The risk is that, rather than saddle the investment costs associated with greener technologies and processes, EU producers may instead simply shift production from Europe to less well-regulated countries.
The EU is forging ahead on climate change, pledging to reduce greenhouse gas emissions by 40 per cent in 2030, and the EU Emissions Trading Scheme (ETS) is its flagship policy.
The price at which EU ETS allowances trade hands, commonly referred to as the carbon price, has more than tripled to about €25 per tonne of CO2 since 2018, and is likely to head even higher in the coming years.
This has big ramifications for energy intensive sectors including steel, aluminium and fertiliser producers: in May, ArcelorMittal, cited high carbon prices in its announcement to close 3m tonnes of steel production.
But the higher carbon price should still be welcomed as it will ultimately reduce emissions from the EU, and allow the region to position itself as a leader in the green economy.
Policymakers need to think through carefully on what they can do to manage the economic risks.
An analysis by CRU suggests carbon prices could reach about €40 a tonne by 2028, as the EU pushes for deeper and increasingly costly reductions in emissions.
That raises the risk that industrial production ultimately shifts to less well-regulated countries, which could end up damaging both the environment and the European economy.