Sandbag welcomes the Circular Economy Act (CEA) as an important step to accelerate the  transition to a circular economy in the EU. Progress in this area has been slow and this act is  sorely needed to address systemic issues holding back circularity, including the current  fragmented approaches across Member States.

We support the stated intention of supporting business cases based around utilising waste  and secondary materials, and recognise the need for incentives to, for example, reduce  volumes of waste in electrical and electronic equipment and boost recovery of critical raw  materials. Focus should also be placed on reuse and repair of materials and resource efficiency as well as recycling, so as to minimise energy consumption, with low carbon energy a scarce  resource in the coming years.

Our key recommendations focus on measures focused on the strategically important and  carbon-intensive steel sector. Within the context of the Circular Economy Act, priority should  be placed on enhancing the use and quality of steel scrap, promoting closed-loop recycling, and aligning carbon incentives that encourage the production of clean steel.

Steel scrap plays a central role in decarbonising the EU steel industry. Long steel products are already produced almost entirely from scrap in Europe, mainly through electric arc furnaces  (EAF), which generate significantly lower direct CO₂ emissions than the blast furnace–basic oxygen furnace (BF–BOF) route. The key challenge now lies in decarbonising flat steel production, which still relies predominantly on the BF–BOF process.

While flat steel production faces different technical constraints than long products, increasing the share of scrap in its production is both technically feasible and strategically necessary. In  particular, combining direct reduced iron (DRI) with high-quality scrap in EAF-based production offers a viable pathway to substitute virgin iron while maintaining product quality. Demand for high quality scrap is low in Europe, as EAF flat steel production capacity is low. However, transition towards low carbon steelmaking will require improving scrap collection, sorting, and certification.

Minimum recycled content requirements and design for recyclability

To stimulate a robust market for clean scrap and secondary steel, the Circular Economy Act (CEA) should introduce mandatory minimum recycled content requirements and design-for-recyclability requirements for key industrial sectors, starting with the automotive industry,  which is the largest user of flat steel in the EU. Importantly, these requirements should apply to all steel placed on the EU market, including steel imported from third countries, not only to domestic production, to ensure a level playing field.

Although steel from end-of-life vehicles is widely recycled, only about 6 % of recycled automotive steel currently finds its way back into car manufacturing, whereas most of it is downcycled into construction applications, exported to third countries (also for downcycling), or even blended with low-grade scrap. Design-for-recyclability requirements are also essential to reduce contamination from components such as copper wiring and electronics, particularly in electric vehicles, to ensure that recycled steel meets automotive-grade quality standards.

By introducing mandatory minimum recycled content requirements and complementary design-for-recyclability measures, the CEA would help build a strong structural demand for clean scrap, attract investment in advanced pre-treatment, dismantling, and sorting facilities, and accelerate circularity across Europe’s industrial steel value chains.

This requirement could also be extended to other high-value industrial sectors, such as household appliances or rail rolling stock, to increase the share of high-quality secondary steel in production. Concrete targets and technical thresholds would then be defined in sector-specific legislation and implementing acts.

Although the EFR categories (E1, E2, E3, E5H, E6, E8, E40, EHRB/EHRM) provide a useful framework for steel scrap classification in Europe, including criteria on thickness, piece size,  and residual metallic content, the system remains largely voluntary and does not fully reflect the diversity of available scrap. European mills may therefore receive lots with variable quality, have limited confidence in categorisation, and tend to overspend in over-specified scrap categories by fear of disappointing quality for the categories they would normally aim for. Currently, scrap quality checks rely mostly on visual inspection, leading steelmakers to over-specify purchases to compensate for uncertainty. Affordable equipment to improve sorting and handpicking efficiency based on optical recognition or artificial intelligence, allows scrap processors to better identify grades and recover other valuable materials.

As highlighted in the Steel and Metals Action Plan published by the European Commission in March 2025, better harmonisation of scrap classification systems is needed, as current disparities between Member States create barriers for certain types of scrap. In the United States, the ISRI system is widely used as a de facto contractual reference by steel producers: any lot not meeting grade specifications may be rejected or downgraded. These specifications detail thickness, piece size, density, inclusion/exclusion of galvanized or blackened material, and impurity limits, which ensures higher lot uniformity and allows more intensive use in flat steel production.

Demand for high-quality scrap, particularly for flat steel production through EAF-DRI routes, naturally drives improvements in classification. As mills require more precise lot specifications to maintain product quality, scrap collection, sorting, increasing granularity and harmonisation across Europe. The Circular Economy Act could support this evolution indirectly, for instance by introducing mandatory minimum recycled content requirements, which would increase production of flat steel via EAF-DRI routes, thereby driving demand for high-quality scrap in high-value applications, encouraging harmonisation and transparency in scrap reporting and certification, and providing an opportunity to establish an EU framework for harmonised and more granular scrap classification and certification, building on and strengthening the existing EFR system to ensure consistent quality definitions and facilitate trade of high-grade scrap across Member States.

In addition, traceability can build on existing proposals in the Circularity requirements for vehicle design and management of end-of-life vehicles5, which already include obligations for recyclers and dismantlers to recover a minimum share of materials. Using digital scrap passports, batch-level documentation, or certification schemes would further strengthen these measures, ensuring high-quality scrap is verified and retained in the EU.

To maximise circularity and climate benefits, the Circular Economy Act should ensure that high-quality scrap is prioritised for high-value applications, particularly flat steel, rather than being downcycled or exported. Currently, much post-consumer scrap, including from vehicles and ships, is diverted to construction applications, exported, or blended with lower-grade scrap.

The main issue with exporting or downcycling scrap is that it reduces the availability of high-quality scrap for domestic low-carbon production, limiting the development of closed-loop recycling and the decarbonisation of the EU steel sector. Using high-grade scrap for construction is not as beneficial as recycling it into flat products, because it tends to deflate the price of construction steel, making (potentially lower emission) materials comparatively less competitive.

In addition to regulatory measures such as minimum recycled content requirement, scrap quality standards, and design-for-recyclability obligations, the CEA should include provisions  to prioritise the allocation of high-quality scrap within the EU. This is especially relevant for  ship recycling, as only about 1% of EU-owned ships are dismantled in Europe, meaning that large volumes of high-quality steel are currently lost to foreign markets. Expanding EAF-DRI capacity for flat steel would create demand for this premium scrap, making it a strategically valuable resource for low-carbon steel production.

It should be noted that public procurement is unlikely to drive significant demand for high-quality flat steel, because public projects tend to use long steel products. Consequently, incentives or requirements in this area may have limited impact on promoting closed-loop recycling for high-grade materials.

In conjunction with introducing the Circular Economy Act, it is important also to review and optimise the design of existing policy frameworks in order to drive a circular transition. Since steelmaking is covered by the EU ETS, creating a meaningful carbon price signal will be essential to sustain this transition and ensure investment flows toward genuinely low-carbon technologies. The ETS should therefore not be weakened through international credits, CDR, cap loosening etc.

In addition, the impact of the carbon price is muted by free allocation. Their gradual phase-out, thanks to the ramping-up of CBAM, will increase the cost of BF-BOF steel and enhance the competitiveness of low-emission and recycled steel, thereby naturally boosting demand for ‘clean steel’.

In the meantime however, under the current Free Allocation Regulation (FAR), allowances are still granted according to intermediate products such as hot metal or DRI, rather than to finished steel output. This approach unintentionally discourages circularity: scrap use receives no allocation, while ore-based feedstocks are rewarded.

In Europe, long steel products are already made entirely from scrap, but flat steel remains  mostly produced from virgin iron. Making a better economic case for scrap use in flat steel  production is therefore key to decarbonising the sector and reducing Europe’s dependency on imported raw materials. To address this, Sandbag proposed that for integrated steel plants, free allocation should be linked to flat steel output rather than hot metal or DRI production (see our September 2023 submission to the Climate Change Expert Group, “Flat Steel in the Free Allocation Regulation”). The same overall benchmark volume can be preserved by applying the average ratio of hot metal per tonne of flat steel. This simple adjustment would ensure a level playing field between recycled and primary steel, and reward scrap use without increasing the total volume of allowances in the ETS. It would inherently strengthen incentives for circularity, thus aligning with the objectives of the Circular Economy Act.

The Circular Economy Act represents an opportunity to move beyond the EU’s current fragmented waste policy and embed circularity as a core pillar of Europe’s industrial and climate strategy, creating the harmonised, predictable conditions needed for circular business models. To maximise circularity in the steel sector, the following measures should be prioritised:

• Introduce mandatory minimum recycled content requirements in key industrial sectors such as automotive, appliances, and rail, applying to all steel placed on the EU market, including imports, to create a stable demand for high-quality scrap.

• Make design-for-recyclability mandatory to reduce contamination (e.g. copper, coatings, electronics) and improve the quality of recovered scrap from complex products.

• Retain high-quality steel within the EU, particularly from ships by developing a specific digital material passport for ships.

• Establish an EU framework for harmonised and more granular scrap classification and certification, building on and strengthening the existing EFR system to ensure consistent quality definitions and facilitate trade of high grade scrap across Member States.

• Maintain a strong and credible carbon price signal, avoiding the weakening of the ETS through additional credits or flexibility mechanisms, to drive investment in genuinely low-carbon and circular technologies.

• Align carbon incentives with circularity objectives by reviewing existing instruments such as the Free Allocation Regulation (FAR) to reward the use of scrap in flat steel production and ensure equal treatment between primary and secondary steel under the ETS and CBAM frameworks.

This summary is based on Sandbag’s official submission to the European Commission. The original document includes full references and source material.

March 13th 2025

More on the Circular Economy Act