European industrial competitiveness is increasingly influenced by the combined cost of EU ETS carbon, energy prices and production factors, alongside rules affecting imports and investment. A provisional EU arrangement to keep more emissions allowances in reserve has altered expectations for future carbon-market scarcity. Steel, aluminium and cement producers continue to operate amid weak demand, international competition and uncertainty about the returns from industrial decarbonisation.
Under a political agreement reached on October 20, 2026, the EU plans to increase the market stability reserve allowance-invalidation threshold from 400 million to 700 million permits, subject to formal adoption. The arrangement does not require additional allowances to be sold or released into circulation. Manufacturing costs are expected to continue tracking EU ETS auction prices, electricity and gas prices, production efficiency and the availability of free allocation.
Steel output and export trends amid CBAM rollout
The scale of the challenge is reflected in European steel production figures. Industry association EUROFER reported that EU crude steel output fell to 125.8 million tonnes in 2025, described as the lowest level on record. Apparent steel consumption is expected to rise by only 0.1% in 2026.
EUROFER’s October outlook also reported a 20% decline in exports to third countries during the first half of 2026. Weak construction and manufacturing activity were cited alongside global excess steelmaking capacity as factors affecting the sector independently of CBAM.
How production technology shapes carbon and electricity exposure
Cost structures vary across industrial sectors depending on production technology. In steel, blast-furnace operations create carbon exposure through iron ore reduction and fuel use, while electric-arc furnaces can reduce direct emissions. Electric-arc furnace competitiveness also depends on scrap quality and electricity costs.
Primary aluminium production is described as particularly electricity intensive, while scrap remelting follows a different direct and indirect emissions profile. Cement production faces a separate constraint because emissions from limestone calcination cannot be removed simply by purchasing renewable electricity.
Because of these differences, a single EU ETS price can translate into substantially different cost and investment implications across sectors. Carbon-intensive producers, electricity-intensive manufacturers and firms using recycled materials are therefore not exposed to identical incentives or operating constraints.
CBAM scope since January 1, 2026
The Carbon Border Adjustment Mechanism entered its definitive phase on January 1, 2026. It initially covers selected products in iron and steel, aluminium, cement, fertiliser, electricity and hydrogen sectors. The mechanism is designed to align the carbon treatment of covered imports with that applied to European production.
Manufacturers using CBAM-covered materials as inputs may face higher purchasing costs where those materials are subject to CBAM charges. At the same time, some imported finished goods that incorporate those materials remain outside CBAM’s current product scope, raising concerns about potential carbon leakage further along supply chains.
Downstream CBAM expansion proposed for 2028
The European Commission proposed extending CBAM using document COM(2025)989 in December 2025. The proposal aimed at adding selected steel- and aluminium-intensive downstream goods from 2028. Negotiations have not produced a common final list of additional products.
The European Parliament and the Council adopted different positions on the extension. As a result, the proposed expansion has not become a final adopted change to CBAM’s product coverage.
Steel and aluminium producers support expanding coverage to finished products competing with European manufacturing. Some machinery, automotive and equipment manufacturers expressed concerns about additional compliance requirements and higher sourcing costs before the existing regime has fully settled into operation.
Power costs, reserve expectations and free allocation changes
Producers considering direct-reduced iron routes, electric furnaces, clean-power supplies or recycling facilities require credible long-term revenue expectations. Higher future carbon prices can improve relative economics for lower-emission production but may also raise operating costs for European industrial facilities and increase material purchase expenses.
The provisional market stability reserve agreement is intended to provide a larger buffer against future allowance scarcity. However, how that buffer affects industrial investment depends on its influence on market expectations and the resulting carbon-price outlook.
The European Commission’s July 2026 EU ETS revision proposal adds another variable by proposing a slower phase-out of free allocation for CBAM sectors. The process could extend from 2034 to 2038, while the existing legal schedule remains in force because the proposal has not amended legislation.
If investors base valuations on a slower phase-out, they may underestimate future carbon costs if negotiations lead to a different outcome. Models that ignore the Commission’s proposal may overstate exposure under scenarios where the proposed changes are eventually adopted.
Trade safeguards, exemptions and contract pricing effects
Carbon costs are only one element of manufacturers’ competitive position within Europe. EU steel trade safeguards, tariffs, sanctions affecting certain origins, freight rates, automotive production levels and currency movements can all influence import volumes, selling prices and profit margins.
The impact of changes in steel imports or market prices therefore cannot be attributed automatically to CBAM without separating other factors. The 50-tonne annual mass-based CBAM exemption also needs distinction from a general exemption from customs classification and record checks for small businesses; it does not mean all smaller companies avoid relevant customs documentation requirements.
Regulatory costs interacting with commercial pricing can create uncertainty for individual firms. A European steel mill may need to buy allowances but lack pricing power when global capacity is excessive. A downstream fabricator under an annual fixed-price contract may also be unable to recover unexpected increases in steel input costs until contract renewal.
Investment timelines for decarbonisation projects
Certain operational improvements can be implemented over shorter periods through upgrades such as metering changes, materials accounting adjustments and energy efficiency measures. Converting furnaces or developing carbon-capture projects requires design work, permits, financing, construction and reliable long-term offtake arrangements.
Regulatory commitments made in 2026 can affect whether investors proceed immediately or wait for greater certainty about future carbon costs and industrial support measures. Delaying projects may postpone emissions reductions that policy frameworks aim to encourage.
Emissions documentation requirements for Western Balkan suppliers
For manufacturers in Serbia, Bosnia and Herzegovina, North Macedonia and Montenegro, an immediate challenge is documenting product-level emissions at a cost and reliability acceptable to EU buyers. The longer-term question concerns whether European purchasers will shift more production into the EU or source lower-carbon materials from abroad or reorganise supply chains.
The EU’s provisional carbon-market agreement provides more flexibility for managing future allowance supply. At the same time, debate continues over free allocation approaches and whether downstream CBAM coverage should expand further.
Suppliers in Southeast Europe are expected to continue demonstrating emissions performance as European buyers assess procurement costs, regulatory exposure and the competitiveness of alternative production locations within regional markets.