Europe needs strategic autonomy and a strong economy...

Energy-intensive industries traditionally powered European economic growth and prosperity. These industries provide millions of high-quality jobs directly along their long supply chains and support businesses in other sectors. 

Heavy industry keeps Europe safe. Geopolitical tensions are leading to greater protectionism and an increased focus on sovereignty as policymakers seek to regain direct control of supply chains to support national defence. Without robust domestic production capabilities Europe’s security and effective crisis response will be undermined. Abrupt changes in foreign policy, along with intense competition from US and Chinese businesses, mean that Europe must drastically improve its competitiveness if economic growth and the established quality of life of its citizens are to be maintained. 

... but persistent challenges hamper growth

Russia’s invasion of Ukraine has exacerbated the long-standing problem of high energy prices in Europe. Today, energy-intensive industries face natural gas prices that are four to five times US levels, and electricity prices that are two to three times US levels.^[1]

High energy prices have played a key role in reducing industrial capacity, investment and jobs in Europe. Nearly 30 heavy industry plants in Europe announced closures in the past three years and more are for sale as owners seek to divest.^[2]

Many in the sector believe complex European environmental policies also contribute to declining competitiveness. The EU has committed to net zero by 2050, with an intermediary goal of a 90% net reduction in greenhouse gases by 2040.

While ambitious and well-intentioned, critics say that these policies have undermined the industrial sector’s ability to compete in domestic and international markets. The EU Emissions Trading System, Carbon Border Adjustment Mechanism (CBAM) and Corporate Sustainability Reporting Directive are regulations designed to foster investment in European industrial decarbonisation and create a level playing field. However, there is a need to nurture greater innovation, reduce complexity and remove barriers to investment for energy-intensive industries.

Europe’s heavy industry has reduced emissions by 46% since 1990, but that is due in part to erosion in demand and increased international competition.^[3] Meanwhile emissions from imports have increased offsetting nearly half of that improvement.^[4]

Draghi report and the Clean Industrial Deal chart a course for European competitiveness

Sluggish European industrial growth has dominated policy discussions since early 2024 and led to the publication of reports such as Mario Draghi’s The future of European competitiveness and Enrico Letta’s Much more than a market report. Both documents are now central to the EU’s policy agenda.

In order to increase economic sovereignty and reduce external dependencies, these reports call for streamlined regulations, boosting the single market and a focus on innovative technologies such as Artificial Intelligence and semiconductors.

In response to challenges outlined in Draghi’s report, the European Commission launched the Clean Industrial Deal policy paper and its Competitiveness Compass in early 2025. According to these reports, affordable, home-grown, clean energy and feedstock will drive European industrial growth, but these will need to be underpinned by technology innovation, circularity and effective public and private funding and financing mechanisms. ^[5]

However, more than a year on, of the 383 recommendations in the Draghi report so far only 11% have been fully implemented.^[6] The European Commission’s policy refresh will only translate into renewed competitiveness if European industrial businesses are able to grasp th opportunities outlined. 

Pacing the energy transition

Europe needs to facilitate the energy transition – the shift from fossil fuel-based energy systems to ones based on low-carbon sources – to protect its strategic autonomy and prosperity whilst protecting the environment.

More home-grown, affordable low-carbon energy will be crucial to boost Europe’s energy security, resilience and independence. This will require large investment in power and low-carbon fuel generation, transport and supply as well as flexible solutions. However, there is a need to strategically plan and execute the decarbonisation of the energy system to avoid increasing energy prices and causing additional harm to industrial competitiveness.

Slowing decarbonisation too much, however, may have a long-term, impact on the environment, bring energy security challenges and ultimately harm the economy.

The Deloitte Decarbonisation and Competitiveness Benchmark Survey

The Deloitte Decarbonisation and Competitiveness Benchmark Survey provides a benchmark to help organisations measure their own decarbonisation progress. The survey focuses on areas that can drive competitiveness:

• Prices and costs
• Energy transition
• Sustainable products and services
• Decarbonisation plans
• Clean technology adoption
• Funding

It is based on a survey of 500 executives including 107 from the chemicals sector, 106 from industrial products, 106 from the cement, ceramics, lime and glass sector, 106 from the steel and non-ferrous metals sector, and 75 from data centre operators. The average annual revenue of respondents’ companies was €4 billion and the average number of people employed by their companies was 4,847. Respondents were located in each EU member state as well as in Norway, Switzerland and the UK.

Prices and costs

The results from Deloitte’s benchmark survey confirms that European industrial businesses are at a competitive disadvantage. Six in ten respondents say their operating costs in Europe are more than 10% higher than rivals elsewhere. This translates into higher prices in the market. In short, European businesses are squeezed between high costs and global price competition (see Figure 1).

A majority of respondents say their prices are higher than those of competitors outside Europe. Nearly half say they are more than 10% higher. As a result, Europe has become a net importer in many sectors, including steel, chemicals and cement, despite the additional cost of transporting goods produced elsewhere.

Market prices confirm this view. In Q2 2025, cement prices in Germany, for example, stood at $229 per metric tonne, compared to $96/MT in the US, and $54MT in China.^[7]

The high price of electricity and heating is often identified as a root cause of European industry’s cost disadvantage. Our benchmark supports this hypothesis. Respondents told us that the largest share of costs is fuel or feedstock/raw materials (20% on average) and electricity (14%), see Figure 2.

As noted, historically high energy prices in Europe increased further when Russia invaded Ukraine. However, switching to greener fuel is unlikely to make supply easier as 42% of respondents say low-carbon fuel or feedstock sources are “very” or “somewhat” difficult to access, compared to just 14% who say the same of fossil fuels.

This energy-cost penalty isn’t only felt during production. For respondents that import and export outside Europe, logistics adds more to production costs than tariffs or carbon taxes. The likely cause is the cost of fuel for transport. Logistics adds most to the cost of producing goods outside Europe for sale inside, with nearly four in ten of our respondents reporting that it adds 11% or more.

While logistics costs exist for industrial businesses outside Europe, they still don't outweigh domestic production costs. This exacerbates the competitive disadvantage that European companies experience compared to non-European companies.

European companies face further cost increases from carbon taxes – nearly half of respondents report that these add more than 5% to costs – and meeting regulatory requirements on a range of environmental issues.

Energy transition

Given the outsized impact energy prices have on industrial costs and emissions, their reduction is essential.

One approach is simply to consume less. Our benchmark shows the sector is making progress on energy efficiency, with seven out of ten respondents reporting improved efficiency in the past two years. The pace is accelerating: in the next two years, nearly half expect efficiency gains of 6% or more (see Figure 3).

Despite this effort, efficiency alone will not make European industrial businesses more competitive. Nor will it reduce emissions in line with EU’s net zero target. There are three broad approaches that industrial businesses could adopt to achieve a substantial reduction in energy costs and emissions.

The first is to extend electrification and benefit from the decarbonisation of the grid. Industrial producers will be able to arbitrage energy costs through self-generation and switching to the grid when prices are low.

The electricity grid is the chief source of power for industrial companies. Our benchmark shows that 61% draw between 31% and 50% of their European energy consumption from the grid (see Figure 4). Most are also purchasing at least 6% of their energy needs through mechanisms such as PPAs or spot market purchases that are enabled by the grid. Price hedging is another mechanism that enables businesses to de-risk by providing predictability (and if done well, better prices).

The second approach is to self-generate electricity with renewable sources. Onsite renewable sources may not be able to power high-heat production processes on their own, but they can support supplementary operations such as transport. Indeed, 60% of respondents say they have adopted some solar electricity generation.

Each of these approaches is constrained by grid capacity. Electrifying industrial production needs an increase in grid supply and the ability to sell self-generated electricity back onto the grid. Delays in approving new grid connections are preventing renewable sources from being added. According to one estimate, 1,700 GW of renewable energy and hybrid projects were waiting for grid connections across 16 countries in Europe in 2024-25.^[8]

The third approach is for businesses to switch to cleaner fuels for their high-heat processes, such as low-carbon hydrogen or biomass. These are often the only decarbonised options for some energy-intensive industries. However, limited supply of these fuels prevents large scale adoption. The reason for limited supply is because of limited demand that is the result of higher costs compared to their fossil fuel equivalents.

Cost of grey, blue and green hydrogen

The European Hydrogen Observatory reports that in 2023 in Europe, the levelised production costs of grey hydrogen (generated through steam methane reforming – SMR) averaged approximately 3.76 €/kg H2. When incorporating a carbon capture system, the average cost of blue hydrogen production via SMR increased to 4.41 €/kg H2, while the average cost of production by water electrolysis, using grid electricity, averaged 7.94 €/kg H2 (green hydrogen).^[9]

Sustainable products and services

Another strategy for competing on carbon is to identify and capture demand for sustainable products and services. Our benchmark tells us that two-thirds of respondents say their company derived between 3% and 10% of the previous year’s revenue from sustainable products or services.

This strategy is not available to everyone. Demand for sustainable products depends in part on the regulatory obligations of buyers. For example, the EU’s ReFuelEU regulation requires airlines to increase use of sustainable fuel from 2% in 2025 to 70% by 2050.^[10] Housebuilders, by contrast, have no specific obligation to use sustainable bricks.

This strategy also relies on demand, which can be variable. Deloitte’s most recent Sustainable Consumer survey, in 2024, found that 36% of UK consumers are prepared to pay more for ethical or sustainable products but most (64%) are undecided.^[11]  While certain consumers express a willingness to pay more in surveys, there is a recognised ’say-do‘ gap where actual purchasing behaviour deviates.  

Almost two-thirds of our respondents (65%) believe that their customers would expect to pay more for sustainable products and services, although only a third say those customers are prepared to pay a premium of more than 6% (see Figure 5).  At the same time, sustainable products also cost more to produce, according to 76% of respondents. This cost increase outweighs the price premium: over half (51%) say sustainable products cost at least 6% more to produce.

To achieve near-zero carbon industrial products, the cost increase will be far greater than this. Deloitte estimates that producing steel using low-carbon hydrogen, for example, will cost 137% more than for producing conventional steel.^[12] For fertiliser, Deloitte analysis suggests the figure is 244%.^[13]

Decarbonisation plans

The EU’s plan to decarbonise the European economy by 2050 is ambitious. But our benchmark shows that Europe’s industrial companies have equally ambitious commitments.

The most common, as selected by 35% of respondents, is to achieve net zero emissions by 2040. A further quarter aims to reach net zero by 2045 (24%) and the same number aims for 2050 (24%). Two-thirds of respondents say they are “on schedule”. However, it is unclear how these targets will be achieved without key conditions in place.

Businesses have been ramping up investment to meet their net zero targets. Indeed, 82% of respondents say that their organisation increased investment in energy transition in the past two years. This includes 31% that grew investment by 11% or more. At the same time, 81% have increased investment in circular economy practises. Investment of this type will rise in the next two years, the benchmark suggests.

Respondents also expect their investments in energy transition (80%) and the circular economy (78%) to grow in the next two years. In each case, most expect growth of 6% or more (see Figure 6).

Clean technology adoption

Eliminating most of the carbon emissions from industrial production requires the implementation of cleaner and more efficient technologies throughout the value chain.

These might not all be cutting-edge innovations. Many of the necessary technologies are already mature. However, scaling these technologies into production will require significant capital expenditure and coordinated transformation. 

Survey respondents have experimented with a range of clean technologies as well as low-carbon fuel sources and raw materials such as biomass feedstock. The most widely adopted are solar generation (60%), use of recycled (59%) and biomass (51%) feedstock, and heat pumps (50%).

However, the benchmark suggests implementation of clean technology has been limited (see Figure 7). Only 33% say their organisation has deployed clean technology “extensively”. Two-thirds (66%) say their organisation is “extremely” or “very” effective at identifying and assessing new clean technologies, but only 51% say the same of their ability to scale them. 

So, what kind of clean technologies are likely to be most utilised? Carbon capture and storage (CCS) is likely to play an important role in Europe’s industrial decarbonisation. It is highly likely that Europe’s industrial base will depend on carbon-emitting fuels for the foreseeable future and CCS will be essential for substantially eliminating emissions. However, according to survey respondents, CCS is yet to be deployed at scale in the industrial sector in Europe. 

Nine out of ten respondents say their access to CCS infrastructure is constrained. While Northern Lights in western Norway and the Porthos CO2  project around the Port of Rotterdam offer advanced CCS infrastructure, there were only eight carbon storage facilities in operation in all of Europe as of July 2025.^[14]  In contrast,  by 2023 there were already 13 facilities in operation in the US.^[15]

Funding

Transforming Europe’s industrial base to low-carbon, cost-competitive production requires unprecedented investment. Decarbonising the four most energy-intensive industries (chemicals, basic metals, non-metallic industries and paper) needs an estimated €500 billion investment over the next 15 years.^[16]

Where will this investment come from? European industry is already reliant on public funding. A third of respondents each derive over 10% of their external funding in Europe from the EU, national or regional public financing (see Figure 7).

The EU has already provided substantial support for industrial decarbonisation through its Innovation Fund, which is supported by the ETS. The Clean Industrial Deal also proposes to mobilise €100 billion to support clean manufacturing.^[17] However, this falls far short of the required investment.

Private investors will play a role. Survey respondents’ single largest source of funding is conventional equities and bond issuance, with 71% deriving more than 10% of their financing this way. A surprisingly high proportion (40%) have also drawn on sustainability-linked bonds and green finance for more than 10% of external funding.

Industry leaders interviewed for this research say these sources cannot offer anything like the scale required. The alternative is shareholder funding, but on the promise of profit, not sustainability.

Uncovering the way to low-carbon competitiveness for businesses…

Use mature renewable technologies and energy efficiency to save costs   

1. Adopt behind-the-meter and onsite technologies: mature and already available is most European countries, these can reduce costs, stabilise energy prices for businesses and enhance energy security. Such technologies include not only solar panels, heat pumps and wind turbines, but also hybrid systems with energy or heat storage that can provide price arbitrage services. 
2. Consider alternative contracting mechanisms: such as Power Purchase Agreements (PPAs) can help lock in a fixed electricity price (often sourced from renewables). 
3. Conduct energy audits: these will uncover opportunities for immediate energy savings by recommending more efficient technologies such as waste heat recovery systems, simple process adjustments or digital solutions. 

To improve European industrial competitiveness, the business case for low-carbon technology investment needs be to clearer and stronger. This will require businesses to have closer and more purposeful relations with their stakeholders such as policymakers, suppliers and customers, and investors as well as other energy consumers.  

Forge stronger connections with your stakeholders and peers    

1. Strengthen policy input: The need for more effective relationships with policymakers has never been more important. Industry input on policy, for example in allocating public funding or simplifying and streamlining regulations, will be crucial to achieving a range of positive decarbonisation and competitiveness outcomes. These include prioritising and/or accelerating approvals for planning and consenting for low-carbon energy infrastructure. 
2. Explore strategic partnerships with your suppliers and customers: Several partnership types already exist to support decarbonisation efforts, including licencing and technology transfer agreements, and joint development agreements for researching, developing and commercialising decarbonisation technologies or advanced low-carbon materials. Sustainable sourcing, waste management or circular economy partnerships can further help to reduce emissions throughout the supply chain. 
3. Work closer with your investors: Investors, both public and private, look for certain characteristics in their investment targets and assess projects against a range of risk factors, according to The UK energy transition investor survey. Most institutional investors are technology risk averse. Involving them at an earlier stage than usual, educating them about your business and the technology for which you are seeking the investment may help them become more comfortable with the risk. 
4. Collaborate in industrial cluster/s: Work with your peers and other industrial energy consumers to aggregate demand for low-carbon energy (such as green molecules) or carbon capture. Such initiatives can help improve access to infrastructure and/or reduce cost of access. 

… and policymakers

Business leaders interviewed as part of our research repeatedly stressed the need for European regulatory reform. They told us that simpler regulations and measures for spreading cost across the value chain are fundamental requirements. This would allow the industrial sector to address its global competitiveness as it continued to decarbonise.

Europe’s industrial companies cannot wait until the perfect conditions arrive. Instead, they must use both the benefits and constraints of the European market to spur innovation and establish a world-beating edge in industrial decarbonisation.

Throughout this article we have highlighted the supply-side challenges faced by European energy-intensive industries. However, to achieve a truly sustainable and competitive European industrial landscape requires a multifaceted approach that goes beyond current supply-side policies.  Simply relying on the ETS, subsidies, and even a strengthened CBAM risks leaving European producers at a disadvantage, with minimal impact on global emissions.

We advocate a three-pronged strategy for achieving a European industrial competitiveness:

1. Broaden and strengthen CBAM: CBAM must be significantly strengthened to effectively level the playing field and prevent the displacement of European production by imports with lower environmental standards. This requires not only tightening existing regulations but also expanding the scope of the mechanism to encompass a wider range of products and emissions.
2. Implement demand-side mandates: The critical missing element is the creation of robust demand for sustainably produced European goods. This would entail the introduction of demand-side mandates, requiring a progressively increasing share of key products to be manufactured using sustainable methods. Demand-side mandates would create the market certainty needed to stimulate investment, foster economies of scale and drive innovation. These mandates should be complemented by:
   - A partial or full EU origin requirement could be incorporated into the mandates to bolster strategic autonomy and prevent the displacement of European production by lower-cost imports. This could involve linking public funding to minimum levels of local content, a strategy already employed in some countries.
   - Establishing value chain enablers, such as trading platforms, common standards (for example, carbon accounting or environmental product declarations), and strategic partnerships could be crucial to facilitate the smooth implementation of demand mandates.
3. Retain and expand supply-side support: While demand-side mandates are crucial, existing supply-side mechanisms, including subsidies and tax breaks, should be retained and potentially expanded to address specific challenges, such as high energy costs. However, these should be viewed as complementary to demand-side measures, not as a primary solution to the cost gap between sustainable and conventional products.

By combining these three elements – a strengthened CBAM, robust demand-side mandates and targeted supply-side support – the EU can create a virtuous cycle of sustainable production and consumption fostering economic competitiveness while decarbonising. This approach will not only safeguard European industry but also contribute meaningfully to global climate goals.