HomeLow carbon futureDoes it make sense to give the steel industry money to reduce its climate impact?

Does it make sense to give the steel industry money to reduce its climate impact?

It’s been ten months since Tata Steel, which owns the big steelmaking plant at Port Talbot in South Wales, effectively gave the government an ultimatum: support our decarbonisation plans or we may close. 

There were positive noises at the start of the year, suggestions that £300 million each were on offer to Tata and British Steel which owns the UK’s other blast furnace based steelmaking site at Scunthorpe, but things then went quiet. Only now is there news that a deal for Tata at least might be included alongside support for a battery plant for Tata-owned car company JLR in Somerset.  

Steelmaking matters. It’s emblematic of industrial might and self sufficiency. The UK already has much lower production capacity than other countries of similar wealth. It’s popular, on the whole, as a source of well paid jobs in areas with steel plants. And it can help underpin a host of other connected businesses. No politician wants to lose steelmaking on their watch. Quite apart from how that looks are the challenges of finding other local jobs and the site clean up and redevelopment costs, as the ongoing saga around Teesside is showing. 

The world is moving to low carbon steel
Steel is a huge emitter of carbon, responsible for somewhere between seven and 11 per cent of global emissions depending on the accounting method. But it’s increasingly hoped that the tide can be turned, even in supposedly hard to abate sectors.  

Five years ago work began on the HYBRIT pilot plant in Sweden. This replaces coal as the reducing agent for iron ore with green hydrogen. Its investors are mainly state owned but it has been a gamechanger that they, and the Swedish government directly, were willing to put money behind a solution to the conundrum of how to make low carbon virgin steel.   

A swathe of European producers now have plans to move to hydrogen steelmaking – backed by government support – and the world’s first large scale green hydrogen plant, H2 Green Steel, also in Sweden, hopes to begin production in 2025. 

HYBRIT’s development coincided with a big push from the corporate world towards science based climate targets, which include reducing scope 3 (upstream) emissions from suppliers of materials like steel, and crucially the emissions from coal associated with steel. There are now 36 businesses, including big names like Volvo, British Land, Lendlease and Iberdrola, with commitments to buy low carbon steel through the SteelZero initiative. The UK government kicked off global co-operation on clean steel procurement by governments at the COP26 climate summit. 

Most steelmaking takes place in Asia, not Europe. Globally, there is more steelmaking capacity than is needed, which is depressing prices. But governments outside Europe are looking to modernise their industries too. 

China, which makes half the world’s steel, has committed to peak steel emissions by 2030; this is less than the 2025 goal originally hoped for but it has measures in place to develop hydrogen and trial its use in steelmaking. India is not aiming for its steelmaking to reach net zero until 2070, by which time its domestic demand will have multiplied many times, even if resource efficiency is built in. Despite this, and its more limited resources, India is developing a mission that will map a route to this goal, including R&D funding and the public procurement of low carbon steel.  

The steel industry in Japan, the next biggest producer, has resisted carbon pricing for 20 years, but the government’s new green transformation programme has a focus on steel including a ten million tonne production target for low carbon steel by 2030 and support for hydrogen based production. There are questions though as to whether this is the right approach, given Japan’s lack of domestic hydrogen supply or whether the underlying energy sources will remain fossil based.  

In the US, another major producer, the Inflation Reduction Act has brought funding for industrial decarbonisation projects, tax breaks for hydrogen production and carbon capture (an alternative route to addressing the emissions from making virgin steel) and a major new federal ‘buy clean’ programme. The next steps on a trade deal with the EU on clean steel is causing difficulties but there is a suggestion that charges could be applied to steel from high emitting countries and the US is also planning its own broader carbon border adjustment which would include steel. 

Globally, the debate has shifted from whether it’s possible to clean up steel production to how to manage the logistics, including how to provide enough renewable power and work with different types of ore. There is also the question of whether sources of iron ore, like Australia, should make the iron locally using domestic hydrogen and export it to be turned into steel elsewhere, rather than supplying the ore and hydrogen separately. 

Steel recycling is a logical route for the UK
Meanwhile, in the UK, Tata and British Steel appear to be opting to replace at least half their ageing blast furnace capacity with steel recycling capacity, in the form of electric arc furnaces (EAF).  

That might sound less glamorous than virgin steelmaking but it’s a sensible move for a scrap-rich country like the UK. It’s something Green Alliance highlighted as a no regrets first move in our report last year on UK steelmaking.  

The governments in New Zealand and Canada are already supporting similar moves to EAF and Japan is shifting some subsidies in that direction. Despite all the attention going to hydrogen steelmaking, some less developed economies are also looking at how to make better use of scrap as more and more becomes available. China expects a doubling of EAF capacity by 2030, although whether that will be powered by low carbon electricity is another question. India wants to start tracking and recycling its scrap and South Korea is developing approaches to improve scrap quality making it more useful. 

It’s not ideal to give public money to private companies, especially ones that aren’t UK owned. To help the industry decarbonise, it would be better to improve the investment environment with lower electricity prices and measures to improve scrap steel quality, for instance. These measures are needed anyway to keep EAFs competitive. But there’s a strong competitive case for some UK capital support, especially in the face of considerable subsidy being made available in other countries. 

Our calculations suggest that providing a relatively small government investment of £300 million to each of the two blast furnace sites could, if used appropriately, save as much carbon annually as taking 2.4 million petrol cars off the road. That’s a very good result for a relatively modest investment. 

The window is closing for the UK to get ahead in the world as a next generation steel producer. But with our growing renewable energy capacity and potential for circularity to support the industry, there could still be space for UK leadership in a resource efficient, high value green steel sector.  

Written by

Head of Policy at Green Alliance