Steel value chain: Effects of the planned border adjustment mechanism on the downstream industries

December 28, 2021

This package includes a faster limitation of the permitted emissions from industry and the energy sector within the framework of the European emissions trading system (EU-ETS). In addition, the previously applicable free allocation of emission certificates to particularly energy-intensive companies that are in international competition is to be phased out and a border adjustment mechanism is to be introduced instead. So far, the free allocation has ensured that the companies concerned at European locations do not have to shoulder higher costs than outside the European Union (EU) and therefore do not relocate their production and the associated emissions to other locations due to the stricter European climate policy. In the future, the border adjustment mechanism should ensure that

For the customers of steel, aluminum and other raw material producers, this means above all higher prices. This is borne out by the introduction of tariffs in the USA, which twice in the last 20 years has ensured that the prices for steel and aluminum have risen significantly there, while there has been only a slight increase in prices worldwide. Although the introduction of the US tariffs saved jobs in the steel industry, up to 200,000 jobs were lost in the downstream steel processing sectors in 2002 and around 75,000 in 2018, according to initial estimates.

Higher steel prices affect numerous customer industries, above all metal processing, the manufacturers of electrical equipment as well as machine and vehicle construction. The ten industries most affected by this represent one fifth of economic output and one sixth of employment in Germany. At the European level, these ten industries generate almost two trillion euros in added value and thus around a sixth of the total economic output. More than 30 million people are employed in these sectors across the EU, which corresponds to almost 15 percent of the workforce in the EU.

Steel processing companies not only compete within Europe with non-European manufacturers of processed products. They also produce up to half of their products for markets outside Europe. Many of them are small and medium-sized companies that cannot pass higher prices on to their customers in the face of increasing international competition. If the CO 2 price on steel had a full impact thanks to the border adjustment and the elimination of the free allocation, the costs of the metalworking companies in Germany would increase by two billion euros and thus around 3.5 percent of the added value.

The border adjustment mechanism in the form planned by the European Commission is therefore not suitable for maintaining the protection against carbon leakage risks that has been in effect up to now. For the downstream industries in particular, this actually increases the likelihood of relocations. Because companies that process steel and other raw materials in Europe are faced with higher costs that their non-European competitors do not have to shoulder to the same extent.