Competitiveness of low-emissions steel
Background
A green premium is the additional cost consumers pay for a green product, usually due to higher capital and operational expenditures.[1][2] For example, it is significantly cheaper for steel producers to buy coal than to buy green hydrogen. That is because the price of coal tends to not account for externalities, such as environmental harm from emissions. Additionally, infrastructure to mine and trade coal is already available, making it comparatively cheap. Hydrogen or renewable electricity, by contrast, are still relatively new and require costly infrastructure, as well as new resources, technologies, and production routes to produce and distribute them, making them more expensive.[3]
Although the exact cost varies greatly due to contextual factors — such as the current infrastructure and its age, the resources available, energy prices, and regulations in place — a transition would increase costs because of larger operational expenses, capital expenses, and capital losses from closing existing assets.[4] A transition may also be more expensive due to higher financing costs — from higher risk — and lower levels of efficiency in new plant types.[1]
Lack of competitiveness of green steel
The initial green premium associated with low-emissions steelmaking is estimated to be between 15-40% of the original production cost.[1] Because this additional cost exceeds most steel companies’ profit margins, low-emissions production is only possible if companies can sell the low-emissions steel at higher prices. In the competitive globalized market, low-emissions producers are at risk, as they are competing with cheaper, carbon-intensive steel.[4][5][6] The combination of market insecurity and low competitiveness creates a “first-movers disadvantage”.[6] If manufacturers are unsure that they can sell low-emissions steel for a higher price, they will be less likely to invest in this type of production. These pressures highlight the importance of providing market security to overcome financial challenges of the energy transition.
Although premiums affect end consumers, too, they will likely have a significantly smaller impact there than on steel producers. That is because steel is only one of many inputs to products such as cars, machines, houses, and other commodities.[1][6] The cost increase to the overall product is therefore much smaller. By 2030, the cost of passenger cars is estimated to increase by around 0.5%, white goods by 1.5%, and construction costs by 2.1% (under the scenario of a shift to low-emissions steel). However, by 2050, these costs will likely decrease by 0.3% for cars, 1% for white goods, and 1.4% in construction, due to predicted changes in the cost of green energy and low-emissions steel.[6]
Because the increase in end-product producer costs is so small, it is unlikely that it will be passed on to end customers, or if they are, that they would significantly influence consumer purchasing decisions.[1] For industries consuming large amounts of steel, however, the price difference is significant, as they will be the ones initially asked to pay the green premium.[7] To retain their profitability, the most intuitive decision is to stick with cheap, coal-based steel. That is why policy interventions are required at this level: to ensure that low-emissions steel is sold despite its higher prices, and to strengthen the market, thereby promoting the energy transition.[6]
There are three possible routes to address the competitiveness challenge: 1) reduce the cost of producing low-emissions steel to reduce the green premium, 2) reduce the competitiveness of carbon-intensive steel, or 3) cover the initial green premium. Whichever pathways are implemented, they will have to be combined concurrently with other policy targets, specifically those that strengthen market security.
Policy Action
Policy targets to reduce the cost of producing low-emissions steel include:[8]
- Ensure the availability of competitively-priced low-emissions energy through greater investments into green energy systems.[3]
- Increase access to funding for low-emissions steel producers to cover costs associated with steel production, e.g., with loan guarantees, grants, and invest heavily in breakthrough technologies to reduce their costs and improve their efficiency.
- Provide economic incentives and advantages for low-emissions steel producers, e.g., subsidies, tax credits or deductions, etc.
- Invest and incentivize investments into breakthrough technologies, renewable energy and energy infrastructure. This can increase these resources’ availability and reduce their costs, hence lowering the cost for low-emissions steel production investments.
Policy targets to make carbon-intensive steel less competitive include:[8]
- Implement and improve emissions trading systems (e.g., carbon taxes, tradable emissions standards, cap and trade systems, etc.) to make carbon-intensive steel more expensive. For them to be effective, they must 1) include the steel and coal industry within them, 2) incentivize emissions reductions through high enough emissions costs, and 3) be implemented internationally.[3][9]
- End free allowances for carbon-heavy steel producers, particularly in carbon emissions schemes. While these allowances are supposed to ensure competitiveness, they disincentivize the transition to low-emissions production routes.[10]
- Increase the price of coal, or reduce its availability through carbon trading schemes, border adjustment programs, and coal phaseouts.[11] This can include the design of regulations that account for externalities caused by methane emissions during coal mining.
- Create quotas or certificate systems that require increasing shares of steel produced or purchased to be green.[3]
Policy targets to cover the initial green premium include:[8]
- Create Carbon Contracts for Difference (CCfDs) to fund the green premium of low-emissions steel production, e.g., through a tender.[1][3]
- Direct revenues from carbon emissions schemes to fund investments in low-emissions steelmaking and CCfDs.
Examples and Case Studies
The EU Emissions Trading System (ETS)
The EU Carbon Border Adjustment Program (CBAM)
Germany’s Grants for Energy-Intensive Industries
German Carbon Contracts for Differences
Responsible Steel (Green Steel Standards)
External Links
Climate Policy Initiative - Financing Steel Decarbonization
References
- ↑ 1.0 1.1 1.2 1.3 1.4 1.5 Energy Transitions Commission (2021). "Steeling Demand: Mobilising buyers to bring net-zero steel to market before 2030". Energy Transitions Commission.
{{cite web}}: CS1 maint: url-status (link) - ↑ Breakthrough Energy (2022). "The Green Premium". Breakthrough Energy.
{{cite web}}: CS1 maint: url-status (link) - ↑ 3.0 3.1 3.2 3.3 3.4 IEA (2020). "Iron and Steel Technology Roadmap—Towards more sustainable steelmaking". International Energy Agency.
{{cite web}}: CS1 maint: url-status (link) - ↑ 4.0 4.1 World Steel Association (2021). "Climate change and the production of iron and steel" (PDF). World Steel Association.
{{cite web}}: CS1 maint: url-status (link) - ↑ Gates, Bill (2021). How to Avoid a Climate Disaster—The Solutions We Have and the Breakthroughs We Need. Penguin Books Limited.
- ↑ 6.0 6.1 6.2 6.3 6.4 MPP (2022). "Making net-zero steel possible" (PDF). Mission Possible Partnership.
{{cite web}}: CS1 maint: url-status (link) - ↑ Hoffmann, Christian (August 2022). "Interview with Nele Merholz for "Breaking the Barriers to Steel Decarbonization - A Policy Guide"".
{{cite web}}: Missing or empty|url=(help)CS1 maint: url-status (link) - ↑ 8.0 8.1 8.2 Merholz, Nele (2023). "Breaking the Barriers to Steel Decarbonization - A Policy Guide".
{{cite web}}: CS1 maint: url-status (link) - ↑ Bataille (2019). "Low and zero emissions in the steel and cement industries" (PDF). OECD.
{{cite web}}: CS1 maint: url-status (link) - ↑ Gray; M'barek (2022). "Stranded asset and carbon pricing risk in the steel industry". Transition Zero.
{{cite web}}: CS1 maint: url-status (link) - ↑ Cui; et al. (2022). "A strategic approach to coal phase-down for China" (PDF). CCCI Berkeley.
{{cite web}}: Explicit use of et al. in:|last=(help)CS1 maint: url-status (link)
