EU ETS carbon prices are expected to keep rising over the long term, driven by a steadily tightening cap on emissions allowances and growing regulatory ambition across the bloc. While short-term volatility is inevitable, the structural direction of the EU Emissions Trading System points upward. For industrial companies still relying on fossil fuels for heat generation, that trajectory has direct consequences for cost competitiveness and decarbonisation planning.
How high could EU ETS carbon prices realistically go?
EU ETS carbon prices could realistically reach well above current levels by 2030, with many analysts pointing to a range broadly between €100 and €200 per tonne of CO₂ as the system matures. The exact ceiling depends on policy decisions, economic conditions, and how quickly industry decarbonises, but the direction is clear: the system is designed to make carbon increasingly expensive over time.
The EU ETS operates on a cap-and-trade principle. Each year, the total number of allowances shrinks, meaning fewer permits are available for companies to cover their emissions. As supply tightens and demand for allowances remains, upward price pressure builds. The EU has also accelerated the pace at which the cap declines, a reform introduced under the Fit for 55 package, which removes allowances from the market faster than before.
It is worth noting that carbon prices are not a straight line upward. They have historically experienced significant swings in response to economic downturns, energy price shocks, and policy uncertainty. But even accounting for volatility, the structural design of the system makes sustained high prices the expected outcome.
What factors drive EU ETS carbon price movements?
EU ETS carbon prices are driven by a combination of supply-side policy decisions, energy market dynamics, economic activity, and investor behaviour. Understanding these factors helps industrial companies anticipate price movements rather than simply react to them.
- Cap tightening: The annual reduction in the total number of allowances is the single most powerful long-term driver. As the cap falls, scarcity grows and prices rise.
- Energy prices: When gas prices spike, power producers switch to coal, increasing demand for allowances. Conversely, cheap renewables reduce fossil fuel use and dampen allowance demand.
- Economic output: Industrial production levels directly affect how many allowances manufacturers need. A recession reduces demand; a boom increases it.
- Policy signals: Announcements about ETS reform, the Carbon Border Adjustment Mechanism (CBAM), or the EU’s Clean Industrial Deal all influence market expectations and can move prices quickly.
- Speculative and financial activity: Institutional investors and financial players participate in the carbon market, amplifying both upward and downward price movements in the short term.
The EU’s broader industrial policy context also matters. The Clean Industrial Deal, launched in 2026, signals a commitment to mobilising over €100 billion to support clean manufacturing and proposes an industrial decarbonisation bank, partly funded through ETS revenues. This institutional momentum reinforces the expectation that carbon pricing will remain a central policy tool.
Which industries are most exposed to rising carbon costs?
The industries most exposed to rising EU ETS carbon prices are those that rely heavily on fossil fuels for heat generation and have high direct emissions from their production processes. This includes sectors such as steel, cement, chemicals, pulp and paper, glass, and food and beverage manufacturing.
What these sectors share is a dependence on high-temperature industrial heat, a process requirement that cannot easily be met by simply switching to electricity or hydrogen given current infrastructure constraints. Industry accounts for a substantial share of total global energy consumption, and the vast majority of heat demand is still met by burning fossil fuels. Each tonne of CO₂ emitted requires a corresponding allowance, so as prices rise, the cost of doing nothing compounds quickly.
Companies in these sectors that have not yet begun decarbonisation of industrial heat face a dual exposure: rising compliance costs from the ETS itself, and the risk of being outcompeted by peers who have locked in lower-carbon production costs earlier. The introduction of CBAM adds a further dimension, since imported goods from outside the EU will increasingly face carbon costs at the border, reshaping competitive dynamics globally.
How does a higher carbon price affect industrial competitiveness?
A higher carbon price affects industrial competitiveness by directly increasing the operating cost of fossil fuel-based production. Every tonne of CO₂ emitted carries a price tag, and as that price rises, companies burning gas, oil, or coal for heat face a growing cost disadvantage relative to those using lower-carbon alternatives.
The impact is not uniform. Companies with older, less efficient boilers or furnaces emit more CO₂ per unit of output and therefore feel the cost pressure more acutely. Those that have invested in energy efficiency or cleaner heat sources carry a smaller compliance burden and can redirect capital to growth rather than carbon costs.
There is also a strategic dimension. Customers, particularly large industrial buyers and consumer brands, are increasingly scrutinising the carbon footprint of their supply chains. A supplier that cannot demonstrate progress on Scope 1 emissions risks losing contracts to competitors who can. Volatile energy prices compound this pressure: companies exposed to both high carbon costs and unpredictable gas prices face a double squeeze on margins.
The concern about CAPEX versus OPEX trade-offs is real and legitimate. Investing in clean heat technology requires upfront capital, while the savings and compliance benefits accrue over time. But the longer a company delays, the higher the cumulative carbon cost it pays, and the more expensive the eventual transition becomes as fossil fuel boilers age and replacement becomes unavoidable.
When should industrial companies start responding to carbon price risk?
Industrial companies should start responding to carbon price risk now, not when prices hit a specific threshold. The lead time for evaluating, procuring, and integrating new heat generation technology is typically measured in years, not months. Companies that wait for carbon prices to become painful before acting will find themselves making rushed decisions under financial pressure.
A practical way to frame the timing question is to work backwards from your own decarbonisation targets and regulatory obligations. If your company has committed to net-zero by 2040 or 2050, and your heat generation is currently fossil fuel-based, the window for an orderly transition is already narrowing. EU ETS free allowance allocations for industrial sectors are also being phased down over time, meaning the effective carbon cost exposure will increase even if market prices stay flat.
The question of security of supply adds further urgency. Companies that remain dependent on imported fossil fuels face not only carbon cost risk but also geopolitical and price volatility risk. Diversifying heat sources now is both a decarbonisation strategy and an energy resilience strategy.
- Assess your current carbon exposure: Calculate how many ETS allowances your operations require and what rising prices mean for your cost base over the next five to ten years.
- Map your heat demand profile: Understand the temperature levels, volumes, and continuity requirements for your industrial heat, this determines which decarbonisation options are technically feasible.
- Evaluate alternatives against your specific constraints: Consider whether full electrification is viable given grid congestion in your region, whether hydrogen infrastructure is accessible, and what drop-in alternatives exist.
- Build the internal business case: Frame the investment in terms of avoided carbon costs, energy price stability, and strategic positioning, not just upfront CAPEX.
- Engage technology partners early: Procurement and integration timelines for industrial heat systems are long. Starting conversations now preserves optionality.
What decarbonisation options are available for high-temperature industrial heat?
The main decarbonisation options for high-temperature industrial heat are electrification, green hydrogen, biomass, and emerging circular fuel technologies such as Iron Fuel Technology. Each option has distinct trade-offs in terms of cost, infrastructure requirements, emissions performance, and operational compatibility.
Electrification is often the first option considered, but it faces real constraints in many industrial contexts. High-temperature heat demands significant electrical capacity, and grid congestion in many European industrial regions means that connecting new large loads is slow and expensive. For companies in areas with limited grid capacity, electrification is not a near-term solution.
Green hydrogen offers genuine decarbonisation potential for high-temperature processes, but the infrastructure for hydrogen transport, storage, and delivery at industrial scale remains underdeveloped in most regions. Cost remains a barrier, and the combustion properties of hydrogen require significant modifications to existing burner systems.
Biomass can serve as a lower-carbon alternative in some applications, but its sustainability credentials are contested, supply chains are constrained, and it still produces CO₂ at the point of combustion, meaning it does not fully resolve ETS compliance exposure.
For companies where these options are too costly, too slow, or constrained by infrastructure, Iron Fuel Technology offers a different approach. Iron fuel burns cleanly to produce high-temperature heat with near-zero direct CO₂ emissions, and the resulting iron oxide is regenerated using hydrogen, completing a fully circular cycle. The technology is designed to integrate with existing industrial setups, avoiding the need for a complete infrastructure overhaul.
How Iron Fuel Technology helps with decarbonising industrial heat
We developed Iron Fuel Technology specifically to address the decarbonisation challenge that many industrial companies face: the need for reliable, high-temperature heat without the carbon emissions, and without the infrastructure barriers that make electrification or hydrogen impractical in the near term.
Our Iron Fuel Boiler delivers:
- Up to 95% energy efficiency, outperforming many conventional fossil fuel systems
- Near-zero direct CO₂ emissions, the only CO₂ output stems from a pilot safety flame, resulting in just 10 kg of CO₂ per MWhth
- Ultra-low NOₓ emissions, RIFT claims the lowest NOₓ output of any fuel at under 5 Mg/MJ
- Grid-independent operation, iron fuel is stored and transported in standard containers, with no dependence on electricity grid capacity or hydrogen pipelines
- Seamless integration with existing industrial boiler infrastructure, reducing transition risk and disruption
- A long-term fuel supply agreement, providing cost predictability and security of supply in a world of volatile energy prices
The technology has been demonstrated at TRL7, megawatt-industrial scale, and the first commercial contract has been signed with Kingspan Unidek. Backed by €113.8 million in funding, including an €83.1 million Series B and a €30.7 million EU Innovation Fund grant, we are scaling from pilot to commercial deployment with a focus on Food and Beverage, Specialty Chemicals, and Pulp and Paper sectors.
If rising EU ETS carbon prices are creating pressure on your operations and you are evaluating your options for decarbonising industrial heat, we would welcome the conversation. Get in touch with our team to explore whether Iron Fuel Technology is the right fit for your facility.
Frequently Asked Questions
How do I calculate my company's current EU ETS carbon cost exposure?
Start by identifying your total annual CO₂ emissions from heat generation and comparing them against the free allowances your facility currently receives. Multiply any shortfall by the current carbon price to get your annual compliance cost, then model that figure against projected price ranges (e.g., €100–€200/tonne by 2030) to understand your future exposure. Many industrial companies work with energy consultants or use EU ETS registry data to benchmark their position. This exercise often reveals a much larger financial liability than anticipated, which is why building it into your strategic planning now is critical.
What happens to free allowance allocations as EU ETS reform progresses?
Under the Fit for 55 reforms, free allowance allocations for industrial sectors are being progressively phased down, with the pace of reduction accelerating through the 2020s and into the 2030s. This means that even if market carbon prices remained flat, your effective carbon cost exposure would still increase year on year as fewer free allowances offset your emissions. The phase-down is directly linked to the introduction of CBAM, which is designed to prevent carbon leakage as domestic industries lose their free allocation buffer. Companies should model their future free allocation trajectory now rather than assuming current levels will continue.
What are the most common mistakes industrial companies make when planning their decarbonisation of heat?
The most common mistake is treating decarbonisation as a single technology decision rather than a process-level engineering challenge — assuming, for example, that electrification is universally viable without first auditing grid capacity, temperature requirements, and load profiles at the facility level. Another frequent error is underestimating lead times: procurement, permitting, and integration for industrial heat systems can take two to four years, so companies that delay planning until carbon costs become painful often find themselves with no good near-term options. Finally, many companies fail to account for the full cost of inaction — the cumulative carbon payments made during delay often dwarf the upfront CAPEX of the transition technology itself.
How does the Carbon Border Adjustment Mechanism (CBAM) affect companies outside the EU that supply into European markets?
CBAM requires importers of certain carbon-intensive goods — including steel, cement, chemicals, and others — to pay a carbon price equivalent to what EU producers pay under the ETS. For non-EU suppliers, this effectively eliminates the cost advantage they previously held by operating in jurisdictions without carbon pricing. As CBAM expands in scope and free allowances for EU producers are phased down, the competitive pressure on non-EU suppliers will intensify. Companies exporting into the EU should begin assessing their embedded carbon footprint now, as demonstrating lower-carbon production will increasingly become a prerequisite for market access.
Is Iron Fuel Technology compatible with my existing boiler infrastructure, or does it require a full plant overhaul?
Iron Fuel Technology is specifically designed for integration with existing industrial boiler infrastructure, which is one of its key advantages over alternatives like full electrification or hydrogen, which often require significant modifications to burner systems, pipelines, or electrical connections. The Iron Fuel Boiler can be retrofitted alongside or in place of conventional fossil fuel systems, reducing transition risk and minimising operational disruption. The best way to assess compatibility with your specific facility is to engage the RIFT team early in your planning process, as site-specific factors such as temperature requirements, steam output, and space availability all influence the integration design.
How should we build the internal business case for investing in clean heat technology when the upfront CAPEX is significant?
The most effective internal business cases frame the investment not just as a cost, but as a hedge against three compounding risks: rising carbon compliance costs, volatile fossil fuel prices, and supply chain carbon scrutiny from customers. Model the total cost of ownership over a 10–15 year horizon, comparing the cumulative ETS allowance purchases, energy costs, and maintenance of your current fossil fuel system against the CAPEX and operating costs of the clean alternative. Including avoided carbon costs, potential access to EU funding instruments (such as the Innovation Fund or the proposed industrial decarbonisation bank), and the strategic value of early mover positioning often shifts the financial picture significantly in favour of acting sooner.
What should we do if full electrification or green hydrogen isn't viable for our facility in the near term?
If grid congestion, infrastructure gaps, or cost barriers make electrification or green hydrogen impractical for your facility in the near to medium term, the priority is to identify credible alternative pathways rather than defaulting to continued fossil fuel use and absorbing rising carbon costs. Circular fuel technologies like Iron Fuel Technology are specifically designed for exactly this scenario — delivering high-temperature heat with near-zero direct CO₂ emissions and no dependence on grid capacity or hydrogen pipelines. The key is to map your heat demand profile in detail (temperatures, volumes, continuity requirements) and evaluate alternatives against your actual operational constraints, not against an idealised infrastructure scenario that may not materialise for your region within your planning window.
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This content was generated with the help of AI and it may contain mistakes