New Fastmarkets modelling shows a moderated EU Emissions Trading System trajectory would hold allowance prices near €110 a tonne by 2035 and cut combined low and near-zero steel output by 48%.
A softer carbon price path in Europe would cut combined output of low and near-zero emissions steel by 48% against the current policy trajectory, according to modelling published by Fastmarkets on 4 August. The finding comes from a policy moderation scenario in the price reporting agency’s latest Green Steel Market Outlook.
The EU Emissions Trading System (EU ETS) is the main lever pushing conventional and lower-emission steel costs together. As free allowances are withdrawn, blast furnace and basic oxygen furnace producers carry the full cost of their emissions. They also pay indirectly through carbon embedded in electricity prices and imported feedstocks, while the Carbon Border Adjustment Mechanism extends that exposure to importers.
Under Fastmarkets’ base case, which assumes legislation as it currently stands, EU allowance prices pass €200 a tonne by 2035. Direct carbon costs for conventional production would then approach €450 a tonne, against roughly €40 a tonne for an integrated hydrogen-based direct reduced iron and electric arc furnace producer. That gap reorders the competitiveness of every steelmaking route through the 2030s.
Commission proposal points to a gentler tightening
The European Commission’s proposed EU ETS review moves the other way. It would cut the Linear Reduction Factor to 3.7% for 2031-35 and 1.7% from 2036, alongside changes to the Market Stability Reserve. For sectors covered by the border mechanism, including steel, it would extend the withdrawal of free allocation while tying continued allocation more closely to investment in European decarbonisation.
Fastmarkets tested a policy moderation scenario in which intervention caps real carbon price growth at 50% above 2025 levels, giving €110 a tonne in 2035. The agency stresses this is a stress test rather than a forecast of the final legislation.
The timing consequences are sharp. On the current trajectory, blast furnace costs rise steeply from 2030, exceed natural gas-based DRI-EAF costs by 2032, and reach parity with hydrogen-based production in 2035. Explicit green premiums disappear across all emission buckets by that point, because low-emission steel simply costs less to make. Under policy moderation, conventional steel stays cheaper for longer and near-zero producers keep charging a premium on thinner margins.
Hydrogen-based DRI-EAF is the most exposed. Its 2035 output under policy moderation sits 63% below the current-trajectory outcome. Conventional production holds a materially larger share of the European flat steel market instead.
Emissions and competitiveness pull against each other
Average emission intensity of European steel consumption falls 27% between 2026 and 2035 on the current path, against 18% under the modelled policy change. The trade-off is price. Conventional hot-rolled coil prices rise over 100% more by 2035 on the current trajectory than under policy moderation, raising the risk of lost domestic production and heavier reliance on imported semi-finished material.
The Commission has proposed a €100 billion Industrial Decarbonisation Bank, opening with an Investment Booster backed by 400 million allowances, to compensate for a weaker price signal with direct support. For anyone financing a DRI-EAF project in Europe, the size and allocation of that fund now matters as much as the allowance price itself.
