In February, the European Parliament’s Environment Committee approved its report on a WTO-compatible Carbon Border Adjustment, calling for a rapid phase-out of free allocation. The debate and votes on the non-legislative resolution will take place in the full plenary the week starting on 8 March.

The resolution is a critical test for the Parliament’s view on the transition of the European industry towards climate neutrality. It is important to see the right outcome, because it will set the tone for future work on the Carbon Border Adjustment Mechanism (CBAM). In June 2021 in a package of measures will be on the table, including reforms to the EU’s Emissions Trading System (EU ETS) meant to align it with the EU’s enhanced climate ambition.

European steel companies have been launching a large number of projects to develop and implement breakthrough low carbon technologies.

This transition will be successful only under the right market conditions facilitated by a supportive framework that includes effective carbon leakage measures and an international level playing field against unfair competition, support for investment in innovation and roll-out, the creation of markets for green materials and the availability of the appropriate low carbon energy sources.

The higher 2030 and 2050 climate targets require strengthened, not weakened, carbon leakage protection. Yet, the opinion of the Environment Committee calls for the gradual and rapid phase-out of free-allocation of allowances in the EU ETS. The internal logic of the CBAM’s WTO compatibility is that sectors covered under the EU ETS cannot ‘be protected twice’, justifying a phase-out.

However, the steel industry is not asking for double protection, since existing carbon leakage measures are already partial and digressive. We are asking for a level playing field on the costs the EU ETS is putting on our industry beyond the current level of free allocation and compensation.

These costs were at €1.5 billion euros in 2018 when the carbon price was around 20€/t, but in the meantime the price has almost doubled to 40€/t. Furthermore, the cost of EU ETS compliance and the cost of innovation to decarbonise – literally, carbon-abatement – are not the same thing. Removing free allocation would see European steel producers paying the EU ETS costs on their entire output facing global competitors who would be paying only on their portion sold into the EU, usually below 5% of their total sales.

Steel exporters to the EU would be able to absorb the CBAM with little impact on their balance sheets, as confirmed also by market analysts.

On export markets – the EU sends upwards of 20 million tonnes to partners in third countries – EU players covering the full cost of their EU ETS allowances would be competing with global competitors paying little or nothing towards carbon abatement. At today’s carbon prices, this represents an additional 70 per tonne of primary steel – a price difference that steel-users will baulk at.

We cannot risk the European steel sector on an experiment without first considering the full impact of the combination of policies being considered. A CBAM, alongside existing free allocation rules under the EU ETS, is the most appropriate way of ensuring that European steel can achieve its aim of environmental, economic and social sustainability.

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