The steel sector is a significant contributor to global carbon emissions, accounting for roughly 7-9% of CO2 output due to its energy-intensive production processes. Addressing its environmental impact requires integrating carbon costs—such as carbon pricing, taxes, or emissions trading schemes—to internalize the environmental externality and incentivize emission reductions. Imposing carbon costs raises operational expenses for steel producers, encouraging investment in cleaner technologies and energy efficiency improvements. Innovation incentives play a critical role alongside carbon pricing. These include subsidies, grants, and research funding aimed at developing low-carbon steelmaking methods, such as hydrogen-based direct reduction, carbon capture and storage (CCS), and electric arc furnace (EAF) technologies. Combining carbon costs with innovation incentives can accelerate the sector’s transition toward decarbonization by making sustainable alternatives economically viable. Policymakers must balance competitiveness concerns, ensuring that domestic industries remain viable amid global competition, often through border carbon adjustments or exemptions. Overall, strategically designed carbon costs paired with targeted innovation incentives can drive the steel industry’s shift to low-carbon production, supporting climate goals while fostering technological advancement and economic resilience.