Pursuing decarbonization and competitiveness: a narrow corridor for European green industrial transformation

TL;DR

The paper addresses reconciling deep industrial decarbonization with European competitiveness by extending the PyPSA-Eur energy system model to include five key industrial sectors at plant scale. It analyzes multiple transition pathways (Continued Decline, Stabilization, Reindustrialization) under climate policy, incorporating intra-European relocation and imports of green intermediates, with climate-adjusted weather data and a myopic optimization horizon to 2050. The study finds that deep decarbonization is technically feasible mainly through electrification and green hydrogen, while competitiveness depends on policy design; imports of green intermediates and targeted subsidies can reduce costs and preserve production, whereas broad subsidies are financially unsustainable. Practically, the results suggest focusing policy on high-employment, high-value sectors like steel finishing and ammonia, leveraging strategic imports of HBI and methanol, and maintaining current production levels rather than pursuing aggressive expansion. These insights inform resilient, climate-aligned European industrial policy and strategy for maintaining autonomy and growth under global decarbonization pressures.

Abstract

This study analyzes how Europe can decarbonize its industrial sector while remaining competitive. Using the open-source model PyPSA-Eur, it examines key energy- and emission-intensive industries, including steel, cement, methanol, ammonia, and high-value chemicals. Two development paths are explored: a continued decline in industrial activity and a reindustrialization driven by competitiveness policies. The analysis assesses cost gaps between European green products and lower-cost imports, and evaluates strategies such as intra-European relocation, selective imports of green intermediates, and targeted subsidies. Results show that deep industrial decarbonization is technically feasible, led by electrification, but competitiveness depends strongly on policy choices. Imports of green intermediates can lower costs while preserving jobs and production, whereas broad subsidies are economically unsustainable. Effective policy should focus support on sectors like ammonia and steel finishing while maintaining current production levels.

Figures (9)

• Figure 1: Industrial production trajectory within the geographical scope of the model, EU27 (without Cyprus and Malta), UK, Switzerland, Norway, Albania, Bosnia and Herzegovina, Montenegro, North Macedonia, Serbia, and Kosovo, for the five industrial goods considered in the study, in the Continued Decline, Stabilization, and Reindustrialization scenarios. Note that methanol production data exhibit an irregular trend, which may be attributable to inconsistencies or gaps in reporting rather than to underlying structural changes in the sector.
• Figure 2: Production of industrial goods in four scenarios: the first column represent the scenario with No Climate Policy and Stabilization of industrial production, the other three columns show scenarios implementing the EU Climate Policies, spanning from Continued Decline, to Stabilization and then Reindustrialization. Rows indicate the different industrial sectors and the technologies available in the model are depicted in the legend.
• Figure 3: Prices of industrial goods, average across European countries and time steps, for different scenarios. Dotted lines for methanol and plastics represent a price when no carbon price on End Of Life (EOL) emissions is applied.
• Figure 4: (a) Total industrial production levels across European countries in 2024, showing current capacity distribution. (b) Projected industrial production trajectories for 2030, 2040, and 2050 under four scenarios: Continued Decline (two top rows) with No relocation within Europe and with Relocation within Europe, Reindustrialization (two bottom rows), again with No relocation within Europe and with Relocation within Europe. Color scale represents total industrial production in Gtons/a. (c) Industry expenditures for electricity for all commodities, across the four scenarios for 2030, 2040, and 2050, in billion euros per year. Boxes contain the difference between Relocation within Europe and No Relocation and the percentage change with respect to the No Relocation scenario, computed as $\Delta C_{\%} = \frac{C_{Reloc} - C_{No\ Reloc}}{C_{No\ Reloc}} \cdot 100$.
• Figure 5: (a) Projected industrial production trajectories for 2030, 2040, and 2050 under two scenarios, both with Intermediate Imports: Continued Decline and Reindustrialization. (b) Annual system costs (bnEUR/a) shown in the left-hand graph, and carbon prices (EUR/tCO$_2$) for the two previous scenarios, along with the corresponding values for the No Intermediate Imports case. Boxes contain the difference between Intermediate Import and No Intermediate Imports and the percentage change with respect to the No Intermediate Imports scenario, computed as $\Delta C_{\%} = \frac{C_{Import} - C_{No\ Import}}{C_{No\ Import}} \cdot 100$.