EU: Debating Carbon Leverage in Steel



The European steel industry's free CO₂ allowance distribution has sparked contention. While the EU aims to prevent carbon leakage with the allocation system, concerns arise that it unfairly favors carbon-intensive primary steel over eco-friendly recycled steel. Environmental groups and the recycling sector challenge the allocation, citing disparities in favor of energy-intensive steelmaking methods.


The European Commission's plan to reevaluate CO₂ allowance distribution for industries from 2026-2030 triggers debates, particularly within the steel sector. To curb carbon leakage, the sector enjoys free allowances under the EU Emissions Trading Scheme (ETS), yet concerns loom over methodologies favoring primary steel over its recycled counterpart.

The steel industry faces the risk of relocation due to increased manufacturing costs resulting from EU carbon pricing policies. Listed under the "carbon leakage list," the sector receives allowances up to 100%, facilitating an ostensibly free license to pollute until the implementation of the carbon border adjustment mechanism (CBAM) in 2034.

However, environmental and recycling groups voice apprehension over the methodology of free allowance allocation, asserting that it inadvertently incentivizes carbon-intensive steel production. The distribution significantly favors primary steel from iron ore, despite recycled steel's substantial reduction in carbon emissions by at least 58%, as claimed by the European Recycling Industry Confederation (EuRIC).

EuRIC highlights disparities: While the USA and Turkey exhibit 70% recycled steel production, Europe stands at only 55%. The allocation disproportionately benefits carbon-intensive steelmaking methods, leading to concerns about contradicting EU climate targets and hindering circular and low-carbon steel production.

Eurofer, the European Steel Association, supports increasing scrap recycling in Europe. Yet, it contends that the Free Allocation Regulation aims to restore fair competition between steelmakers rather than promote specific manufacturing processes. Eurofer emphasizes that primary steel, although receiving more allocations, incurs significantly higher costs due to emissions, asserting distinct markets for primary and secondary steel.

Sandbag challenges this narrative, arguing that current rules elevate primary steel despite the feasibility of producing high-grade flat products with over 50% scrap. They advocate for a shift in free permit allocation, urging fair competition and promoting best practices in decarbonizing the industry.


The draft regulation's imminent release has heightened discussions. It remains a focal point of contention, echoing a significant policy tug-of-war between incentivizing eco-friendly practices and sustaining competitiveness in the steel industry. Interested stakeholders anticipate forthcoming debates and a potential shift in free allocation policy within the steel sector.

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