The Effects of ETS & CBAM on Cost Differences in the European Steel Industry : A Case Study on Swedish and German Long Engineering Steel Manufacturers

Abstract: To combat anthropogenic climate change and comply with the Paris Agreement, the EU has previously introduced its Emissions Trading System (ETS) and has now also proposed a Carbon Border Adjustment Mechanism (CBAM). While these tools may reduce emissions within the EU, and in some cases, even in other countries, they can also affect European industries in unpredictable and sometimes negative ways. One industry that is currently included in the ETS is the steel industry. While the steel industry has not been signifi cantly affected yet, as the prices for ETS allowances remain relatively low, this is likely to change as the price for allowances rises. By identifying the factors which lead to cost differences between steel manufacturers in European countries through interviews and literature and comparing the costs of two manufacturers with similar production methods, this study aimed to quantify the cost diff erences that arose due to the ETS by constructing a model capable of estimating the cost differences. Furthermore, plausible changes to the ETS were identified and developed into scenarios where the cost differences that occurred between the two companies due to the new circumstances were analyzed. Energy was found to be the biggest cause of differences in cost, followed by transport costs if one company had a location advantage due to being closer to the customer. Historically, the cost of purchasing ETS allowances was nearly negligible. However, when the price of allowances was predicted to increase, the cost difference caused by the ETS grew significantly and became almost as important for competitiveness as energy costs by the 2030s. The scenarios further affected the total cost difference, making it both decrease and increase depending on how the ETS was altered. Depending on how the EU alters the ETS in the future, the steel sectors in some countries might become more competitive, while others might lose financial viability. Great care must therefore be taken when developing the system so that European emissions can continue to decrease without putting companies in certain countries at a severe disadvantage. Furthermore, the CBAM, or other measures, must be put in place if carbon leakage is to be avoided when the prices for ETS allowances rise.