Why Slower Decarbonisation Would Not Fix Europe’s Steel Problems
The EU must manage decarbonisation, industrial competitiveness and economic security together, rather than treating climate policy as the main obstacle. A commentary by Pier Paolo Raimondi
This commentary draws on the main takeaways from an Italo-German roundtable on the future of the European steel industry, co-organised by IEP Bocconi and the Europa-Institut at Saarland University on June 15, 2026.
Held in the framework of the January 2026 Protocol on a German-Italian Plan of Action for Strategic Bilateral and EU Cooperation, the event brought together representatives from government, industry and academia to discuss decarbonisation, energy costs, scrap markets, defence-related steel demand and the EU’s shift towards stronger trade protection.
European policymakers and steelmakers face critical challenges: declining competitiveness, fiercer international competition and rising global protectionism. Additionally, the steel industry, which accounts for 5-6% of total EU emissions, must undergo a massive transformation to support the EU net-zero target.
The European Union (EU) and its member states have responded with several measures, but these pursue three different objectives, that are hard to reconcile, especially in the short term: decarbonization, industrial competitiveness and economic security. Each objective entails consequences for the others.
This is why prioritisation is essential, informing political support and allocating resources to the most strategic segments.
A coordinated green industrial policy at the EU level is required, since challenges vary among member states. For example, Germany and Italy jointly account for 44% of total EU steel production, but through different production routes, with different climate, energy and decarbonization implications.
Decarbonisation
High energy prices, driven largely by fossil-fuel dependence, are a clear competitive disadvantage for European industry. Clean electrification offers a structural way to reduce that exposure. Energy prices will redraw the European industrial map with industries moving to regions, including within the EU market, with cheaper electricity prices – decisive for cost and competitiveness.
Decarbonisation routes for steel differ sharply by country.
Germany must phase out of its coal-based blast furnaces-basic oxygen furnace (BF-BOF) production, still over 70% of the national production, mainly through low-carbon-emission alternatives, hence a clear bet on hydrogen.
Italy, with around 89% of output coming from scrap-based electric-arc furnace (EAF), will need scale up renewables in the power generation that remains heavily gas-dependent. However, fragmented regulation slows down progress, leaving the country exposed to imported price shocks.
The two, alongside Austria and North African partners (Algeria and Tunisia), are cooperating to build the SoutH2 Corridor, expected to carry 4 million tonnes of low-carbon hydrogen also for industrial decarbonization.
However, several companies have scaled down or postponed their green steel projects due to lack of demand, highlighting the trade-off between decarbonisation and competitiveness.
Furthermore, the transformation of the iron and steel sector needs around €80 billion between 2031 and 2040, and €100 billion between 2031 and 2050.
The EU needs to deploy demand-measures and financial tools to reduce the ‘green premium’ between high- and low-carbon technologies, with financial support for the industry carrying clear conditionalities on innovation and decarbonization.
Coordinated policies, rather than a proliferation of state aid including on electricity price subsidies, would prevent fragmentation of the single market.
Competitiveness
If the long-term objective is decarbonisation, the pressing problem is short-term competitiveness, with growing temptation to regain it by diluting climate ambitions.
Capacity utilization rate stands around 65%, against the 85% needed to be market competitive. As the EU output has declined (from 160 Mt in 2017 to 129 Mt in 2024), the bloc has become a net importer, running a 10 Mt trade deficit in 2024.
The policy response has moved quickly with the launch of the Clean Industrial Deal (February 2025), the Steel and Metals Action Plan (March 2025) and, most recently, the Industrial Accelerator Act (IAA), with the goal to revive manufacturing capacity and support decarbonisation.
It introduces minimum low carbon requirements (25% by 2029) for public procurement and support schemes. Unlike aluminium and cement, the IAA does not propose mandatory ‘Made in Europe’ for steel, given the safeguard measures in place.
However, any Union origin requirements should be linked to decarbonization.
Public procurement covers only around 2% of steel demand, so lead markets must be established through demand-pull measures in sectors such as automotive, a key market for flat and high-quality steel, with modest end-price increase for consumers. For this, a clear low-carbon label is needed, something that the IAA misses and deferred to the Ecodesign for Sustainable Products Regulation. However, the label should acknowledge also decarbonisation efforts already made.
The trade-off between competitiveness and decarbonisation is visible in the growing political pressure against the Emission Trading System (ETS) to reduce energy prices and regain some competitiveness following the 2026 energy crisis. Yet, it covers a small share of production cost, and the sector has benefited from free allowances worth around €54.6 billion since 2005 undermining the carbon price signal.
Weakening it may offer temporary breath for companies, but it will resolve competitiveness loss while destroying the business case for innovative solutions, such as circularity and green steel as Saarland’s premier Anke Rehlinger warned in defence of the €5 billion Saarstahl and Dillinger green steel project.
Walking away will result in losing the race on green steel and potentially replicating the experience of other industries like the clean tech. Several countries are keen to develop green steel domestically, as illustrated in China’s 15th Five-Year Plan or Gulf countries’ economic strategies.
Economic security: openness vs. protectionism
This brings to the last objective: economic security, and the consequent dilemma between openness and protectionism.
As imports rise, the EU seeks both to prevent carbon leakage and to curb excessive import surges. The EU Carbon Border Adjustment Mechanism targets the former, since major steel producers still rely largely on BF-BOFs.
Trade defence instruments and tariff-quotas, as recently approved by the European Council, tackle the latter. They are motivated by growing global overcapacity: the OECD expects it to reach 721 Mt by 2027 (five times the EU output). However, steel producers have struggled to compete given cost disadvantages.
Trade measures are called also to secure key input for cleaner steel: scrap. The EU is the world’s largest net exporter, accounting for more than 30%.
As global major steel producers shift towards EAF production, competition over scrap may emerge. Before turning to export bans, a granular analysis of ferrous scrap flows and quality is needed to ensure supply without weakening international cooperation.
Europe should remain open: resilience is not autarky. Keeping some domestic steel production may serve for resilience and socioeconomic goals. However, defence steel needs are modest; thus, the security argument should not justify blanket support and tariffs.
Furthermore, the EU would benefit from importing some green intermediate products and moving down to the value chain.
Amidst the enormous challenges, the three objectives cannot all maximised at one, demanding for clear prioritization. Temporary and short-sighted fixes on ETS, blanket tariffs and scrap bans will erode the decarbonisation business case without meaningful gains on competitiveness.
Conversely, coordinated EU policy on investment, demand-side measures, and trade, backed by regulatory certainty, is essential. This must be coupled with trade openness to international markets, by building international value chains for raw inputs and green, energy-intensive intermediate products.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
