European cement stocks fell sharply at the start of February on fears that the EU could extend its timeline for decarbonising the sector and adjust the regulatory framework. Although a revision of carbon limits for the Emissions Trading System (ETS) is already under way, carbon permit prices have already dropped five per cent, BNP Paribas reported.
The sell-off came days after the European Commission held a workshop to take a “reality check” based on feedback from industrial companies. BNP Paribas said any shift in EU CO2 targets would have major implications for exposed building materials stocks such as Cemex, CRH, Heidelberg Materials and Holcim. While analysts described the market reaction – which saw some EU majors' stocks fall by 10-15 per cent – as an “over-reaction”, weaker proposals for regulations governing the cement sector could still lead to several scenarios.
Potential proposals to EU CO2 targets
Regulatory changes could include a smaller cut to the current 693kg CO2/t clinker benchmark used for free allowances than the widely expected 666kg. The phase-out of free allowances could also be delayed beyond the proposed 2034 end-date. BNP Paribas also flagged potential changes allowing more international credits in 2031-40, which it argued could slow the annual CO2 reduction factor from 4.4 to 3.4 per cent.
Final benchmarks for ETS Phase IV Part I (2021-25) are due on 12 March 2026. BNP Paribas expects clarity on benchmark and free-allowance changes soon, while broader reforms are more likely by July.
2040 intermediate target
On 10 February 2026, MEPs approved proposed revisions to the framework for 2040. These targets are critical as they sit between the Green Deal, which has a 2030 greenhouse gas emission target of 55 per cent compared to 1990 levels, and the EU’s ultimate aim of achieving climate neutrality by 2050. “The intermediate phase of the 2040 target is where deeply political choices have to be made – just as climate policy faces increasing resistance from within the EU, as well as mounting geopolitical pressure from the US to roll back decarbonisation in Washington’s attempt to assert fossil-fuel dominance over Europe,” said Green European Journal.
The MEPs decided to maintain an EU 2040 net emissions reduction target of 90 per cent versus 1990 levels. However, the package includes flexibility, allowing five per cent of reductions to come from international credits, effectively lowering the domestic target to 85 per cent. The emissions reduction in this period will be driven by accelerated deployment of renewable energy and the phasing out of fossil fuels, which will be reduced by 80 per cent compared to 2021.
Cement pricing implications
BNP Paribas said ETS tightening and CBAM could lift inflation by one per cent in the near term, while imports are expected to remain competitive even after CBAM. The bank forecasts a four per cent rise in EU cement prices in 2026 and a 100bp gross margin uplift as the sector front-loads part of the future CO2 cost burden. A dilution of EU policy could make even that four per cent difficult.
Without cement price increases, BNP Paribas sees the biggest downside risk to earnings forecasts for Holcim (-10 per cent) and Heidelberg Materials (-7 per cent). Over the medium term, tighter carbon permit supply is expected to support higher carbon prices, steepen the cost curve, and drive consolidation in the early 2030s, with carbon capture remaining a key uncertainty as to whether it can be attractive.
