The Carbon Border Adjustment Mechanism, or CBAM, works by attaching a price to the embodied carbon of imported goods. When an exporter ships steel into the European Union, the importer must purchase certificates corresponding to the emissions released during production, valued against the EU Emissions Trading System allowance price. If the steel was made in a country with its own carbon pricing, that cost can be deducted, but most MENA producers operate under regimes with no explicit carbon price at all. The study models what this means in practice: a tonne of blast-furnace steel produced in the region can embody on the order of two tonnes of carbon dioxide when process emissions from coke consumption and limestone calcination are counted alongside fuel combustion and grid electricity. At a carbon price of, say, 80 euros per tonne of CO2, that translates into a border cost approaching 160 euros per tonne of steel, a sum large enough to erase the thin margins on which commodity steel trading depends.

The researchers frame the question as one of comparative vulnerability. MENA steel exporters, including major producers such as Turkey, Egypt, Algeria, Saudi Arabia, Iran and Morocco, ship significant volumes of long products, rebar, billets and semi-finished steel to Europe. Their production mix is dominated by two routes: the traditional integrated blast furnace-basic oxygen furnace route, which relies on coking coal and generates large direct process emissions, and the electric arc furnace route, whose emissions profile depends almost entirely on the carbon intensity of the electricity feeding it. The second route is widespread in the region precisely because natural gas has historically been abundant and cheap, and in the Gulf states direct reduced iron plants paired with electric arc furnaces have been a natural fit. That structural detail, the study shows, matters enormously for how the carbon border bill lands.

In the direct reduced iron process, iron ore is reduced in its solid state using a gaseous reducing agent, typically reformulated natural gas consisting chiefly of hydrogen and carbon monoxide, rather than being melted in a blast furnace with coke. This avoids the coking coal requirement and cuts direct emissions substantially, but the process still releases CO2 from the reforming reaction and from the oxidation of carbon that enters the iron. The electric arc furnace then melts the DRI or scrap using electrical energy. The result is a production pathway whose carbon intensity is highly tunable: swap natural gas for green hydrogen produced by electrolysis, power the reforming and melting with solar or wind electricity, and the embodied emissions of the final steel can fall by an order of magnitude. The paper quantifies this tunability and connects it directly to border-adjustment exposure, showing that each step down the emissions-intensity curve translates almost linearly into avoided border costs.

The study’s central quantitative finding is that decarbonization pays. Scenarios in which MENA producers shift toward DRI-electric arc furnace production, increase scrap sharing, deploy renewable electricity and eventually adopt hydrogen-based reduction show border adjustment costs falling from levels that would be commercially crippling to levels comparable with, or below, those faced by competing exporters. The authors estimate that the carbon border bill for the region’s steel exports could be reduced by a substantial share under plausible technology pathways, with the largest savings accruing to producers who combine low-carbon power with gas-based DRI retrofitted for partial hydrogen use. Critically, the savings are not uniform: countries with abundant renewable resources and existing DRI capacity, such as Saudi Arabia, Algeria and Egypt, are positioned to capture disproportionate benefit, while those locked into coal-based blast furnace routes face steeper adjustment challenges.

What makes the analysis technically interesting is the way it dissects the accounting behind border costs. Carbon border charges are calculated on the embodied emissions declared for a product, and the rules allow actual measured emissions to be reported rather than default values, provided verification standards are met. Default values tend to be conservative and penalizing, particularly for exporters from regions assumed to have dirty grids. The study emphasizes that MENA producers have an immediate, low-cost lever available: rigorous measurement, reporting and verification of their actual emissions intensity, coupled with procurement of verified low-carbon electricity. Because electricity often accounts for a large fraction of the emissions attributed to EAF-based steel, the carbon intensity of the grid becomes a direct determinant of border cost. A producer in Morocco drawing on one of the world’s largest concentrated solar complexes, or a Gulf producer pairing its DRI plant with photovoltaic capacity, can document an emissions profile far below the default assumptions.

The paper also engages with the economics of the transition itself. Decarbonizing steel is capital-intensive: hydrogen electrolyzers, renewable generation, electric arc furnaces and carbon capture retrofits all require investment that commodity steel margins struggle to support. The authors argue that avoided border costs function as an internal carbon price signal, effectively converting the CBAM threat into a revenue stream that can justify green capital expenditure. When avoided certificate purchases are treated as cash flow, the business case for renewable-powered DRI and hydrogen blending strengthens considerably. The study suggests that the prospect of guaranteed access to the European market, the world’s largest importer of embodied-carbon-regulated steel, gives MENA producers a first-mover advantage: those who decarbonize early not only pay less at the border but may also capture premium demand from European buyers seeking verified low-carbon inputs for their own downstream industries.

The regional implications extend beyond trade balances. MENA economies face a structural dilemma familiar to fossil fuel exporters: their comparative advantage in cheap natural gas is eroding in a decarbonizing world, and their industrial bases need new anchors. Green steel offers one. The region’s exceptional solar irradiance, with capacity factors among the highest on Earth, means that electrolytic hydrogen produced there could be among the cheapest globally, potentially undercutting hydrogen produced in Europe itself. Several Gulf states and North African countries have already announced hydrogen strategies and renewable targets, and the study provides an economic rationale for connecting those energy ambitions directly to heavy industry. Rather than exporting molecules or electrons alone, MENA producers could export the embodied energy as finished low-carbon steel, capturing more value along the chain.

The authors are careful about caveats. The CBAM framework is still evolving, with transitional reporting phases giving way to full financial obligations, and the scope of covered products may expand. The study’s scenarios depend on assumptions about future carbon prices, renewable capital costs, hydrogen production efficiencies and scrap availability, each of which carries uncertainty. Hydrogen-based direct reduction at scale remains unproven commercially, and the infrastructure requirements, storage, pipelines, water for electrolysis in a water-stressed region, are non-trivial. There is also a distributional question within the region itself: producers with state-backed financing and existing gas infrastructure can move faster than smaller firms, and the transition could concentrate the benefits of low-carbon steel exports in a handful of national champions unless policy design spreads the opportunity.

Still, the study’s core message reframes the policy debate. Carbon border adjustment mechanisms are often portrayed in exporting countries as protectionism dressed in green, a unilateral tax that penalizes development. This analysis complicates that view by demonstrating that the mechanism creates a quantifiable, predictable reward for decarbonization, and that MENA producers are better positioned to claim that reward than their reputation for fossil dependence suggests. The region’s existing DRI capacity, its renewable resource endowment and its geographic proximity to European markets combine into a credible pathway toward carbon-competitive steel. For policymakers in MENA capitals, the implication is to treat decarbonization not as a concession demanded by Brussels but as an industrial strategy with a calculable return. For European policymakers, the finding suggests that well-designed border adjustment, paired with technology cooperation and recognition of verified low-carbon production, can pull rather than merely push, drawing trading partners into a race toward cleaner steel rather than simply walling them off.

As the full financial phase of carbon border regulation approaches, the study offers steel exporters in the Middle East and North Africa a decision framework grounded in engineering reality and trade arithmetic. Every tonne of CO2 removed from a tonne of steel is a certificate that does not need to be purchased, a margin that survives, and a step toward an industrial future in which the region’s sunlight, rather than its hydrocarbons, powers its flagship export. The research makes clear that for MENA steel, going green is not merely climate compliance; it is the cheapest available defense of market share in the world’s most valuable steel market.

At the heart of the European climate strategy lies the EU ETS, a pioneering cap-and-trade system that imposes costs on carbon emissions from major industrial sectors, including steel production. By setting a gradually decreasing emissions cap and allowing market trading of allowances, the EU ETS creates a robust financial incentive for steel producers to innovate and decrease their carbon intensity. This mechanism has prompted steel manufacturers within the EU to explore and adopt low-carbon technologies—such as electric arc furnaces powered by renewable electricity and hydrogen-based direct reduction methods—that can yield what is termed “green steel.” However, transformation is neither uniform nor universal within the EU steel sector due to technological, economic, and infrastructural disparities.

Complementing the EU ETS, the Carbon Border Adjustment Mechanism (CBAM) aims to level the playing field by imposing carbon costs on imports of carbon-intensive products, thereby reducing the risk of “carbon leakage” where production—and emissions—shift outside EU borders to evade stringent regulations. CBAM’s implementation threatens to reshape global steel markets by incentivizing exporters to match or even exceed the EU’s environmental standards, pushing manufacturers in non-EU countries toward decarbonization. Early signals indicate that CBAM is encouraging international steel producers to develop green steel offerings to maintain market access and competitiveness in Europe’s environmentally conscious market.

The confluence of the EU ETS and CBAM is fostering a dynamic marketplace where green steel is increasingly demanded and supplied. This emerging green steel market does not exist in isolation; it is intimately tied to broader energy transitions, raw material availability, and geopolitical factors. For instance, ramping up green steel production necessitates substantial green hydrogen supplies and renewable energy infrastructure. The complexity and capital intensity of these requirements favor regions with abundant clean energy resources and supportive policy frameworks, thereby influencing the geographical distribution of green steel production hubs.

Moreover, the nature of market signals from the EU regulatory frameworks is stimulating innovation across the steel value chain. Steelmakers are investing in novel technological pathways such as direct reduction of iron using green hydrogen, enhanced scrap recycling with electric arc furnaces, and carbon capture and storage integrations. Each technological trajectory involves distinct advantages and challenges in terms of scalability, energy requirements, and cost efficiency. The resulting diversification of production mechanisms highlights the complexity facing policymakers and industry leaders in defining sustainable pathways.

Economic modeling within recent studies projects that the green premium—the additional cost associated with producing environmentally friendly steel—will initially constrain demand. However, as climate regulations tighten globally and green technology costs decline, green steel is expected to transition from niche markets to mainstream production. Importantly, stringent regulatory environments like those orchestrated by the EU serve as bellwethers influencing policy reforms in other jurisdictions, potentially leading to a cascading global adoption of carbon pricing and offsets.

Trade dynamics are another arena dramatically transformed by the advent of green steel markets. Countries lacking stringent environmental regulations face dual pressures: adapt swiftly or risk market exclusion. This dual pressure is reshaping trade alliances and compelling bilateral negotiations on climate standards embedded within trade agreements. The cost structures introduced by CBAM also provoke strategic reassessments among multinational steel corporations, some of which contemplate relocating production to jurisdictional spaces offering renewable energy competitiveness and technological synergies.

Social considerations stem from these industrial transformations. The steel sector employs millions globally, and shifts toward green technologies demand a rethinking of workforce skillsets, job compositions, and community impacts. Policymakers must orchestrate just transition frameworks that mitigate negative social consequences while maximizing new green employment opportunities. The ratcheting up of carbon constraints can produce uneven economic effects, influencing local economies dependent on traditional steel manufacturing.

Importantly, the analysis reveals that the interaction between the EU ETS and CBAM is creating a ripple effect beyond immediate borders. Neighboring countries and key steel-exporting nations are increasingly aligning their policies with the EU’s green ambitions, spurred by both regulatory pressures and opportunities within emerging green steel markets. This alignment may facilitate international cooperation on carbon accounting standards and technology transfers, ultimately accelerating the global steel sector’s decarbonization.

However, significant challenges remain. A key obstacle is the current insufficiency of robust measurement, reporting, and verification (MRV) systems capable of tracing the carbon footprint throughout complex steel supply chains. Accurate MRV is essential to ensure the integrity of green steel labels and to facilitate trust in cross-border trade mechanisms. The development of standardized carbon content certificates and transparent blockchain-based tracking systems is underway but demands rapid scaling and international harmonization.

Furthermore, investment risks associated with pioneering green steel technologies and infrastructure are high due to technological uncertainties and fluctuating policy landscapes. Financial institutions and governments are called upon to develop de-risking mechanisms and innovative financing models to mobilize private sector investments. Public-private partnerships and international climate finance initiatives could play critical roles in bridging financing gaps for green steel deployment, especially in emerging markets.

The urgency of global climate goals anchors the importance of this research. Steel’s decarbonization pathway is emblematic of broader industrial transformations needed to achieve net-zero ambitions. The European Union’s regulatory frameworks serve as a laboratory for systemic shifts, illustrating how market mechanisms combined with border adjustments can influence industrial behavior on a global scale. Yet, the success of green steel markets depends not only on regulatory stringency but also on international dialogue, cooperation, and inclusive economic strategies.

Lastly, consumer awareness and procurement policies are gaining traction as powerful levers in green steel market development. Buyers in construction, automotive, and machinery sectors increasingly demand responsibly produced steel, compelling supply chain actors to prioritize decarbonized inputs. Voluntary corporate commitments, backed by third-party certification systems, augment regulatory pressures, cultivating an ecosystem where sustainability drives competitiveness.

As industries, governments, and researchers navigate this complex landscape, this emerging consensus on green steel markets underscores a broader realization: climate resilience and economic prosperity are intertwined. The integration of emissions trading, border carbon adjustments, and technological innovation reveals a multifaceted strategy poised to redefine one of the world’s most foundational industrial sectors. The coming decade will be critical to watching these nascent markets mature, evolve, and potentially transform global climate trajectories through sustainable steel production.

Subject of Research: Emerging green steel markets influenced by the European Union Emissions Trading System and Carbon Border Adjustment Mechanism.

Article Title: Emerging green steel markets surrounding the EU emissions trading system and carbon border adjustment mechanism.

Article References:
Johnson, C., Åhman, M., Nilsson, L.J. et al. Emerging green steel markets surrounding the EU emissions trading system and carbon border adjustment mechanism. Nat Commun 16, 9087 (2025). https://doi.org/10.1038/s41467-025-64440-9

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