In the past decade, the EU has made tremendous efforts to move towards a more environmentally responsible economic model. Every industry has had to confront the same difficult question: how to reduce its environmental footprint, or even achieve net-zero, without weakening competitiveness, energy security, manufacturing capacity or strategic independence.
For heavy industries, that balancing act is sharper than almost anywhere else. Steel, cement, chemicals, glass and metals are among Europe’s largest industrial emitters, but they are also among the sectors Europe can least afford to lose. They build the materials base for infrastructure, clean technologies, defence, housing and manufacturing itself, and so the ability of many other industries to further decarbonise rests on the shoulders of the heavier industries that sit at the base of their supply chains. If they decarbonise successfully, they can become anchors of a new European industrial model. If they weaken, the consequences ripple through construction, automotive, clean technologies, packaging, machinery and more.
With the EU already having decided that the decarbonisation transition is necessary, the question now turns to how this will be funded, regulated, protected from unfair competition, and turned into a coherent industrial strategy. Once separate policy areas are being pulled together, such as carbon costs, access to clean electricity, import rules, public funding, access to raw and recycled materials policy, permits and supply-chain security. They are becoming part of one industrial rulebook.
From climate policy to industrial policy
The European Commission – the EU body that proposes laws and coordinates many policy programmes – has, in recent years, reframed decarbonisation from an environmental project to being part of the industrial global competitiveness agenda. We saw this first with the Green Deal Industrial Plan in February 2023 and reinforced by the Clean Industrial Deal published in February 2025.
In those plans, the Commission lays out how both competitiveness and decarbonisation can be mutually reinforcing goals, particularly when cleaner production also improves energy and resource efficiency, thereby reducing energy input costs and waste byproduct outputs. Additionally, the Commission recognises that decarbonisation must be properly paired with reduced volatility in energy prices and access, and that the EU must better secure consistent access to raw materials through cooperation with overseas partners. The EU recognises the balance here; it’s not only about emissions but also about jobs, investment, geostrategic resilience, energy costs, and Europe’s position in global value chains.
The carbon price is still the backbone
At the centre of the system remains the EU Emissions Trading System, known as the EU ETS. It is the EU’s carbon market. Large industrial sites and power plants must hold allowances for the emissions they produce. Over time, the number of allowances falls, which is designed to make pollution more expensive and cleaner investment more attractive.
For many heavy industrial companies, the ETS has long been softened by free allowances. These are allowances given without payment to sectors at risk of ‘carbon leakage’ – the danger that production moves outside Europe to countries with weaker climate rules. Free allowances have helped protect industry, but they also reduce the effectiveness of the domestic carbon price.
That balance is now changing. For sectors covered by the EU’s new Carbon Border Adjustment Mechanism (CBAM), free allowances for European companies will be gradually phased out as the CBAM is phased in, reaching full replacement by 2034. Some of the least efficient ETS installations will need credible climate-neutrality transition plans to retain full access to the free allocation. In sum, the EU is keeping carbon pricing at the centre, but it is making remaining support more conditional on real transition planning.
This is not a small administrative change. It means that carbon emission outputs will increasingly become a boardroom issue, not just an environmental reporting issue. Companies will need to understand their emissions profile, their investment pathway and the cost of waiting.
CBAM – Increasing import costs for high-emission goods
The EU’s Carbon Border Adjustment Mechanism, or CBAM, is the other major pillar. The name is unhelpfully technical, but the idea is simple enough: if EU producers pay a carbon price, certain imported goods should face a comparable carbon cost when entering the European market.
CBAM initially covers cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. Since January 2026, importers of covered goods exceeding the small-importer threshold of 50 tonnes have had to comply with the CBAM regime’s authorisation and certificate obligations.
CBAM changes how companies think about sourcing and building supply chains. The embedded carbon in imported inputs – how much carbon was emitted to make them – becomes commercially relevant. A downstream manufacturer buying steel, aluminium or fertilisers may not be a steelmaker or fertiliser producer itself, but it can still become exposed through its supply chain.
The EU is also looking at how the CBAM could extend further downstream, especially to products that use large amounts of steel or aluminium. That debate is not fully settled, and some measures remain in the proposal stage rather than law. But the direction is clear – the Commission wants carbon rules to follow materials through value chains, not stop at the factory gate.
The big question: who pays?
A carbon price can push companies to change; it is a stick, but it cannot, by itself, build new furnaces, electrify industrial heat, construct hydrogen infrastructure, or create carbon storage networks. That is why finance, the carrot, has become central to the EU’s industrial decarbonisation agenda.
The Clean Industrial Deal ringfences €100 billion to support EU-made clean manufacturing. Behind the headline figures sits a patchwork of instruments: EU research money, the Innovation Fund, InvestEU guarantees, the Hydrogen Bank, the Modernisation Fund for lower-income Member States, and national subsidies approved under EU state-aid rules.
Despite the fragmented instruments, the basic point that unites them is easy to understand. The EU is trying to make difficult industrial projects more bankable, helping companies reduce the risk of investing in technologies that are expensive today but are considered necessary for a lower-carbon industrial base tomorrow.
The Innovation Fund is a good example. It uses revenues from the carbon market to support clean technologies, including industrial heat decarbonisation, hydrogen, carbon capture and clean manufacturing. Recent auction rounds have been heavily oversubscribed, with companies asking for far more support than was available. That tells us two things: the industry is interested, and competition for funding to install decarbonisation technologies will be intense.
National governments also have their role to play. Under the Clean Industrial Deal State Aid Framework, Member States have more wiggle room to support clean energy, electricity costs for energy-intensive users, industrial decarbonisation and clean-tech manufacturing. However, in practice, support will not be equal everywhere. A company’s prospects may depend not only on EU rules, but also on the ambition, speed and fiscal capacity of the Member State in which it invests.
No silver bullet
The EU’s industrial decarbonisation strategy does not rest on one miracle technology. It is more of a toolbox, and different sectors will need different combinations.
Electrification is one route. If more industrial processes can run on clean electricity, companies can reduce fossil fuel use and local pollution. This is especially relevant for industrial heat, but it depends on affordable power, grid capacity and faster permitting.
Hydrogen is another route, particularly for uses where direct electrification is difficult. It may play a role in steelmaking, high-temperature heat, chemicals and some transport links. But the optimistic mood around hydrogen’s potential is quickly soured by the associated costs. Hydrogen cannot solve every problem, and it needs production, infrastructure, storage space and above all else – committed, long-term bulk buyers to ensure credible business models that attract investors.
Carbon capture, use and storage – often shortened to CCUS – remains relevant for sectors where emissions are inherent to the production process, such as cement. The concept is straightforward: capture CO2 before it reaches the atmosphere, then use it or store it safely underground. The challenge is not only the capture technology, but also pipelines, storage sites, regulation and public acceptance.
Circularity is the quieter but increasingly important piece of the puzzle. Using more recycled metals, secondary raw materials and efficient production processes can reduce demand for virgin resources and lower emissions. Aluminium is a prime example, as using recycled scrap can cut emissions by around 95% compared with virgin production by avoiding the most energy-intensive stages of mining, refining and electrolysis. This is why the forthcoming Circular Economy Act matters. It is expected to push Europe closer to a single market for secondary raw materials and to make circularity part of industrial competitiveness, not just waste policy.
Raw materials are equally central. Clean technologies require metals and minerals, and as Europe scales up their deployment, more virgin inputs will be needed beyond what recycling can provide. Europe does not want to swap dependence on imported fossil fuels for dependence on insecure material supply chains. That is why the Critical Raw Materials Act sets benchmarks for European-based extraction, processing, and recycling, while seeking to reduce overdependence on any one foreign supplier through diversification.
Finally, the revised Industrial Emissions rules are about reducing pollution to air, water and land from large industrial sites. A company planning a major investment cannot look only at carbon emissions reductions. It must also consider environmental permits and local impacts.
What changes between now and 2030?
The next few years will be decisive, as several parts of the framework shift from strategy to implementation.
First, CBAM is now operational. Importers in covered sectors need to treat carbon data and customs compliance as live business risks. Companies further down the value chain should also reassess their suppliers and the carbon content of their material inputs, before they, too, are included in the scope of the EU’s rules.
Second, the future of the ETS is becoming a major political discussion. The design of the carbon market for the 2030s will dictate how much EU industry is expected to pay for its green transition, the role of public financing, investment signals and the balance between climate ambition and competitiveness. Companies should not wait until the rules are final before engaging.
Third, the proposed Industrial Accelerator Act points to a new phase of demand-side industrial policy. If adopted, the idea is to expedite permitting for strategic projects and to use public procurement and support schemes to create markets for cleaner, more resilient products. Put simply, public money may increasingly come with conditions: lower carbon, stronger ‘Made in Europe’ European value chains, or both.
Fourth, sector-specific action plans are becoming more important. As an example, steel and metals face different decarbonisation barriers than those in the chemicals sector, and a single generic industrial policy will not be enough.
Finally, infrastructure will make or break the agenda. Industrial sites cannot decarbonise in isolation if the grid is congested, hydrogen networks are not in place, CO2 storage is unavailable, or permits take too long. This is where the EU’s ambition will meet reality.
The opportunity and the risk
With these policies, the EU intends to carve out a pathway for its traditionally heavy-emitting industries to decarbonise and be fit for a carbon-constrained world. It can create demand for cleaner materials, reward early movers, reduce exposure to volatile fossil fuel markets, and keep critical industrial capabilities on the continent.
But there is also a risk. If policy becomes too fragmented, too slow or too expensive, companies may face the worst of both worlds: higher compliance costs without the infrastructure, funding or market demand needed to invest. That would weaken exactly the sectors Europe says it wants to protect.
This is why implementation matters more than slogans. ‘Clean industry’ is easy to support in principle. The hard work lies in electricity prices, grid connections, permitting offices, national subsidy schemes, data systems, procurement rules, skilled workers and bankable projects.
At Lykke Advice, we support companies in navigating this transition. We help businesses understand the EU policy landscape, monitor legislative and funding developments, identify relevant stakeholders, and build credible engagement strategies in Brussels and across Member States. For hard-to-decarbonise industries, decarbonisation is no longer only a technical or operational challenge. It is a strategic positioning exercise, and companies that understand the policy environment early will be better placed to protect their competitiveness and seize the opportunities of Europe’s clean industrial transition.
