Decarbonization pathways of energy intensive industries in an enhanced CGE framework

Achieving EU climate neutrality requires deep decarbonization of energy-intensive industries, where emissions stem from both fuel combustion and process/feedstock use and where competitiveness pressures are high. This study quantifies the socio-economic implications of industrial decarbonization in the European Union to 2050, focusing on three energy-intensive sectors and using the GEM-E3 computable general equilibrium (CGE) model. We extend GEM-E3 with (i) a technology-rich, bottom-up representation of steelmaking that captures alternative production routes, input requirements, costs, and material constraints, and (ii) a dedicated module for carbon capture and storage (CCS) uptake in industrial process emissions (steel, cement, chemicals). 

We evaluate two policy settings: a Frozen Policy Pathway (continuation of pre-2023 EU ETS policies and limited ambition) and a Core Policy Scenario aligned with Fit-for-55 and long-term climate-neutrality objectives, including updated ETS1/ETS2, the Carbon Border Adjustment Mechanism (CBAM), and CO₂ standards for vehicles; variants explore sensitivity to electricity prices. Results indicate that near-complete decarbonization of energy-intensive industries by 2050 is technically achievable, but economic outcomes depend strongly on policy design and energy-system conditions. CBAM materially supports domestic output in exposed sectors—most notably ferrous metals—by reducing the competitiveness gap with more carbon-intensive imports, while chemicals and cement experience moderate output reductions due to export impacts and demand shifts. Electricity prices emerge as a pivotal determinant of competitiveness in a highly electrified net-zero economy. The enhanced steel module suggests that carbon pricing alone is insufficient for widespread hydrogen-based steelmaking; additional support and/or CCS is required to accelerate breakthrough transitions. Macroeconomically, stringent policies deliver large emissions cuts (≈83% vs. frozen policies by 2050) at a moderate GDP cost (≈1.8%).