third, for imported products with emissions below EU benchmark values, the CBAM rate in 2026 is only 2.5% of the EU emission cost. This means that in the early years of the mechanism, the cost advantage of imports may still be significant, and only the gradual increase of charges to 100% by 2034 will equalise costs.
Energy intensity as an additional burden
Beyond the direct process emissions from blast furnaces, European steelmaking is also burdened by indirect emission costs arising from high electricity prices. Poland is in a particularly difficult situation in this respect, because its energy mix is still predominantly coal‑based, and electricity prices are strongly correlated with CO₂ allowance prices. According to data, the cost of CO₂ allowances already accounts for about 59% of the average industrial electricity price, while other production costs account for 25%, and margins and taxes for 8%.
In practice, this means that steel mills in Poland – which are among the largest industrial electricity consumers (using power in electric arc furnaces, rolling mills, auxiliary equipment) – pay electricity bills where more than half of the price results from EU climate policy. This is an additional burden that does not exist in countries such as China, Turkey or India, where carbon trading systems are weak or non‑existent and coal‑based power comes without extra allowance costs.
Risk of carbon leakage and industrial relocation
The most serious threat posed by the EU CO₂ tax to steelmaking is carbon leakage. This occurs when, in response to rising production costs driven by climate policy, companies move their operations outside the European Union – to countries with looser regulations, lower emission costs and lower overall energy prices. For steelmaking, a sector with globally integrated supply chains and relatively high transport costs relative to product value, the risk of relocation is particularly high.
China, despite having introduced its own domestic emissions trading system, remains a formidable competitor for European steelmaking due to lower production costs, economies of scale, and the fact that many Chinese mills use more modern technologies with lower unit emissions. In contrast, steel production in Poland still relies mainly on classic blast furnace‑converter technology, which is far more emissive than electric‑arc technology, but still remains cheaper than importing steel from Asia once transport costs and tariffs are added. However, the elimination of free allowances and the need to bear full emission costs could erase this advantage and make European production unprofitable compared with imports from China, Turkey, India or South Korea.
An additional risk factor is EU trade policy. In May 2026, the European Parliament voted for new rules increasing tariffs on steel imports from outside the EU from 25% to 50% when quantitative limits are exceeded, and reducing the overall duty‑free import quota. This is designed to protect the European market from a flood of cheap Asian steel, but paradoxically it may further encourage European buyers to seek suppliers outside the Union who offer lower prices despite higher duties. At the same time, these tariffs do not solve the problem of lower production costs resulting from the absence of emission charges outside the EU.
The situation of Polish steelmaking against the European backdrop
Polish steelmaking is in a particularly difficult position compared with other EU member states. First, Poland’s steel industry is largely based on outdated blast furnace technology, which is more emissive than modern electric‑arc furnaces fed by scrap. According to data, producing one tonne of steel in Poland generates between 1.6 and 2.2 tonnes of CO₂ – a value higher than the EU average of about 1.3–1.5 tonnes of CO₂ per tonne of steel. The higher the unit emissions, the greater the cost of purchasing allowances per tonne of product.
Second, Poland’s coal‑based power sector translates into high industrial electricity prices and an additional burden from indirect emission costs. Industrial electricity prices in Poland are higher than in countries such as Germany or France after accounting for compensation and exemptions. As the Instrat foundation notes, electricity prices for industry in Poland are likely to remain higher than in the rest of Europe for a long time, due to the generation structure and the cost of the energy transition.
Third, the Polish steel market is heavily dependent on intra‑EU imports, especially from Germany, which is both the largest supplier and the largest consumer of steel products. As reports from early 2026 indicate, Polish steel producers hoped that the introduction of CBAM would curb non‑EU imports and raise prices, thereby improving their financial situation. Reality has proved more complicated – imports from Ukraine, Belarus and other non‑EU countries did fall, but their place was taken by cheaper steel from Germany, which flooded the Polish market, lowering prices and worsening the profitability of domestic mills.
Intra‑EU competition, though not subject to additional duties or border charges, poses a huge challenge for Polish steelmaking, especially when German producers benefit from lower energy prices (thanks to subsidies and network charge exemptions) and more advanced technologies. Under higher emission costs, it is the less cost‑effective and more emissive plants – such as many Polish mills – that will find themselves in the toughest situation. The first symptoms are already visible: in 2024, coal output in Poland fell, and some of the less profitable mines were closed.
Signs of needed restructuring are also appearing in steelmaking. ArcelorMittal Poland, the country’s largest steel producer, has repeatedly called for support for decarbonisation and warned of the consequences of climate policy without adequate safeguard mechanisms. The European steel market is under pressure from rising import competition, and many European steelworks face a dilemma: invest billions of euros in low‑carbon technologies (hydrogen‑based DRI, electric arc furnaces, carbon capture) to meet rising emission costs, or gradually reduce production and close plants.
Decarbonising steelmaking
European steelmaking faces the necessity of deep decarbonisation of its production processes if it is to survive under rising emission costs. However, the transformation of the steel sector is extremely expensive and risky, and the available technologies are still at the demonstration or early deployment stage. The most advanced concept is replacing coke‑fired blast furnaces with hydrogen‑based direct reduction of iron ore.
This process – known as hydrogen‑based DRI (Direct Reduced Iron) – can reduce CO₂ emissions by up to 95% compared with classic blast furnace technology. However, it requires huge capital expenditures (building a new DRI plant costs on the order of €3–5 billion), access to very large quantities of green hydrogen (whose industrial‑scale production is still in its infancy), and stable supplies of high‑grade iron ore.
According to analyses by the Instrat foundation, investments in low‑ and zero‑carbon technologies are essential, but Polish steelmaking may become locked into outdated technologies if appropriate action is not taken at the national and EU level. That is why, among other reasons, the Polish Ministry of Industry announced in 2025 an action plan for the sustainable development of the steel industry, which includes creating a dedicated R&D fund for the steel sector, supporting investment in low‑carbon technologies, and cooperating with EU institutions on access to climate funds.
At the same time, implementing such investments in Poland faces serious obstacles. High energy costs, a lack of sufficient green hydrogen supply (which would have to come from offshore wind farms in the Baltic Sea, still at an early stage of development), regulatory uncertainty, and long payback periods mean that private investors may be reluctant to commit capital. Moreover, if the decarbonisation process in the EU proceeds too slowly relative to the pace of free allowance reductions, steelworks could fall into a trap: they will not yet have zero‑carbon technologies ready, yet will have to pay full emission costs for their old, emissive production.
Compensation for energy‑intensive industry
The European Union and national governments have introduced a range of mechanisms to mitigate the impact of rising allowance prices and indirect emission costs on energy‑intensive industry, including steelmaking. In Poland, a compensation system for companies in energy‑intensive sectors has been in place since 2019, covering part of the increase in electricity costs resulting from the ETS. In 2024, compensation was granted to 97 entities for a total amount of about PLN 2.9 billion, while in 2023 it amounted to about PLN 2.7 billion.
The funds come from the sale of emission allowances and are transferred by the President of the Energy Regulatory Office by way of an administrative decision. In 2026, the list of sectors eligible for compensation was expanded by a further 22 sectors, increasing the chance of recovering part of the costs also for companies not previously covered by the system.
In January 2026, the European Commission also eased the rules on state aid for energy‑intensive companies, enabling them to recover up to 80% of indirect emission costs. As reported by the service Farmer.pl, Polish companies thus have a chance for a larger scale of potential state aid, ensuring greater predictability of support in the years 2026–2030. This is a significant easing, as previous rules were more restrictive and limited the amount of possible compensation.
Despite these mechanisms, the compensation system is not perfect. In 2025, there were signals that the steel industry had still not received payouts for excessive energy and gas costs, indicating administrative problems and delays in the implementation of aid programmes. Moreover, compensation mainly concerns indirect emission costs (resulting from energy prices), not direct process emission costs (from purchasing allowances for blast furnaces). The latter will rise as free allocations are reduced and by 2034 will become a full burden for which no systemic compensation is currently foreseen.
A coming burden for the entire value chain
From 2028 (after being postponed from the originally planned 2027), the ETS2 system will enter into force, extending emissions trading to the transport and building heating sectors. Although this mechanism does not directly target steelmaking as a producer, it will have significant indirect effects on the entire economy, including the steel industry.
First, ETS2 will raise fuel and heating costs for households and businesses, which in the longer term may reduce demand for durable goods – cars, machinery, household appliances, construction – i.e. the main steel‑consuming sectors. Lower demand means lower production and lower revenues for steelworks. Second, higher transport costs (fuel) will translate into higher logistics costs for the entire steel supply chain – from ore transport, through semi‑finished product shipments between mills and rolling mills, to final product delivery to customers.
For steel, a material with relatively low value relative to its weight and volume, transport costs have a significant impact on the final price. Third, ETS2 may increase pressure on governments and the EU to further raise ETS allowance prices for industry, because – as some experts argue – the more sectors are covered by the system, the stronger the pressure to reduce emissions across all areas of the economy. The new system will also require Polish steelworks, like other companies, to carry out additional reporting and emissions management, increasing administrative and compliance costs.
Financial instruments at EU and national level
To support the transformation of energy‑intensive sectors, including steelmaking, the European Union has launched several financial instruments. The most important is the Modernisation Fund, financed by revenues from the sale of 4.5% of the total pool of CO₂ emission allowances under the EU ETS. The Fund operates in the years 2021–2030, and Poland – as one of the ten eligible countries (those with the greatest CO₂ reduction challenges and lower GDP per capita) – is the largest beneficiary of these funds.
Since 2020, Poland has secured approval for 30 priority programmes with a total value of about PLN 53.5 billion. These funds are mainly allocated to modernising energy systems, including the development of renewable energy sources, energy efficiency, grid modernisation and energy storage, also covering industrial and local government projects. The Polish government is currently seeking to extend the Modernisation Fund until 2040, which would provide additional resources for the transformation in the next decade as well.
The second important instrument is the Innovation Fund, one of the world’s largest funding programmes for the commercial demonstration of innovative low‑carbon technologies. The Fund is financed by revenues from the auctioning of EU ETS allowances and supports demonstration projects for breakthrough innovations, including zero‑carbon steel production technologies. In May 2026, a new call for proposals under the Innovation Fund worth €10 billion was launched, representing a significant opportunity for European steelworks to obtain funding for building hydrogen‑based DRI plants, CCS (carbon capture and storage), or other innovative solutions. The condition for receiving support, however, is to present a mature technological and business project – which for many companies may be an insurmountable barrier.
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