International cooperation

Background

China is currently the world’s largest steel producer (49% of the global capacity and 60% of global steel emissions), followed by India (10% of global steel emissions), which continues to increase its capacity to meet its economic goals and the needs of its growing population. Both countries face a similar development challenge: expanding their capacity to provide energy and resource access to their citizens, while also trying to decarbonize their infrastructure to meet their climate goals. This paradox is also visible within their development pledges: Although both countries announced plans to become carbon neutral by 2060 and 2070 respectively, they also continue to invest in new BF-BOF plants — the most carbon-intensive steelmaking process. Therefore, they currently have the largest global share of BF-BOF steelmaking capacity under development. Due to the large share of steel capacity, and, consequently, emissions, global steel decarbonization efforts cannot succeed if there is no successful transition within China’s and India’s industries. Some countries' steel transition, therefore, should be a priority on the international political agenda.

Climate politics frequently confronts the question of “Who needs to pay for climate change?” Often, however, it is also a question of feasibility: How can countries with lower GDPs and higher susceptibility to climate change afford a transition that is already considered expensive in wealthier countries? In many cases, such countries require extensive support, for example through increased access to funding, green resources, and technologies, or even with specific infrastructure developments. To run EAFs, for example, we need large amounts of renewables and other low-emissions energy, which require large changes in energy infrastructure. To overcome the economic obstacles that low- and middle-income countries face, it will take more international cooperation and support, targeting both the steel industry directly and enabling industries such as the renewable energy sector.

Currently, there are no international agreements that determine how to transform the steel industry on a global scale. Changes are mainly driven by national laws and international market forces. However, due to the international nature of the industry, it is difficult for one country to transition without the risk of “carbon leakage”, which refers to the process in which a company moves to a location with lower carbon compliance costs. This risk can be avoided when changes are made internationally, also referred to as “leveling the global playing field”.

All international agreements come with strengths and weaknesses. The EU’s Carbon Border Adjustment Mechanism (CBAM) and other international carbon pricing and border tax schemes highlight how cross-country collaboration can result in economic power large enough to create market incentives for steel companies around the world to reduce their emissions. On the other hand, the dependency on collective agreement and bureaucratic processes can also pose a challenge to fast action. To ensure competitiveness within the European and global markets, EU members have to request funding or at least receive official permission for the government’s industry investment decisions. This makes it inherently difficult for countries to take initiative and unilaterally make more ambitious investments to transform their national industries. But even though there may be some limitations to international cooperation, such collaboration will be necessary for the development of a competitive market, strong accountability measures, the coordination of effective action, and guiding relevant stakeholders, such as international financial institutions and trade cooperations. An effective international agreement would require the participation of the top ten producing countries (making up around 85% of total steel production) or the top 25–50 steel companies, which account for around 40%–60% of global steel production, respectively, and which could create a critical mass for global change.

Policy Action

Policy targets to level the global playing field include:

• Collaborate to create international cross-sectoral carbon accounting and regulation schemes or carbon border adjustments.
• Increase access to funding for steel decarbonization from international organizations, such as the World Bank, International Monetary Fund, etc. This can include concessional finance by multilateral banks, development finance institutions (DFIs), private finance, equity, debt, grants, or other financial instruments.
• Create trade agreements for hydrogen, renewable energy, and other resources relevant to the regional steel decarbonization pathways.
• Identify policies that create markets for low-emissions steel and ensure competitiveness in compliance with World Trade Organizations requirements.
• Provide more information in languages other than English. While  most senior decision makers can read English, they may not read it as frequently, and information in anyone’s native language is easier to take in.

Policy targets to improve international cooperation and accountability include:

• Create and ratify a binding international agreement between major steelmaking countries and companies to ensure multilateral commitment and accountability to rapid steel decarbonization. This could take the form of a climate club, for example, and should include a definition of green steel, a certification and tracking framework, and the commitment not to build BF-BOF plants without CCUS past 2025.
• Identify how wealthy countries can support and incentivize other countries in creating and achieving steel decarbonization pathways, e.g., through financial investments into infrastructure, energy production systems, trade of relevant resources, information and training, etc. This support should be enforced through bilateral and multilateral agreements.
• Increase the security of steel trade to shift political preferences towards trade rather than national capacity expansion. A commitment to not use tariffs and border taxes on green steel during the energy transition may support such a goal.
• Consider creating consumption-based regulations for materials going into end-use products (e.g., cars). These regulations could include carbon taxes, gradually declining caps on end-product emissions, or mandates for low-emissions usage shares.
• Establish international forums to exchange information about technologies, best practices, climate finance, and strategies to increase awareness and trade.

Examples and Case Studies

UN Leadership Group on Industry Transition

SteelZero International Procurement Pledges

The EU Carbon Border Adjustment Program (CBAM)

Paris Agreement and Nationally Determined Contributions

EU Research Fund for Coal and Steel (RFCS)

EU-US Global Arrangement on Sustainable Steel and Aluminium

External Links

Introduction to International Climate Finance

Global Landscape of Climate Finance 2021

COP27 Primer Climate Finance