The European Union’s proposed revision of CO₂ standards for new cars and vans introduces an unusual new tool: credits for using low-carbon steel.

Under the European Commission proposal, manufacturers would have to cut average tailpipe emissions by 90% from 2035, while the remaining 10% could be compensated through measures including low-carbon steel produced in the EU, as well as certain renewable fuels.

That would leave room for some vehicles with combustion engines, plug-in hybrids and range extenders after 2035.

The idea is meant to connect two difficult industrial transitions: reducing emissions from road transport and cleaning up steel production.

How the Credits Would Work

Steel production is highly energy-intensive, so replacing conventional material with lower-emission alternatives can significantly reduce manufacturing emissions.

The proposed system would reward carmakers for buying qualifying low-carbon steel. Those credits could then help manufacturers comply with the new post-2035 vehicle CO₂ rules.

However, the International Council on Clean Transportation argues that the environmental logic is not straightforward.

Steel-sector emissions are already regulated through the EU Emissions Trading System. As a result, using cleaner steel does not automatically cancel out additional CO₂ emitted from vehicle exhausts. In other words, lower manufacturing emissions and tailpipe emissions belong to different parts of the climate-policy framework.

Where the Benefit Could Come From

That does not mean steel credits have no value.

If designed carefully, they could create guaranteed demand for genuinely fossil-free steel produced in Europe. Long-term demand is particularly important because new steelmaking technologies require large investments and manufacturers need confidence that customers will pay for cleaner material.

According to the ICCT analysis, enough fossil-free steel production capacity has already been announced in the EU to make a stricter credit system technically possible.

Restricting eligibility to genuinely fossil-free production could therefore encourage investment without giving manufacturers easy credits for changes that might have happened anyway.

The Risk of Easy Credits

The biggest concern is how broadly “low-carbon steel” is defined.

If coal-based steel production is allowed to qualify after relatively modest efficiency improvements, manufacturers could receive credits without supporting the deeper transformation of the steel sector.

The same problem could arise with recycled steel.

Recycling is essential to reducing industrial emissions, but giving unrestricted credits for recycled material could simply redirect existing supplies from one buyer to another rather than increasing the total amount of low-emission steel available.

The ICCT warns that this could create so-called windfall credits while delaying investment in genuinely fossil-free steelmaking.

The Formula Matters

How the credits are calculated will be just as important as which types of steel qualify.

The ICCT argues that the European Commission’s proposed formula should use emissions values reflecting actual EU steel production rather than broader assumptions.

Calculations should also consider only the steel that ultimately ends up in the finished vehicle, rather than larger quantities used earlier in manufacturing but lost during processing.

A correction for real-world vehicle emissions would also make the comparison between steel-related reductions and permitted tailpipe emissions more accurate.

A Delicate Trade-Off

The current EU framework still formally sets a 100% CO₂ reduction target for new cars and vans from 2035. The Commission proposal would replace that with a 90% tailpipe reduction requirement combined with compensation mechanisms.

Low-carbon steel credits could therefore become much more than a technical detail.

Designed narrowly, they could provide carmakers with an incentive to support major investments in cleaner European steel production. Designed too generously, they could provide compliance flexibility without delivering equivalent additional emissions reductions.