European industrial competitiveness is being influenced by the combined cost of carbon, energy and production, alongside rules affecting imports and investment. A provisional EU deal to keep more emissions allowances in reserve has altered the framework for dealing with future carbon-market scarcity. Steel, aluminium and cement producers continue to report weak demand, ongoing international competition and uncertainty about the payback from industrial decarbonisation.
On October 20, 2026, a political agreement set out an increase to the market stability reserve allowance-invalidation threshold from 400 million to 700 million permits, subject to formal adoption. The arrangement does not require any 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.
EU steel output declines amid trade pressure
The scale of the challenge is visible in European steel production figures reported by EUROFER. The industry association said 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 also reported a drop in exports to third countries during the first half of 2026. In its October outlook, the association cited a 20% decline in exports over that period. Weak construction and manufacturing activity, together with global excess steelmaking capacity, are cited as factors affecting the sector independently of CBAM.
Carbon exposure varies by production technology
Steelmakers face different cost structures depending on their production routes. Blast-furnace operations generate 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 has a different direct and indirect emissions profile. Cement production adds another constraint because emissions from limestone calcination cannot be eliminated simply through purchases of renewable electricity. As a result, a single EU ETS price can translate into different cost and investment implications across industrial sectors.
The same carbon-price signal does not create identical incentives for all operators. Carbon-intensive producers, electricity-intensive manufacturers and firms relying on recycled materials face different operating constraints. These differences also affect how companies assess potential investment in decarbonisation measures.
CBAM covers multiple sectors from 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.
CBAM coverage can still create cost mismatches for parts of supply chains. Manufacturers using CBAM-covered materials as inputs may face higher purchasing costs, while some imported finished goods that incorporate those materials remain outside the mechanism’s current product scope. This has raised concerns about potential carbon leakage further along manufacturing chains.
Downstream product scope remains unresolved
The European Commission proposed extending CBAM coverage through COM(2025)989 in December 2025. The proposal would cover selected steel- and aluminium-intensive downstream goods from 2028. The European Parliament and the Council have adopted different negotiating positions.
A common final list of additional products has not been agreed, so the proposed extension has not become an adopted expansion of product scope. Steel and aluminium producers support extending coverage to finished products competing with European manufacturing. Some machinery, automotive and equipment manufacturers have expressed concerns about additional compliance requirements and higher sourcing costs before the existing CBAM regime has fully settled into operation.
Power costs and allowance rules influence investment choices
Companies considering direct-reduced iron processes, electric furnaces, clean-power supplies or recycling facilities require credible long-term revenue expectations. Higher future carbon prices can improve the relative economics of lower-emission production while also increasing costs for operating industrial facilities and purchasing materials within Europe.
A provisional market stability reserve agreement is intended to introduce a larger buffer against future allowance scarcity. The impact on industrial investment depends on how the reserve affects market expectations and the resulting carbon-price outlook. Lower expectations for extreme carbon-price movements could reduce downside risks for manufacturers.
At the same time, changes in expected allowance scarcity can affect incentives to invest in emissions-abatement technologies with higher costs. The assessment is described as requiring project-specific cash-flow modelling rather than relying only on the reserve threshold.
A separate variable comes from an EU ETS revision proposal published by the European Commission in July 2026. It proposes a slower phase-out of free allocation for CBAM sectors that could extend the process from 2034 to 2038. The existing legal schedule remains in force because the proposal has not amended legislation.
Trade safeguards and exemptions affect margins
Carbon costs are only one element shaping industrial competitiveness in Europe’s markets. EU steel trade safeguards, tariffs, sanctions affecting certain origins, freight rates, automotive production levels and currency movements also influence import volumes, selling prices and profit margins. Changes in steel imports or market prices therefore cannot be attributed automatically to CBAM without separating other factors.
The mechanism’s annual mass-based exemption of 50 tonnes also needs distinction from broader exemptions for small businesses related to customs classification and record checks. The threshold does not mean smaller companies are automatically excluded from customs or documentation requirements tied to their activities.
Regulatory costs interact with commercial pricing arrangements in ways that can vary across contracts. A European steel mill may need to buy emissions 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.
Decarbonisation projects depend on lead times
Certain operational improvements can be implemented over shorter periods, including upgrades related to metering, materials accounting and energy efficiency. Converting furnaces or developing carbon-capture projects requires design work, permits, financing, construction and reliable long-term offtake arrangements.
Regulatory commitments made during 2026 can influence whether investors proceed immediately or wait for greater certainty about future carbon costs and industrial support measures. Delaying a project may postpone emissions reductions that policy frameworks aim to encourage.
Emissions verification requirements apply in Serbia and neighbouring states
For manufacturers in Serbia, Bosnia and Herzegovina, North Macedonia and Montenegro, near-term commercial requirements include documenting product-level emissions at a cost level acceptable to EU buyers. Suppliers must provide reliability standards that meet procurement needs within EU supply chains.
The longer-term issue for these suppliers concerns whether European purchasers will relocate more production within the EU or source lower-carbon materials from abroad. Another possibility cited is reorganisation of industrial supply chains by buyers within Europe’s procurement strategies.
The provisional carbon-market agreement is described as providing greater flexibility on future allowance supply. At the same time, debate continues over free allocation and downstream CBAM coverage expansion. Suppliers in Southeast Europe are expected to continue demonstrating emissions performance as European buyers evaluate procurement costs, regulatory exposure and alternative locations’ competitiveness.