EU Carbon Policy Update: The Cost Curve Flattens, the Direction Holds

Two developments this summer will shape the economics of European steel for the next decade. One slows the pace of change. The other widens its reach.

A slower phase-out of free allocation

Under current law, free allocation of EU ETS allowances for CBAM sectors, including iron and steel, began phasing down in 2026 and is scheduled to reach zero in 2034. On July 17, 2026, the European Commission proposed a revision of the ETS that would slow that phase-out and extend it to 2038. Nothing changes for 2026 or 2027, but the cost curve for later years would be noticeably flatter. The Commission has also proposed benchmark changes that would increase free allocation to industry over the 2026 to 2030 period.

This is a proposal, not law. It now goes through the ordinary legislative process, with agreement targeted for early 2027.

CBAM moves downstream

In December 2025 the Commission proposed extending CBAM to around 180 steel- and aluminium-intensive downstream products from 2028, along with measures against circumvention. The Council agreed its position in June 2026, and on September 15, 2026 the European Parliament adopted a negotiating position supporting a wider scope, including products such as fasteners, wire and springs. The two institutions will now negotiate the final text. Until then, the existing CBAM scope applies.

How to read it

It is tempting to read a slower phase-out as a step back. We see it differently. A longer runway gives producers time to invest, and it reduces the risk of a cliff edge that pushes production offshore. Meanwhile, a wider CBAM closes the gap that would let embedded carbon slip into Europe inside finished goods. Taken together, the policy direction has not changed: carbon in steel will be measured, reported and increasingly paid for, across more of the value chain.

What it means for producers and buyers

• Planning horizon. A flatter cost curve makes long-term decarbonization investments easier to finance, not less necessary.
• Downstream visibility. Manufacturers of steel-intensive products will need emissions data from their steel suppliers, which pulls carbon accounting further into procurement.
• Inputs matter. Measures that do not require new capital, such as switching to renewable carbon inputs, remain among the fastest ways to lower the footprint of steel already being made.

We will keep tracking both files as they move through Brussels. The detail will change. The destination will not.

Sources

• SteelOrbis: EC proposes extending free ETS allowances for CBAM sectors until 2038
• European Parliamentary Research Service: CBAM extension to downstream products
• Trade Compliance Resource Hub: Commission proposes expansion of EU CBAM to downstream goods
• European Commission: Allocation to industrial installations