German Industry Under EU ETS Reform Pressure: How Carbon Costs Reshape Manufacturing Competitiveness

Carbon Price Surge: A Hidden Tax on German Industry

Since 2023, the carbon allowance price under the EU Emissions Trading System (EU ETS) has been fluctuating in the range of 80-100 euros per ton, a more than tenfold increase from the 5-8 euros per ton in 2017. Confindustria, the Italian industrial federation, recently called for a "pragmatic reform" of the ETS in Brussels, pointing out that the current mechanism has threatened the survival of European industry—this sentiment also reflects the widespread anxiety among German industrial circles.

As Europe's largest manufacturing economy, Germany's pillar industries such as steel, chemicals, automotive, and mechanical engineering are highly sensitive to energy and carbon costs. According to Confindustria's estimates, the impact of carbon prices on electricity costs is about 25-30 euros per megawatt-hour, and German industrial electricity prices are already among the highest in the world. When carbon prices exceed 100 euros, the carbon cost alone can increase the cost per ton of steel for German steel companies by about 80 euros, effectively offsetting their technological efficiency advantages.

The Carbon Cost Gap: Germany's Race Against Global Competitors

What further unsettles German industry is the global asymmetry in carbon costs. During the same period, carbon prices in California's carbon market are only about $25 per ton, while the average price in China's national carbon market is below $10 per ton. Emerging industrial economies such as India and Turkey currently have no mandatory carbon pricing. This disparity means that the "green premium" of "Made in Germany" is shifting from a quality premium to a cost penalty.

Although the EU has introduced the Carbon Border Adjustment Mechanism (CBAM) to level the carbon costs of imported products, CBAM is being implemented in phases and initially covers a limited scope—only six major sectors: steel, aluminum, cement, fertilizers, electricity, and hydrogen. For downstream complex supply chains (such as auto parts and precision machinery), the pass-through effect of indirect carbon costs (e.g., electricity) has not been fully hedged.

Industrial Logic: From "Decarbonization" to the Tipping Point of "Deindustrialization"

The survival logic of German industry is undergoing a fundamental restructuring. Traditionally, the advantages of German manufacturing lay in high energy efficiency, precision engineering, and supply chain integration. However, the surge in carbon costs has upset this balance:

• Energy-intensive industries bear the brunt: Taking steel as an example, companies like ThyssenKrupp and Salzgitter have launched hydrogen-based direct reduction iron projects, but the cost of green hydrogen is still 2-3 times higher than that of grey hydrogen. If carbon prices remain high, companies will face a dilemma: either invest heavily in decarbonization or reduce production and relocate overseas.
• Double overlay of electricity costs: Natural gas and coal-fired power account for about 40% of Germany's electricity mix. Through the "marginal pricing" mechanism, carbon costs are passed on to all electricity-consuming enterprises. Chemical giants such as BASF and Covestro have made it clear that European energy costs are a core variable in their investment decisions.
• Indirect pressure on the automotive industry: The production of electric vehicle batteries and lightweight components also requires large amounts of electricity. Carbon footprint accounting will further drive up supply chain costs.

The Chain Effect on the European Industrial Chain

Confindustria's warning is not just Italy's voice alone.Confindustria's warning is not an isolated view in Italy. The Federation of German Industries (BDI) has repeatedly pointed out that without adjustments to the ETS design, Europe may fall into the paradox of "green policies leading to industrial relocation, thereby weakening overall emission reduction capacity." Currently, data from the European Steel Association (EUROFER) shows that the capacity utilization rate of EU steel has dropped from 85% in 2019 to less than 75%, with some production capacity shifting to the United States or the Middle East—regions offering cheap energy and extremely low carbon costs.

A deeper impact lies in the fact that Germany's "hidden champion" enterprises (small and medium-sized high-end manufacturers) lack the ability to relocate across borders and will be forced to bear high carbon costs, squeezing profit margins. In the long run, this could lead to a structural decline in German manufacturing, weakening its position as the core of the European industrial chain.

The Next Three Years: Reform Window and Decarbonization Investment Gamble

The debate over ETS reform reflects the difficulty of coordinating EU climate policy with industrial policy. On the one hand, the European Green Deal requires a 55% reduction in emissions by 2030, with rising carbon prices serving as a core tool to incentivize emission reduction; on the other hand, industry stakeholders call for the introduction of a "carbon price stabilization mechanism" or expansion of free allowance allocation to prevent excessively rapid carbon price increases from harming competitiveness.

• Possible adjustment directions include:
• Delaying the schedule for auctioning allowance reductions;
• Expanding the scope of the indirect carbon cost compensation mechanism to more industries;
• Accelerating the second phase coverage of CBAM to include auto parts and machinery equipment;
• Establishing "Carbon Contracts for Difference" to provide price insurance for decarbonization investments.

Long-Term Trend: The Path to Rebirth of German Manufacturing

Over the next 5 to 10 years, German industry will enter a critical period of "low-carbon reshaping." Enterprises that successfully transform may gain new competitive advantages—such as carbon-neutral steel and green hydrogen-driven chemical products commanding higher market premiums. However, this depends on the policy environment providing a predictable carbon cost curve.

For the global advanced manufacturing competitive landscape, if Germany can offset carbon cost disadvantages through technological innovation, it will continue to lead in high-end manufacturing; otherwise, capacity relocation will accelerate the shaping of a new map of "regionalized manufacturing." The fate of European industry may be hidden in the interplay between ETS allowance auction prices and CBAM implementation details.