Market security for low-emissions steel

Background

Large steel customers and their demands should be key considerations in future steelmaking development. Such customers include the construction, automotive, and machinery industries, which together account for more than 60% of global steel demand. If customers are interested in buying low-emissions steel, or are willing to pay the higher prices associated with it, an industry transition will result in increasing profitability for steel producers. In such a scenario, producers would be more likely to opt for sustainable production.

An increase of green steel demand and market security results in higher levels of green steel production. With low supply and without the benefits of economies of scale, low-emissions and green steel prices increase, making it more difficult to find buyers and remain profitable.

The higher cost of low-emissions steel, created by the green premium and scarcity, causes a reinforcing feedback loop. Without intervention, low-emissions steel is unlikely to become competitive quickly, creating high uncertainty in the market. Source: Merholz, 2023.

Greater market security may also make it easier to fund a green steel venture in the first place. Because the cost of construction for new plants is very high, most steel companies are dependent on significant amounts of capital from banks, governments, or private investors. Such entities are unlikely to invest in low-emissions steel if it is unclear such projects will become profitable. Conversely, uncertainty about the profitability of emissions-intensive steel would make investments in low-emissions steel production more likely. Increasing market security, therefore, not only helps to ensure profitability and influence companies’ decision-making for future steelmaking, but also enables such projects through increased access to funding.

While the challenge of low market security can be addressed using regulations or carbon pricing — which would force a green transition or make carbon-intensive production less profitable — low-emissions and green steel demand is another area of possible intervention.

Policy Action

Policy targets to promote low-emissions steel competitiveness include:

• Implement carbon or lifecycle emission regulations, and carbon taxes or trading schemes to increase the price of carbon-intensive steel.
• Cover the initial green premium of low-emissions steel to reduce prices for steel consumers and thus increase demand.
• Create low-emissions steel above-market price guarantees, similar to feed-in tariffs.

Policy targets to increase low-emissions steel demand include:

• Use public procurement policies, e.g., through guarantees to purchase low-emissions steel for government-funded construction projects. Alternatively, this could include the setting of benchmarks for emission intensities of construction materials (Energy Transitions Commission, 2021; IEA, 2020; Mission Possible Partnership, 2022).
• Create and widely implement certifications and labeling of low-emissions steel to increase access to funding for and promote consumer choices towards low-emissions steel.
• Require or incentivize large steel consumers to decarbonize their value chains.

Policy targets to increase investment security include:

• Provide access to funding for low-emissions steel projects and reduce or eliminate future investments in BF-BOF steelmaking. This should be done in collaboration with financial stakeholders to ensure consistency and effectiveness. Instruments could include concessional and subordinated loans, low-interest loan guarantees, reimbursable advances, equity investments, debt guarantees, subsidies, and tax incentives such as rebates, tax credits, or tax deductions.

• Collaborate with public and private investors to develop public-private partnerships and blended finance mechanisms to reduce investment risks.
• Create guaranteed markets, contracts for differences, priority market access, and minimum content shares to reduce investment risks.
• Incentivize and create demand signals that provide market and investment security:
  • Exhort the creation of bilateral offtake agreements between large steel consumers and producers to provide direct demand signals.
  • Incentivize volume-specific public future purchase commitments for low-emissions steel. They can be pooled and may or may not be directed towards a specific producer.
  • Incentivize or require large steel consumers to decarbonize (e.g., through their supply chains) to create indirect demand signals. Organizations and investors can also make decarbonization commitments to promote such demand signals.

Examples and Case Studies

First Movers Coalition

SteelZero Procurement Pledges

UN IDDI Public Procurement Commitments

H2 Green Steel Pre-Selling

BMW Green Steel Deal

Mercedes-Benz Green Steel Equity Stake

Ford Green Steel Purchase Commitment

German Carbon Contracts for Differences

Responsible Steel (Green Steel Standards)

Green Public Procurement Program with Emissions Intensity Threshold in California

EU Green Public Procurement Criteria Draft 2022

External Links

The EU Emissions Trading System (ETS)

ICAP International Emission Trading Systems Map

The EU Carbon Border Adjustment Program (CBAM)

World Bank - Public Private Partnerships

Commitment to Green Construction with Public Funds