Europe’s steel industry warns over abrupt end to free carbon permits

Europe’s steel industry has stepped up its pleas to the European Commission to ensure a level playing field for domestic producers as Brussels prepares to publish plans for a carbon border tax.

In a letter sent to the commission last week, the European Steel Association (Eurofer) urged the EU not to reduce the allocation of free carbon allowances for the industry under the Emissions Trading System too quickly while the carbon border levy is being introduced.

The commission is set to unveil proposals to revamp the cap-and-trade ETS to extend the system to new industries and gradually phase out free allowances for all sectors in July.

Brussels will also put forward an accompanying proposal for a carbon border adjustment mechanism (CBAM) to tax imports based on their carbon footprint. It is unlikely to become operational until 2023 at the earliest.

Steel producers, however, say that withdrawing the free allowances too quickly would result in a steep rise in operating costs which would undermine companies’ ability to invest in low-carbon technologies. The industry is already counting the cost of record carbon prices, which have increased the cost of polluting.

“An abrupt introduction of an untested CBAM replacing free allocation and compensation fully or to a large extent immediately . . . would have a disruptive impact on the EU steel industry and the related value chains,” said the letter, a copy of which has been seen by the Financial Times.

“It would expose EU steel producers and downstream sectors to the full carbon costs, undermining the financial ability of our companies to invest in low-carbon technologies.”

European producers would have “10 to 100 times more carbon costs than global competitors, because of costs on every single tonne of EU steel, while competitors will have costs only on the share of their production they export to the EU”, the letter from Eurofer said. “This would create a damaging and significant mismatch.”

The association has suggested that the ETS scheme continue for a transition period of eight years after the border mechanism is introduced. This transition period should run until a sustainable market for “green” steel is fully formed in 2030.

Internal commission estimates seen by the FT suggest that Brussels is working towards phasing out free carbon allowances for sectors covered by the CBAM by 2030 or 2035 depending on when the border levy is in place.

“Our steel industry is under major pressure but that won’t stop us from pushing them to change,” said one EU official.

In a statement, the commission said the CBAM would “ensure that the price of imports reflects more accurately the level of CO2 emissions embedded in these products for selected sectors”.

“This mechanism will make sure that the EU efforts towards climate neutrality are not undermined by the risk of transfer of production to other countries with less stringent emission constraints.”