Carbon Accounting for Steel and Aluminium in Europe

European steel and aluminium producers face unprecedented pressure to decarbonise. Major players like ArcelorMittal, Thyssenkrupp, Acerinox, and Norsk Hydro operate in a tightening regulatory environment shaped by the EU Emissions Trading System (EU ETS), the Corporate Sustainability Reporting Directive (CSRD), and the Carbon Border Adjustment Mechanism (CBAM). Understanding how to accurately account for emissions across these sectors is critical for compliance, competitive positioning, and investment decisions.

European Steel and Aluminium Emissions Context

Steel and aluminium are among Europe's most carbon-intensive industries. Steel production accounts for roughly 7-8% of global CO2 emissions, while primary aluminium smelting is highly electricity-intensive and therefore highly variable in carbon intensity depending on grid composition.

Both sectors are now covered by multiple regulatory frameworks. The EU ETS places a carbon price on emissions, while the CSRD requires large European companies to report detailed sustainability data. Simultaneously, CBAM creates a new mechanism to manage carbon leakage risk and incentivise global decarbonisation.

For non-European producers, CBAM raises the cost of importing steel and aluminium into the EU unless they can demonstrate equivalent carbon pricing at home. This creates a powerful incentive for global supply chains to decarbonise or face margin erosion.

Key Emission Sources in Steel and Aluminium

Steel and aluminium production emit carbon at multiple points in the value chain. Accurate carbon accounting requires identifying and quantifying each source.

Scope 1 Emissions: Direct Production Processes

Blast furnace ironmaking generates approximately 1.8 tCO2 per tonne of steel produced through direct chemical reduction of iron ore. This is the single largest source of emissions in conventional steelmaking.

Coking coal combustion and calcination of limestone in the blast furnace drive these emissions. Scope 1 also includes:

• Direct combustion of natural gas and coal for process heat
• Fugitive emissions from furnaces and equipment
• In aluminium smelting, perfluorocarbon (PFC) emissions from anode effects

PFC emissions are particularly important in aluminium accounting because they have a global warming potential (GWP) 6,500 times higher than CO2 over 100 years. Even small volumes represent substantial carbon intensity.

Scope 2 Emissions: Electricity Consumption

Aluminium smelting is extremely electricity-intensive, consuming 12-15 megawatt-hours per tonne of primary aluminium. Scope 2 emissions therefore vary enormously by country and grid composition.

A smelter in Norway, powered by 98% renewable hydroelectricity, reports near-zero Scope 2 emissions. The same facility in Poland, drawing from a coal-heavy grid, would report 5-7 tCO2e per tonne. This geographic variation creates significant competitive dynamics and influences CBAM Explained incentives for location decisions.

Steel production also requires electricity for electric arc furnaces (EAF), though less intensively than primary aluminium smelting.

EU ETS Phase 4: Declining Free Allocation and Full Exposure

The EU ETS entered Phase 4 (2021-2030) with a critical shift in policy: free allocation of carbon allowances to steel and aluminium producers is declining by approximately 2.5% annually.

By 2034, full exposure is expected. Steel and aluminium producers will need to purchase allowances for 100% of their emissions rather than receiving free allowances. This creates a transition period where companies must actively plan decarbonisation investments or face escalating compliance costs.

The EU ETS price has ranged from EUR 50-90 per tonne CO2e in recent years, making the cost of inaction substantial. A typical integrated steel mill emitting 2 million tonnes annually faces EUR 100-180 million in annual allowance costs under full exposure.

CBAM fills the gap by ensuring non-EU producers face equivalent carbon costs when exporting to Europe. This prevents carbon leakage to jurisdictions with weaker climate policies.

Green Steel Transition: Accounting for Hydrogen-Based DRI-EAF

Green steel produced via hydrogen-based direct reduced iron (DRI) combined with electric arc furnace (EAF) melting can reduce Scope 1 emissions by 90% compared to blast furnace routes.

Accounting for this transition requires careful methodology:

• Hydrogen source matters: Green hydrogen (from renewable electricity) produces zero direct emissions; grey hydrogen (from natural gas) produces approximately 10 tCO2/tonne H2
• Electricity sourcing: EAF emissions depend entirely on grid carbon intensity
• Transitional accounting: Companies implementing DRI-EAF hybrid routes must track emissions separately from legacy blast furnace production

Greenio's platform helps manufacturers track these shifting production pathways and report credible decarbonisation progress to investors and regulators.

CBAM: Certificate Requirements for European Importers

From 2026 onwards, European importers of steel, aluminium, and other covered goods must purchase CBAM certificates reflecting the carbon content of imports. The CBAM price initially tracks the EU ETS average allowance price but with a separate mechanism.

Key implications:

• Non-EU producers face incentives to decarbonise or lose market access to Europe
• Importers must track embedded emissions in imported products with new supply chain data requirements
• Transition period (2026-2034) allows gradual adjustment before full compliance

The EU ETS Explained framework and CBAM work in tandem to create a carbon-constrained market for European producers while protecting competitiveness.

CSRD Reporting Requirements for Steel and Aluminium Producers

The CSRD mandates detailed Scope 1, 2, and 3 emissions disclosure for large European manufacturers. Steel and aluminium companies must report:

• Absolute emissions and intensity metrics (tonnes CO2e per tonne of product)
• Transition plans aligned with EU climate targets
• Supply chain emissions (Scope 3), including raw material sourcing and downstream product use

This level of transparency requires robust carbon accounting systems. Many mid-sized steel and aluminium producers are upgrading their measurement infrastructure to meet these requirements.

FAQ

How does the EU ETS affect European steel producers?

The EU ETS places a carbon price on emissions through an allowance trading system. In Phase 4 (2021-2030), free allocation declines annually, exposing steel producers to full allowance costs by 2034. This creates strong economic incentives for decarbonisation investment. Companies must either reduce emissions or purchase allowances at market prices, which have ranged from EUR 50-90 per tonne CO2e in recent years.

What is the CBAM obligation for steel and aluminium importers?

From 2026, European importers of steel, aluminium, and other CBAM-covered goods must purchase CBAM certificates reflecting the carbon content of imports. These certificates cost approximately the EU ETS average allowance price. Non-EU producers that have paid carbon costs in their home jurisdiction can claim credit, but most face new costs when exporting to Europe.

What is green steel and how is it accounted for?

Green steel is produced via hydrogen-based direct reduced iron (DRI) combined with electric arc furnace (EAF) melting, reducing Scope 1 emissions by approximately 90% compared to blast furnace routes. Accounting requires tracking the hydrogen source (green vs. grey), the grid carbon intensity powering the EAF, and separately reporting emissions from DRI-EAF vs. legacy blast furnace production.

How do aluminium smelters report Scope 2 emissions when electricity varies by country?

Aluminium smelters calculate Scope 2 using location-based or market-based methodologies. Location-based reflects the grid carbon intensity where the facility operates (Norway's hydropower smelter reports near-zero; a Polish coal-powered smelter reports 5-7 tCO2e per tonne). Market-based reflects actual electricity contracts (renewable power purchase agreements lower reported emissions). Both must be disclosed under CSRD.

When must European companies comply with CSRD carbon accounting requirements?

Large European companies (250+ employees or EUR 50m revenue) must begin CSRD reporting in 2025 for fiscal year 2024 data. Reporting happens in 2025. Smaller listed companies and non-EU companies with significant EU operations face phased timelines through 2028. Steel and aluminium producers should begin systems upgrades immediately to meet these deadlines.