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To be honest you are absolutely right it does seem like an odd statement that's for sure and I should be wrong. But I don't get why they punish some, while ignoring others who do even worse.
You yourself said you've seen it. Plus I did read in the rules emulation and encouraging emulation was technically illegal. I wouldn't use an emulator on steam to be honest, or anything but purchased or free steam games, I don't want a vac I get enough community bans.
Emulation in and of itself is not illegal. Using roms you don't specifically own in an emulator is illegal but the mere fact that you use an emulator is not illegal by any means. Many people make homebrew games that use the different emulators and playing those that are freely available to the public is 100% legal. I'm not suggesting that you should use illegal roms, I'm simply stating the difference between emulation and owning (or not owning) licensed copies of games.
Discussion of piracy including, but not limited to:
Cracks
Key generators
Console emulators
Copy and pasted this right off the TOS, just so the OP knows they don't like it.
This isn't about it being illegal its about if steam allows it or doesn't mind, it looks like they do. So if you do emulation my suggestion is simply leave it off steam.
If you are for instance running a cracked version of csgo and it is for some reason hooked up to steam, then you could potentially be punished if you cheat.