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Compensation of indirect carbon costs in the post 2020 EU ETS
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Several elements of the draft text (e.g. state aid intensity limited at 75%, exclusion of sectors in the steel value chain such as industrial gases, mining of iron ores and tubes) undermine significantly the effectiveness of the provisions to prevent the risk of carbon leakage because they result in a very low level of compensation (up to less than 50% of the actual indirect costs).
If the default aid intensity is not increased to 100% of the benchmark, the possibility for member states to grant compensation beyond 75% is an important step to reduce indirect costs to eligible sectors.
The additional compensation should be set so that indirect costs are capped at 0.5% of the GVA and should be open to all eligible sectors and not restricted only to some of them. Furthermore, it should be accessible to both the electric arc furnace (EAF), which uses large amount of electricity
to melt and recycle scrap, and the integrated route, which consumes electricity produced from the combustion of recovered waste gases generated unavoidably by the steel making process.
Similarly to the allocation of free allowances to the heat consumer under the rules on free allocation for the direct emissions, the consumption of industrial gases (e.g. oxygen, hydrogen, etc.) should also be considered as eligible for financial compensation when it occurs in a sector that is exposed to indirect carbon leakage such as steel and state aid should be granted to the exposed sector.
Sectors (mining of iron ores and seamless pipes) belonging to the steel value chain need to remain eligible for compensation since they are already recognised at risk of carbon leakage in phase 3 and they contribute to the carbon leakage exposure of the steel industry.
The proposal of splitting existing regions contradicts the political objective of linking more the national energy markets. Furthermore, the overly strict methodology for defining regional areas (1% price divergence in significant number of hours per year) does not capture the reality of energy
markets where the emission pass through factor is influenced by neighbouring member states due to interconnections. Hence, the existing regional areas should be maintained.
➢ Compensation should not be made conditional because it does not distort incentives for energy efficiency investments, since it is based already on very strict benchmarks. If now state aid is made conditional to additional measures to be taken by the company, de facto it is not anymore a (partial)
reimbursement of incurred costs as it requires additional costs to the company.
The fall-back benchmark (80% of reference electricity consumption) should not be reduced further, since it entails already a major reduction of aid.
➢ The steel industry (NACE code 2410) is recognised as eligible for indirect costs compensation in the draft Guidelines but the consultants’ study classifies the sector only at medium risk. Even though there is no different treatment, we are providing evidence which indicates that steel is at very high risk of carbon leakage.
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Brussels, 11 September 2025 – The lack of a solution for steel in the EU-U.S. trade negotiations, the ongoing unpredictability of the global geoeconomic situation, and persistently weak demand against an ever-growing global steel overcapacity are squeezing the European steel market. In 2025, the outlook points to stagnation, with potential recovery only in 2026 — conditional on improvements in the global economy and an easing of trade tensions. According to EUROFER’s latest Economic and Steel Market Outlook, another recession both in apparent steel consumption (-0.2%, revised upwards from -0.9%) and in steel-using sectors (-0.7%, revised downwards from -0.5%) is confirmed for 2025. Growth prospects are now delayed at least to 2026, with projections of a rebound for both apparent steel consumption (+3.1%) and steel-using sectors (+1.8%). However, steel imports continue to hold historically high market shares (25%) in 2025.
Third quarter 2025 report. Data up to, and including, first quarter 2025
Brussels, 10 September 2025 – Reacting to today’s State of the Union Address delivered by Commission President Ursula von der Leyen, Axel Eggert, Director General of the European Steel Association (EUROFER) said: