EU ETS free allocation phase-out: steel compliance-cost risk

No more free carbon: who pays and when in EU steel

The gradual removal of free allowances and the introduction of CBAM reshape competitive dynamics in steel. Understanding when compliance costs arrive, how large they could be, and who is most exposed is critical for capex timing, pricing strategy, investor communication, and policy engagement.

Data and method

• Scope: 28 EU ETS steel firms; focus on the five top emitters: ArcelorMittal, Thyssenkrupp, SSAB, Voestalpine, Salzgitter. Builds a risk index synthesising policy/regulatory, market, technological, financial, and reputational drivers.
• Cost projection uses the 2022 average EUA price of €80; Bloomberg EUA futures imply €70–€81 by December 2030 (uncertainty noted). Assumes constant 2021 emissions to give an upper-bound BAU exposure.
• Incorporates banked allowances (where applicable) to estimate the year of reserve exhaustion and the start of net compliance payments.

Findings

• Phase III reality check (2013–2021). As the most carbon-intensive producer, Voestalpine was the only firm among the five to face positive compliance costs in Phase III; the others’ verified emissions sat below their benchmarks, allowing them to build allowance reserves that deferred costs.
• Allowance buffers drive timing. Estimated reserves postpone exposure for ArcelorMittal and Thyssenkrupp beyond 2034; SSAB to 2030; Salzgitter beyond 2034; Voestalpine had no reserve and paid costs earlier.
• Cost magnitudes (as % of 2024 revenues). Under a no-reserve scenario, annual EU ETS costs could average roughly 2.7% (ArcelorMittal), 1.5% (Thyssenkrupp), 2.1% (SSAB), 3.6% (Voestalpine), and 2.2% (Salzgitter). With estimated reserves, projected annual averages become 0% (ArcelorMittal), 0% (Thyssenkrupp), 3.3% from 2030 (SSAB), 3.5% (already in 2022) for Voestalpine, and 0% (Salzgitter).
• Risk index (TCFD-informed). Overall risk ranking: Voestalpine (High); SSAB (Medium); ArcelorMittal (Medium); Salzgitter (Low); Thyssenkrupp (Low). Drivers vary: carbon intensity, reserve depth, export exposure under CBAM, and timing/credibility of low-carbon investments.

The bottom line: the timing and materiality of EU ETS costs hinge on carbon intensity and allowance buffers

Without deeper decarbonisation or stronger cost pass-through, high-intensity producers—especially those without meaningful reserves—face earlier and heavier margin pressure as free allocations wind down. CBAM reduces leakage risk but offers limited relief on export margins, keeping competitiveness a live concern.

Implications for decision-makers

For corporate CFOs and strategy teams

• Map reserve runways and align major decarbonisation milestones before buffers expire; prioritise projects with line-of-sight abatement per euro invested.
• Where EBIT margins sit in the 5–10% range, even 2–3% of revenue in carbon costs is material—build hedging/contracting and pricing clauses now.

For investors and lenders

• Watch firms with immediate cost exposure and long-dated abatement for earnings risk. Integrate CBAM export share into margin-at-risk assessments.
• Clarify CBAM export treatment and phase-out trajectories to reduce uncertainty. Consider transition-support that accelerates scalable abatement (not just pilots), improving competitiveness while free allocations decline.

Authors

Jacqueline Glaser

Jacqueline is a recent graduate from the MSc Climate Change Finance and Investment at the University of Edinburgh Business School. She is now a Research Assistant for the Grantham Research Institute’s Earth Capital Nexus, focusing on developing and implementing methodologies for assessing businesses’ nature-related risks, impacts, and dependencies along supply chains.