Carbon Pricing for Net Zero/Utilizing Market Mechanism
27 January 2022

A European GREEN DEAL ON STEELWe are already on the road to CO2-neutral production

OUR TARGETOUR AMBITIONOUR CHALLENGE-55% CO2 emissions

Climate neutrality

Enabling policies

2030

2050

NOW

Key carbon pricing elements of EU ETS and CBAM
European Commission proposals of July 2021 affects EU steel, inter alia by• Rebasing allowances & strengthening Market Stability Reserve significantly reduces allowances in themarket and drive CO2 price• Resetting of benchmarks based on alternative technologies in 2026 will significantly reduce free allocationfor steel• CO2 charge for imports as of 2026

• Phase out of free allocation for CBAM sectors as of 2026 (10% p.a.) will further enhance free allocationshortage• No carbon leakage protection foreseen for exports
Today, the free allocation shortage of EU steel is at ca. 20%.
The COM proposals will increase shortage to around 75% in 2030.
www.eurofer.eu

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TODAY’S DIRECT CARBON COSTS FOR EU STEEL INDUSTRY± 3.5bn €/YEAR*Under the assumption of 80 €/t carbon price and 160Mt productionwww.eurofer.eu

4Impact assessment

Direct carbon costs in 2030 for the EU steel industry
There are 25 installations ofprimary steel production in theEU

Carbon intensity t CO2/t

EXISTING BENCHMARK CURVEThe 10% best performers set thebenchmark and the level of freeallocation for the entire sector =2.5 steel installations
FREE ALLOCATION UNTIL 2025

9.6 bn€One single installation would
deeply change the level of freeallocation for the entire sector

FREE ALLOC. WITH NEW BENCHMARKSFREE ALLOC. WITH NEW BENCHMARKS AND CBAM

13.8 bn€

Number of installations

The CBAM reduces further freeallocation by 50% in 2030. The
sector would have a huge
allocation shortage (8.4bn€) even
if it reduces emissions by 30% witharound 25 bn€ investments
5Impact assessment

Comparison between an average EU steel company investing in low
carbon technologies and a traditional third country producer
CO2 emissions/t± 1.5tCO2/t of steel

Direct carbon costs/t± 100€/t of steel±€ 400 M€

Total direct carbon costs

Assumptions: 4Mt production, of which 3Mt in blast furnaces and 1Mt in direct reduced iron plant; carbon price: 97 €/t in 2030CO2 emissions/t± 2 t CO2/t of steel

Direct carbon costs/t± 145€/t of steel

Total direct
carbon costs±€ 30 M€

Assumptions: 4Mt production in blast furnaces, of which 5% is sold on the EU market; carbon price: 97 €/t in 2030
www.eurofer.euC

6Our recommendations on EU ETSACHIEVE THE HIGHER
CLIMATE TARGET
COST-EFFECTIVELYSTRENGHTEN
CARBON LEAKAGE
PROTECTION

Achieve the higher 2030 target
only with the linear reduction
factorReward low carbon technologies
with free allocation without
reducing prematurely benchmarks

Avoid rebasing (one-offcancellation of aroud 120Mallowances)

Avoid the cross sectoral correction
factor by increasing the 3% freeallocation flexibility and/or by using
the Market Stability Reserve

Avoid tightening further theMarket Stability Reserve(doubling the intake rate at 24%
until 2030 and cancelling moreallowances in the reserve)

Maintain 100% free allocation for
CBAM sectors at least until a realtest period (2026-2030)
demonstrates its effectiveness forcomplex sectors like steel

ACCELERATE ROLL-OUT POLICY MAKING WITH
OF INDUSTRIALREALISTIC IMPACT
BREAKTHROUGHASSESSMENTSTECHNOLOGIES
Prioritise industrial technologies
in the Innovation Fund
Reward low carbon technologies
with free allocation
Use all ETS revenues to support
industrial decarbonisation
Recognise the environmental
benefits of carbon capture andusage technologies

www.eurofer.eu

Use a realistic carbon price (COMused 40€ for 2021, increasing to60€ only in 2030)
Include indirect costs in theassessment
Include investment costs in theassessment
Assess the interaction of allelements of the ETS (cap,Market
Stability Reserve, Innovation
Fund, benchmark rules, etc.)
7Achieve the higher climate target cost-effectively
Carbon price tripled in thelast year

www.eurofer.eu•

With the proposed reform, it could
reach around 100€/t by 2030•

Rebasing (one-off cancellation ofaround 120 M allowances) andMarket Stability Reserve (24%intake rate) increase the carbon
price for the same level of 2030
ambition•

A carbon price at 100€/t
increases the electricity price byaround 60€/MWh (more thandoubling the average whole sale
electricity price in normal market
conditions)Steel is the real “stress test”of CBAM
• Very high carbon leakage risk due to high trade andenergy intensity• Many product categories (more than 300 customscodes)• Large trade flows with many countries• Used in several value chains by many downstream
sectors• High absorption risk of the levy (ability to reduce prices
and dump the EU market)• High risk of resource shuffling (different emissions
across the world)
The inclusion of the steel sector in the first or subsequent CBAM
wave should be linked to the realistic timeline required fordeveloping and proving an effective regulatory framework for acomplex and sensitive sector such as steel
www.eurofer.eu9

CBAM & ETS: a prudent phasing in/out
THE UNCONDITIONAL FREE ALLOCATION PHASE OUT AS OF 2026 IS PREMATURE:• CBAM’s effectiveness is unproven, as importers will start paying only in 2026
• Reduced free allocation will undermine companies’ low carbon investment• Export competitiveness will be undermined• Phasing out free allocation increases the impact on downstream sectors andon trade flows
ANY FREE ALLOCATION PHASE OUT AFTER 2030 SHOULD BE:• Conditional to a monitoring system assessing the effectiveness of the CBAM
• Coupled with an emergency carbon leakage protection if needed

www.eurofer.eu

10CBAM complementing free allocation is WTO compatible because…

• It doesn’t provide double protection

E M I S S I O N S• the CBAM covers only emissions that are not covered by free allocation

FREE ALLOCATIONCBAM• EU products/imports are treated equally• The CBAM levy takes into account free allocation granted to EU industry)• It doesn’t discriminate between EU products/imports (national treatment) & among imports fromdifferent third countries (most favoured nation)• It pursues environmental objectives in a non-discriminatory & restrictive way• Free allocation complementing CBAM reduces the CBAM level, hence the impact on trade flows

and product prices
Legal sources: Kings & Spalding; Nctm

www.eurofer.eu

11Export adjustments are WTO compatible because…

• They are an inherent component of the EU ETS to avoid carbon leakage on global markets whilepursuing stricter climate targets with the declining ETS cap• Free allowances for exports (de facto export adjustments) are not illegal subsidies because• they do not represent a financial contribution nor a foregone revenue and do not grant
benefits to EU producers (based on arguments used by the Commission in a recent trade case)• Refunds/Credits for allowance obligations on exports (de jure export adjustments) translate thedestination principle of indirect taxation to EU ETS• The allowance obligation above benchmarks would continue applying to EU domestic sales
Legal sources: Kings & Spalding; Nctm
www.eurofer.eu

12Carbon leakage protection: how to make the CBAM more effective

A solution for EU
exports is possible
and essential

Other circumvention
risks (includingresource shufflingand cost absorption)need to be addressed
effectively

Default values
should be
sufficiently high to
avoid free riding
when real data are
not provided

www.eurofer.eu

Timeline andsubstance of thesecondary legislationneed to provide a
predictable andeffective framework13

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