Carbon costs for imported steel are adding a new competitive factor in Europe by bringing production emissions into line with electricity prices, raw-material availability and manufacturing costs. Under the EU Carbon Border Adjustment Mechanism (CBAM), the carbon content of imported products is increasingly relevant to purchasing decisions. Domestic steelmakers continue to face emissions pricing through the EU Emissions Trading System (EU ETS).
Regulatory changes are also sharpening commercial attention on how different steelmaking routes perform. Differences between blast-furnace and electric-arc furnace (EAF) production are increasingly tied to metallic inputs, production technology and verified plant-level emissions data. These elements are becoming more prominent in how steel suppliers compete.
Production routes and embedded emissions under CBAM
Blast-furnace steelmaking typically uses iron ore and carbon-intensive reduction processes. EAF production uses electricity to melt scrap or other metallic materials. Depending on feedstock composition and operating conditions, EAF output can have substantially lower direct emissions.
The use of an electric furnace does not automatically translate into a low-carbon profile for the finished product. Emissions intensity depends on the materials entering production and the accounting boundaries used. Steel made with direct reduced iron (DRI) and electric melting can show a different emissions profile from steel produced mainly from scrap, even when both rely on electric furnaces.
Under the 2026 CBAM framework, suppliers are required to separate direct embedded emissions from broader lifecycle-related carbon claims. Not every environmental impact described in sustainability disclosures is included in the payable CBAM calculation. Emissions linked to covered precursor materials can also be relevant when they occur outside the facility responsible for final rolling or finishing.
As a result, demonstrating relatively low energy consumption during final manufacturing is not sufficient on its own for CBAM compliance. The scope of what counts for CBAM depends on covered precursor emissions rather than only end-stage performance. This affects how suppliers prepare product-level information for European buyers.
EU ETS free allocation phase-out affects investment timing
The interaction between CBAM and the EU ETS is becoming more significant as free allocation for sectors covered by the border mechanism is withdrawn. Under the current legislative framework, this phase-out is scheduled to complete in 2034. The European Commission has proposed moving the endpoint to 2038, with the final timetable dependent on legislative outcomes.
The resulting schedule is expected to influence investment economics across the European steel industry. It will affect decisions related to integrated mill modernisation, additional EAF capacity, direct-reduction installations and carbon-capture technologies. Capital expenditure planning therefore needs to consider carbon-price exposure beyond the initial years of the definitive CBAM regime.
Carbon-cost evolution is also expected to shape competitiveness across different production configurations. It will be relevant to whether industrial upgrades remain financially viable over time. This includes how investors assess future costs under both CBAM-related requirements and EU ETS pricing dynamics.
EAF expansion depends on scrap supply and electricity pricing
Expanding electric-arc steelmaking increases demand for suitable scrap grades. High-quality scrap remains a finite resource and may face competition from other industrial consumers as EAF capacity grows. This can affect input availability for producers relying on scrap-based routes.
Direct reduced iron provides an alternative metallic input that can complement scrap-based production. Its economic and environmental performance 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 how far European buyers can require a universal shift away from blast furnaces toward scrap-based steel production. Product specifications, metallic input availability and achievable supply volumes remain key considerations for procurement decisions.
A procurement approach based on verified emissions performance and product quality is described as more practical 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 because competitiveness depends on access to reliable electricity at commercially viable prices. Scrap prices fluctuate with material quality and availability, while DRI production requires appropriate feedstock and, for lower-carbon configurations, hydrogen access and supporting energy infrastructure. A producer facing high electricity costs or limited scrap availability may struggle to achieve the lowest delivered production cost despite lower direct emissions intensity.
CBAM adds an additional carbon-related cost consideration but does not remove physical and economic constraints tied to steel production inputs and operations. The underlying factors affecting delivered cost continue to shape which routes are feasible for suppliers.
Western Balkans projects require broader cost assumptions
For steel producers in the Western Balkans, investment assessments are expected to compare existing production economics with multiple technological pathways. Evaluations need realistic assumptions covering electricity, scrap, iron ore, fuels and carbon prices. This broader approach reflects how different inputs interact with carbon-cost exposure.
Financial institutions are advised not to assess furnace replacement projects only against prevailing spot EU ETS prices. Investment appraisals also need to account for finished-product quality, production ramp-up risks, environmental permitting, maintenance requirements and available grid capacity. These factors affect both operational performance and project timelines.
Project viability also depends on whether products can qualify for specific markets and whether customer commitments can be secured. Financing timelines must be considered alongside projected emissions reductions because deployment schedules for new technology can materially influence the economic case.
Verified embedded-emissions data supports European offtake access
European steel buyers have growing incentives to obtain verified embedded-emissions information before entering long-term offtake agreements. Suppliers able to show a credible emissions-reduction pathway may secure access to European markets even when their current production costs are higher.
This is particularly relevant where customers seek lower-emissions steel inputs to reduce carbon exposure across their own industrial supply chains. In that context, process-level information becomes part of how suppliers demonstrate their product’s emissions performance for procurement decisions.
The competitive position of steel producers therefore depends on providing reliable process-level emissions information while maintaining commercially viable production routes. Competition between European blast-furnace and electric-arc steelmaking continues to hinge on carbon costs alongside electricity markets, metallic feedstock availability and manufacturing capabilities.