Europe's Fast-Closing Carbon Window
Carbon pricing alone cannot build industrial champions
We have heard about climate change for decades, and once celebrated signs that the world was finally tackling it. Now progress is reversing in a striking paradox.
🇺🇸 America, in particular, is stepping back from climate commitments even as floods devastate entire regions and insurers pull out of risky areas from California to Florida to Louisiana. In time, the Trump administration is likely to try and push allies into the same backwards position, as it recently did with the OECD’s global minimum corporate tax, by treating climate regulations as trade barriers targeted at US companies and threatening prohibitive tariffs on imports.
Carbon lies at the heart of this crisis: there is too much of it in the atmosphere. Despite decades of climate talks, levels keep rising. The solution requires both cutting emissions and removing existing carbon. Fortunately, new technologies now make this possible on an industrial scale. The question is: how do these technologies become profitable businesses? Two strategies stand out:
China treats carbon removal as an industrial policy, using environmental goals to build its manufacturing lead in solar panels, batteries, and electric vehicles, while offering countries in the Global South a chance to join in seizing this opportunity. As Nils Gilman explains, China’s approach “offers a way to reduce reliance on hydrocarbons by rapidly deploying solar, wind, and electric vehicle infrastructure at scale, often financed through Chinese development banks and implemented by state-owned enterprises.”
The European Union views carbon removal as a moral duty, creating the world’s most advanced regulations to drive change through markets. Central to this is the Carbon Border Adjustment Mechanism (CBAM), which aims to prevent leakage by taxing imports based on their footprint. By setting strict standards and pricing carbon, the EU expects to shape global trade and push industries worldwide to adopt greener practices. This regulatory approach relies on market incentives and legal frameworks rather than direct industrial investment.
These contrasting approaches highlight a key divide: China focuses on building industrial capacity and global partnerships, while Europe emphasises regulatory leadership and market-driven change. But creating fair competition through carbon pricing reveals a deeper challenge. While CBAM levels the playing field, it doesn't guarantee European companies will dominate it.
This echoes historian Fernand Braudel’s distinction between the market economy and capitalism. In Braudel’s view, markets create endless competition with narrow margins, while capitalism is about certain firms building large-scale advantages that grow over time. Europe has created the market signal through CBAM but lacks the industrial strategy needed to develop and support capitalist champions—large, competitive firms that can scale and dominate globally. In contrast, China excels at this capitalist game, using scale and strategic partnerships to strengthen its global position.
Now that the world is rapidly shifting, and America has made clear its goal to bully traditional allies into submission, Europe faces a choice: use CBAM as a lever to compete directly with China’s state-led capitalist model, or risk abandoning its climate stance altogether through forced alignment with the American position.
1/ Europe has created a €100 billion carbon market
Europe has created something significant with CBAM. Starting in 2026, importers must pay for the carbon content of cement, steel, aluminium, fertiliser, electricity, and hydrogen.
Based on current carbon prices of €80–100 per tonne and projected import volumes of 200-250 million tonnes annually, the mechanism could generate €15–20 billion annually in its first years. Over five years, it is expected to raise around €100 billion in carbon costs paid by importers, effectively transferring value to Europe while encouraging industries worldwide to cut emissions.
This represents the world’s first carbon market with enforcement power, a genuine price on emissions that requires industries to find alternatives:
For European firms, CBAM creates competitive advantage. Companies operating within the EU's emissions trading system already pay carbon costs. Now foreign competitors must pay similar costs to access European markets. European steel producers no longer compete against Chinese steel that carries no carbon cost. European cement manufacturers gain protection from Turkish imports that ignore emissions entirely.
For exporters to Europe, CBAM demands fundamental change and urgent action from all sectors. American steel companies must decarbonise production or buy carbon allowances. Chinese aluminium producers face the same choice: invest in clean technology or pay the carbon price. Brazilian fertiliser manufacturers cannot simply ignore their emissions when selling to European buyers.
In this context, carbon-neutral companies gain a clear advantage. A Norwegian aluminium producer using hydroelectric power—though not in the EU—faces minimal CBAM costs. A Swedish steel company powered by renewable energy pays little to no extra carbon costs under the EU’s emissions trading system. A Danish fertiliser manufacturer using green hydrogen also benefits from low carbon expenses. These firms can undercut both European competitors relying on fossil fuels and foreign producers paying carbon penalties.
CBAM sets a level playing field by putting a price on emissions, which creates a fair market environment. But as Braudel’s distinction between the market economy and capitalism shows, this alone won’t create strong industrial leaders. To compete globally, European firms must use capitalism’s power—insert capital to build scale and assert control of value chains—not just fight within the market.
Germany's solar feed-in tariffs demonstrate the risk. German consumers paid premium prices in the 2000s, funding global learning that ultimately reduced solar costs by 90%. China captured the manufacturing whilst Germany funded the innovation. Despite Germany's clean tech exports representing 4% of GDP, more than any G7 country, China ended up dominating production in solar panels and increasingly in batteries.
If the same scenario plays out, Europe would host the market, but the tech, production, and scale grow elsewhere. This shows Braudel’s point: markets alone don’t create champions; capitalism does, through increasing returns to scale. CBAM provides the market foundation, but European policymakers must back capitalist strategies that build firms able to dominate global value chains, not merely survive by following market rules and competing on cost.
2/ Carbon transformation technologies are creating trillion-dollar industries from thin air
Carbon removal is not only about cutting emissions; it can also create valuable products. Captured CO₂ can be used as an input in many industrial processes, from making concrete and fuels to producing plastics, fertilisers, and chemicals. This means carbon can be removed from the atmosphere not just for environmental goals, but while manufacturing goods that can be sold at a profit. The technologies vary in cost and scale, but the most successful will permanently store carbon in products while earning revenue from both disposal fees and product sales.
Indeed, manufacturing companies that embed carbon removal into production achieve superior strategic positioning compared to pure removal providers:
Pure removal companies exhibit what Michael Porter calls “first-order fit” with activities aligned around carbon extraction and credit generation, but they compete primarily on operational effectiveness with limited differentiation beyond technology choices. This leaves them exposed to price-based competition, volatile carbon markets, and complete collapse if Europe abandons CBAM under American pressure.
On the other hand, integrated manufacturers achieve “third-order fit” where production improvements simultaneously reduce costs and increase carbon capture efficiency. Scaling manufacturing inherently scales carbon removal without proportional cost increases, whilst dual revenue streams from products and credits provide stability when carbon prices fluctuate. These interlocking activities create systems that are harder to imitate and more resilient to external shocks.
One promising area is turning carbon into concrete. Concrete is the most widely used human-made material on Earth: about 40 billion tonnes are produced each year. Its key ingredient, cement, is the binder that holds sand, gravel, and water together. Making cement releases large amounts of CO₂, responsible for around 8% of global emissions.
Fortunately, new concrete-making technologies can capture CO₂ and use it as an input instead of producing more. They speed up a natural process called mineralisation, which in nature normally takes hundreds of years, and lock carbon permanently inside building materials in just a few hours. In specialised equipment, CO₂ is reacted with minerals or industrial waste to make a fine powder. This powder can replace up to 30% of cement in concrete mixes without weakening the finished product.
There’s a compelling business case here. Companies buying permanent CO₂ removal on the voluntary market currently pay $600–1,000 per tonne for services such as direct air capture with geological storage. At the same time, construction firms that use concrete for buildings, roads, and other infrastructure are willing to pay 10–30% more for verified carbon-negative materials. Accordingly, a single plant that captures and uses 100,000 tonnes of CO₂ a year to make concrete could earn €15–20 million from disposal fees all while selling materials worth another €30–40 million. Current costs remain 20-30% above traditional cement, but the gap is bound to narrow with scale.
Likewise, carbon-to-fuel technology uses renewable electricity to combine captured CO₂ with hydrogen, producing synthetic fuels that contain carbon but do not depend on oil extraction. First, water is split into hydrogen and oxygen using electricity. Then, the hydrogen reacts with captured CO₂ to create fuels that are chemically the same as those made from fossil fuels.
This approach is vital for aviation, as planes cannot yet run on batteries. It is also important for cars and trucks, which still depend primarily on petrol and diesel. The EU has set targets requiring 2% of jet fuel to come from sustainable, low-carbon sources by 2025, increasing to 63% by 2050. Similar goals apply to road transport to reduce carbon emissions.
Large projects in Europe, like TotalEnergies’s Northern Lights in Norway and REFHYNE in Germany, plan to use renewable electricity to produce synthetic fuels by capturing carbon from the air. As solar power costs fall and hydrogen production through water splitting with renewable electricity approaches $1 per kilogram by 2030, synthetic fuels are becoming more affordable. These fuels offer a way to reduce emissions in transport sectors that are hard to electrify, such as aviation, road freight, and shipping. They also present a promising business opportunity by turning captured carbon into a valuable raw material.
That said, even with renewable electricity at €20 per MWh, synthetic fuels still cost two to three times more than petroleum equivalents. Their path to economic viability depends on carbon prices rising above €200 per tonne or significant subsidies. Nonetheless, ongoing innovation and policy support could help bridge this gap.
Carbon-to-chemicals targets the huge €4.5 trillion European chemical industry, which today relies almost entirely on oil and gas. Instead of making plastics and other chemicals from fossil fuels, companies are starting to use captured CO₂ and renewable electricity as raw materials. This creates a new way to turn carbon into valuable products while cutting emissions:
For example, some European firms are developing ways to make ethylene, a key building block for plastics, directly from CO₂. This not only reduces emissions but also locks more carbon into the plastic itself, keeping it out of the atmosphere for longer.
Another promising approach uses microbes to turn waste gases from factories into useful chemicals, similar to what LanzaTech does in China by converting steel mill emissions into ethanol. Ethanol can then be used to make plastics, detergents, and other everyday products.
If 10% of the European chemical market shifts to carbon-based methods by 2035, it could capture 120 million tonnes of CO₂ yearly and generate about €45 billion in new business. This income would mainly come from selling chemicals made with captured carbon, not just carbon credits. Companies aim to meet demand for greener products and produce plastics, detergents, and specialty chemicals that improve in quality and cost over time. Although current costs are 40–60% higher than petrochemical methods, advances and scale-up will make carbon-based chemicals more competitive, giving businesses a market edge.
All these technologies using carbon dioxide as an input work best when developed together. Industrial hubs like Rotterdam could shift from oil-based processes to carbon use, cutting emissions while making use of existing facilities. Steel plants can supply CO₂ for concrete production, their waste heat can power carbon capture, and the captured CO₂ can feed nearby chemical factories and greenhouses. Each part supports the others and lowers overall costs.
🇨🇳 China already runs hundreds of facilities using these methods, accelerating progress by testing many approaches at once. Europe supports this transition through carbon pricing, which makes using carbon cheaper than releasing it. Moving from seeing carbon as waste to treating it as a resource could create trillion-euro industries within a decade. The companies that grow fastest and largest will decide where these new industries take root for years to come. The race for scale has begun, and early leaders will lock in advantages that regulation alone cannot overcome.