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Market attention has focused on the EU’s Carbon Border Adjustment Mechanism (CBAM) from 2026 for importers of industrial products into the EU market. However, the EU ETS (EU Emissions Trading System) reform and the phase-out of free allocations are set to drive a sharp rise in effective EUA prices, materially increasing emissions costs for EU steel, aluminium, and other industrial producers.
Effective EUA prices (per tonne of industrial emissions)1 will rise as high as 14-43x 2025 levels by 2035 in aluminium and steel markets, according to Fastmarkets analysis. This is reflected in estimated total direct carbon costs (excluding phase 2) rising over 2025 to 2035 from €0.2bn to €1.8bn in aluminium, from €0.7bn to €16.4bn in iron and steel, and from €362mn to €711mn in pulp and paper.
Increased emissions costs arising from the EU ETS reform will be reflected in product prices. A typical producer of steel billets would have paid 26€ on average for emissions per tonne of billet in 2025, equivalent to around 3.4% of the total price. Based on Fastmarkets forecasted EUA prices and the free allocation phase out schedule, this could increase to 30% by 2035.
These costs are likely to pass downstream to products such as hot rolled coil, with implications for end-use sectors. The automotive and construction sectors account for as much as 80% of demand for hot rolled coil and steel overall2, making these sectors particularly sensitive to price increases. A typical vehicle produced in Europe contains around 900kg of steel of average3, which could translate into an increase in costs of up to €265 per vehicle by 2035.
Historically, effective EUA prices have remained low, as a high proportion of EUAs have been freely allocated to industrial installations to prevent carbon leakage. Within the EU’s aluminium and iron and steel sectors, 78% and 90% of EUAs were freely allocated to each sector, respectively in 2025. This reduced the effective price paid by producers in these sectors by up to ten times, to 16€/tCO2e for aluminium and 7€/ tCO2e for steel. This contributes as little as 1% of total product price today. Following CBAM’s introduction, EU ETS reform will phase out free allocation until 2034, when EU producers will face the full cost of their emissions.
This coincides with projected EUA price increases, driven by tighter supply. Since 2013, the EU has applied a linear reduction factor on the ETS cap, reducing the number of allowances released into circulation. This was increased from 1.74% to 4.3% per year in 2024 and is set to increase to 4.4% from 2028.
While EU producers are expected to face significant cost increases under EU ETS reform, the introduction of CBAM aims to keep EU industry in a competitive position compared to imports. For many major steel and aluminium producing countries, CBAM is forecast to incur higher costs for international producers compared to costs incurred from the EU ETS for EU producers.
Countries such as India, where carbon-intensive BF-BOF steel production remains prevalent and industrial emissions intensity is relatively high, could face cost increases from present levels of over 120% of current product prices by 2035 due to CBAM. By comparison, EU producers are expected to face cost increases of around 13% by 2035 because of rising emissions costs under the EU ETS.
On average, EU producers are expected to face smaller cost increases than the average international producers. However, EU producers of steel and aluminium currently face some of the highest production costs across world producers4 5 a result of the high costs of labour, raw materials, and energy. EU ETS reform introduces an additional cost, with outcomes increasingly dependent on emissions intensity at the installation level. Alongside EU producers’ pre-existing high production costs, they will not be competing against the average international producer, but against the most efficient exports from these countries.
The large volumes of emissions-efficient exports make these producers strongly competitive with domestic goods. China’s steel and aluminium production volumes are around eight times higher than the EU for steel and aluminium6 7 and in 2024, China’s EAF capacity was greater than the EU’s capacity of both EAFs and BOFs8. The US, another direct competitor with major export volumes to the EU, also has a comparatively more efficient iron and steel production profile. Even if CBAM works as intended, competition from these emissions-efficient producers is likely to remain a structural challenge for EU industry. To remain competitive, EU producers will need to continue investing in more emissions-efficient production processes.
Understanding how these policy changes will affect effective emissions costs, product pricing, and industry competitiveness across regions requires visibility into the evolving policy environment, EUA price dynamics, and sector- and region-specific sensitivities. As free allocation is phased out under EU ETS reform, exposure to effective EUA prices is expected to increase, with outcomes increasingly differentiated by emissions efficiency at the facility level.
Fastmarkets’ EU ETS product supports this analysis with scenario-based outlooks, facility and company intelligence, and continuous market coverage, enabling users to benchmark exposure and track how EU ETS reform and effective EUA prices are reshaping cost positions across the market. This complements our existing CBAM intelligence suite to give a comprehensive view on the evolution of costs for domestic and international producers.
To discuss what these dynamics mean for your business, get in touch with our carbon experts.