Based on analysis and reporting by Freya Gompertz, Felix Gallagher, and Josh Cowley for Fastmarkets
The reform of the EU Emissions Trading System (EU ETS), and in particular the progressive phase-out of free allocation, is expected to significantly increase carbon compliance costs for EU industrial producers over the coming decade. While much attention has focused on the Carbon Border Adjustment Mechanism (CBAM) as it enters its definitive phase in 2026, recent analysis shows that EU ETS reform itself will be a far more consequential cost driver for domestic producers in sectors such as steel, aluminium, cement, and pulp and paper. Under the revised EU ETS framework, free allowances granted to industrial installations will be reduced year by year and fully eliminated by 2034. At the same time, the overall supply of EU Allowances (EUAs) is tightening due to an increased linear reduction factor on the emissions cap. As a result, the effective carbon price faced by EU producers is set to rise sharply, even without assuming extreme increases in headline EUA prices. Fastmarkets estimates that, by 2035, effective EUA costs for industrial emissions could be several multiples of current levels, translating into direct carbon cost increases from hundreds of millions to tens of billions of euros across major EU industrial sectors.
These higher emissions costs are expected to be passed through along value chains. For example, carbon costs embedded in steel billets, hot-rolled coil, and aluminium products are projected to rise from low single-digit percentages of product prices today to materially higher shares by the mid-2030s. Downstream sectors such as automotive and construction, which account for the majority of demand for steel products, are therefore likely to face indirect cost pressures as EU ETS exposure intensifies. CBAM is designed to mitigate competitiveness risks by ensuring that imports of carbon-intensive goods face a comparable carbon cost. However, even with CBAM in place, EU producers will increasingly compete against the most emissions-efficient international producers, rather than the global average. Countries with large, efficient production bases are expected to remain structurally competitive, reinforcing the importance of emissions intensity at the installation level for EU industry. Producers with lower emissions intensity and more proactive carbon management strategies will be better positioned to absorb rising EUA costs, while others may face sustained margin pressure.
FACS Perspective
EU ETS reform marks a structural shift in how carbon costs are felt across the European industrial economy. Carbon pricing is no longer a marginal compliance issue but it is becoming a core financial input for industrial production and trade.
At FACS, we view this transition as reinforcing the need for forward-looking carbon cost forecasting, granular exposure analysis, and disciplined execution strategies. As free allocation declines and effective EUA prices rise, the timing, scale, and structure of allowance procurement will play an increasingly decisive role in cost management and competitiveness. Understanding how EU ETS reform interacts with CBAM, sector-specific emissions profiles, and evolving market dynamics will be critical for companies seeking to manage long-term carbon exposure in a tightening regulatory and market environment.
You can read the full Fastmarkets analysis here.
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