CBAM impact on steel and what it means for producers

The European Union’s Carbon Border Adjustment Mechanism (CBAM), introduced in October 2023, is set to shake up manufacturers of industrial goods and will have a major impact on the global steel industry. Designed to support the EU’s climate neutrality goals by 2050, importers will need to pay for the carbon emissions linked to their goods under CBAM, just like EU companies already do under the Emissions Trading System (ETS). This helps prevent “carbon leakage”, which is when companies move production to countries with less-strict climate regulations. It also encourages more sustainable practices in the steel sector – one of the world’s most carbon-intensive industries.

How CBAM works in steel production

The new rules level the playing field between EU manufacturers and global competitors by putting a price on the carbon emissions associated with imports like steel and iron. Since 2023, CBAM has tracked emissions from two sources: the production process itself and the electricity used to make the product. Then, from 2026, importers must buy certificates for parts of these emissions, aligning with the EU’s carbon pricing rules – though there are proposals to extend this until 2027. See the section on CBAM Omnibus proposals below for more details.

Incentives for cleaner steel production

CBAM pushes companies toward cleaner technologies as EU steelmakers face rising carbon costs, potentially €150 per ton CO2 by 2030. There are two systems in play:

EU ETS - the total amount of EU Allowances decreases annually as a measure to reduce the emissions within the EU. That, in combination with the phase-out of free allowances under EU ETS will likely increase the price on EU Allowances. EU ETS applies for installations such as steel production sites and power production sites.

CBAM - the price of CBAM certificates will reflect the price of EU Allowances. CBAM applies for products and therefore CBAM also requires CO₂  to be mapped for certain precursors used in the production of the products. But for an ETS-installation there is no need to map emissions for precursors as they have their own ETS reporting if they have production in EU and are covered by EU ETS.

To summarise. To follow the rules, companies must accurately track and report all their emissions – both from their own operations and those of their suppliers – which means they’ll need solid tracking systems and constant communication with suppliers.

Financial impacts and competition

The new mechanism will increase the cost of importing steel to the EU, pushing non-EU producers to cut emissions or risk losing market share. While it shields EU steelmakers from cheaper, high-emission imports, rising ETS and CBAM costs remain a tough proposition.

A key issue for Ovako is that the scope of CBAM should be extended to cover more downstream products, namely those that are steel-intensive, to prevent the risk of carbon leakage, since CBAM today mainly covers raw materials. This is because with the current CBAM set-up it is quite easy to bypass the system by sourcing materials subjected to additional processing that are not listed within CBAM such as gears, axles, bearings.

Furthermore, from our perspective it is important to have some kind of export mechanism, since we also export outside of the EU. That means we are competing globally with suppliers operating under less restrictive climate legislation.

Early adopters of low-carbon tech like green hydrogen could gain an edge, because unused free allowances may be banked for future needs. This makes them less exposed to cost increases when the price of auctioned allowances rises.

Technological transition and innovation

For the steel industry to cut down its emissions, it needs to switch to cleaner technologies like using green hydrogen for direct iron reduction (DRI) and electrified arc furnaces (EAFs). These methods can significantly reduce pollution, but they’re expensive and take time to roll out.

At Ovako we have been moving ahead of legislation. For example, we use 100% fossil-free electricity in our steel and rolling mills. We have also adopted a major initiative to convert our heat treatment furnaces to electricity. So now 90% of the heat treatment we carry out is with electric power. Furthermore, in September 2023, we inaugurated the world's first plant for fossil-free hydrogen for heating steel before rolling at our Hofors plant in Sweden. This has helped to reduce emissions from the rolling mill significantly.

Ovako’s steel currently contains 97% recycled content, making our products almost completely circular. And we are committed to providing data across Scopes 1, 2 and 3 on our delivered products. This information helps customers to make accurate carbon footprint calculations on their products, and informed decisions about their steel purchases.

Steelmakers relying on older blast furnaces have the toughest challenge – they’ll need to either upgrade their equipment or completely change how they make steel. Using more fossil-free energy is also important to reduce emissions from the energy used in production. This shift toward green steelmaking is becoming even more important with policies like CBAM.

Global trade and policy challenges

CBAM has stirred up lots of debates around the world. Some countries see it as unfair, thinking it’s more about protecting EU industries than fighting climate change. But for CBAM to succeed, countries will need to work together, especially to align their rules on charging for carbon emissions.

Countries that already have strong climate policies could gain an advantage if their own carbon pricing systems are recognized under CBAM. As CBAM expands to include more industries, there’s industry consensus to make the rules clearer and more consistent so businesses and governments know what to expect and can adapt seamlessly.

CBAM Omnibus proposals

Since the initial implementation of CBAM, the European Commission has proposed several significant changes through the Sustainability Simplification Omnibus Package. These adjustments aim to streamline reporting requirements while maintaining the core objectives of the mechanism.

Opportunities for the steel industry

CBAM offers the steel industry a chance to reduce their emissions and meet growing consumer demand for more environmentally friendly products. Companies that focus on initiatives like recycling and using materials more efficiently can build a stronger competitive edge. It also encourages collaboration across the supply chain, pushing steel producers, suppliers, governments, and tech companies to work together and speed up the use of cleaner, low-carbon technologies.

In 2023, we launched the Ovako carbon calculator tool to provide customers with a simple one-page document that clearly states the precise carbon footprint of every product they buy from us. It includes a specific CBAM application to support customers with CBAM data should this become necessary. This ensures full transparency between Ovako and our customers.

Preparing for the future – extending the scope of CBAM

With CBAM set to take full effect by 2026, the steel industry faces both challenges and opportunities. To stay ahead, steelmakers must invest in low-carbon technologies like hydrogen-based steelmaking and electrification. Robust systems to track emissions across operations and supply chains will also help with transparency and compliance with CBAM’s complex rules. We are already aligning with these demands by adopting cleaner practices and strengthening emissions tracking.

Steelmakers must also work with policymakers to advocate for fair regulations and financial incentives including an extended scope to cover more downstream products, while educating global suppliers about CBAM standards. Ovako’s proactive efforts to meet these standards and encourage partnerships position us to lead in this transition. By focusing on innovation, accountability, and global collaboration, the steel industry can help build a more sustainable future under CBAM.