The introduction of carbon costs for imported steel is adding a new competitive dimension to the European market, placing production emissions alongside electricity prices, raw-material availability and manufacturing costs. Under the EU’s Carbon Border Adjustment Mechanism (CBAM), the carbon content of imported products is increasingly relevant to purchasing decisions, while domestic steelmakers remain subject to emissions pricing under the EU Emissions Trading System (EU ETS).
The changing regulatory framework is bringing differences between blast-furnace and electric-arc furnace (EAF) production routes into sharper commercial focus. Metallic inputs, production technology and verified plant-level emissions data are becoming increasingly important factors in determining the competitiveness of steel suppliers.
Production technology and embedded emissions determine carbon exposure
Blast-furnace steelmaking generally relies on iron ore and carbon-intensive reduction processes. Electric-arc furnaces, by comparison, use electricity to melt scrap or other metallic materials. Depending on the feedstock composition and operating conditions, EAF production can achieve substantially lower direct emissions.
However, the use of an electric furnace does not automatically establish a low-carbon profile for the finished product. The emissions intensity of steel depends on the materials entering production and the accounting boundaries applied. Steel manufactured using direct reduced iron (DRI) and electric melting can have a different emissions profile from steel produced predominantly from scrap, despite both routes relying on electric furnaces.
Under the 2026 CBAM regime, suppliers must distinguish between direct embedded emissions and broader lifecycle-related carbon claims. Not every environmental impact reported in a company’s sustainability disclosures forms part of the current payable CBAM calculation.
Emissions associated with covered precursor materials can also be relevant, even when they originate outside the facility responsible for final rolling or finishing. Consequently, demonstrating relatively low energy consumption during the final manufacturing stage is insufficient on its own to establish CBAM compliance.
EU ETS free allocation phase-out influences investment decisions
The relationship between CBAM and the EU ETS is becoming increasingly important as free allocation for sectors covered by the border mechanism is progressively withdrawn.
Under the current legislative framework, the phase-out is scheduled to reach completion in 2034. The European Commission has proposed moving the endpoint to 2038, although the eventual timetable remains dependent on the outcome of the legislative process.
The final schedule will influence investment economics across the European steel industry, including integrated mill modernisation, additional electric-arc furnace capacity, direct-reduction installations and carbon-capture technologies.
Capital expenditure decisions taken today therefore require consideration of carbon-price exposure extending well beyond the initial years of the definitive CBAM regime. The expected evolution of carbon costs will be relevant to the competitiveness of different production configurations and the financial viability of industrial upgrades.
Scrap availability and electricity costs constrain the EAF pathway
The expansion of electric-arc steelmaking also creates additional demand for suitable scrap grades. High-quality scrap remains a finite resource and may face competition from other industrial consumers as EAF capacity increases.
Direct reduced iron offers an alternative metallic input that can complement scrap-based production. Its economic and environmental performance, however, depends on iron-ore quality, the fuel used in the reduction process and electricity costs. Lower-carbon DRI configurations also require access to hydrogen or other appropriate energy infrastructure.
These constraints limit the extent to which European buyers can demand a universal transition from blast furnaces to scrap-based steel production. Product specifications, the availability of suitable metallic inputs and achievable supply volumes remain important considerations.
A technology-neutral approach based on verified emissions performance and product quality provides a more practical procurement framework than automatically favouring a particular furnace type. Carbon pricing can support different technological pathways across regions, with competitiveness depending on raw-material resources, electricity access and existing industrial capabilities.
Electricity market conditions remain particularly significant for EAF operators. Although electric-arc production can reduce direct process emissions, its competitiveness depends on access to reliable electricity at commercially viable prices.
Scrap prices also fluctuate according to material quality and availability. Meanwhile, DRI production requires appropriate feedstock and, for lower-carbon configurations, access to hydrogen and supporting energy infrastructure. As a result, a steelmaker facing high electricity costs or limited scrap availability may struggle to achieve the lowest delivered production cost despite having a lower direct emissions intensity.
CBAM introduces an additional carbon-related cost consideration but does not remove the underlying physical and economic constraints of steel production.
Western Balkan steel investments require broader cost assessments
For steel producers in the Western Balkans, investment assessments should compare existing production economics with several potential technological pathways. Such evaluations need to incorporate realistic assumptions for electricity, scrap, iron ore, fuels and carbon prices.
Financial institutions should avoid assessing furnace replacement projects exclusively against the prevailing spot EU ETS price. Investment appraisals also need to account for finished-product quality, production ramp-up risks, environmental permitting, maintenance requirements and available grid capacity.
The ability to qualify products for specific markets and secure customer commitments is another important component of project viability. Financing timelines must also be considered alongside projected emissions reductions, as the schedule for deploying new technology can materially influence the economic case.
Verified emissions data increasingly relevant to European steel procurement
European steel buyers have growing incentives to obtain verified embedded-emissions information before entering into long-term offtake agreements.
Suppliers able to demonstrate a credible emissions-reduction pathway may secure access to European markets even where their current production costs are higher. This is particularly relevant for customers seeking lower-emissions steel inputs to reduce the carbon exposure of their own industrial supply chains.
The competitive position of steel producers will therefore depend on their ability to provide reliable process-level emissions information while maintaining commercially viable production routes. The interaction between carbon costs, electricity markets, metallic feedstock availability and manufacturing capabilities will remain central to competition between European blast-furnace and electric-arc steelmaking.
