The modern world is built from steel – 1.8 gigatons (Gt) were produced last year, 90% of all metal produced globally. From wind turbines to electric vehicles, steel will be an integral enabler of the energy transition. But steel production is a major source of greenhouse gas (GHG) emissions. Most steel is still made using coal to reduce iron ore, a process that emits roughly two metric tons of CO2 per ton of steel. The industry accounts for 7% of global GHG emissions from the energy system – equal to global aviation, shipping and chemicals emissions combined.
For the world to reach net-zero emissions by 2050 in line with IPCC (Intergovernmental Panel on Climate Change) recommendations, attention needs to turn to industrial sectors such as steel, where emissions in the production processes themselves and the need for very high temperatures make the path to decarbonisation more difficult than in the power sector.
Ambitious targets to reach net-zero
The good news is that a revolution in steel production is now within reach. Major steel-producing countries, including China, Japan, the EU and now the US, have set ambitious targets to reach net-zero economies. Achieving them demands not just further material efficiency, greater recycling of scrap steel and continued process efficiency; it will take a shift to radically different zero-emissions primary (ore-based) steelmaking. A range of solutions – from replacing coal with green hydrogen as a reducing agent, to carbon capture and storage or use (CCS/U), and eventually direct iron electrolysis – are approaching technological readiness. These solutions are being championed by a number of high-ambition steel producers – including the two largest players, Arcelor Mittal and China Baowu Group – who have announced commitments to net-zero steelmaking.
However, the business case is not yet there to unlock investment in green steel production at scale. Low-emissions steel products will cost 20-50% more than steel made through the conventional high-carbon route, and even more for first-of-a-kind plants. Carbon pricing could bridge this gap in theory. However, a coordinated global carbon pricing mechanism is nowhere on the horizon; and regional policies imposing additional costs on steel producers risk impacting market share and investments in the most climate-conscious jurisdictions, while emissions shift to places where the cost of polluting is cheaper.
We have a narrow window of opportunity to act. Steel plants run almost continuously, and major reinvestment and refurbishment takes place only every 20 years or so at each production site. About half of Europe’s steel assets are up for reinvestment this decade, providing a unique opportunity to kick-start the transition by switching those production assets to zero-emission technologies. But if these technologies aren’t brought to market quickly enough, we risk locking in high-carbon investments for another 20 years or face the prospect of stranded assets and a slower, more costly transition.
Creating the business case for green steel
Our goal at the Mission Possible Partnership, through the Net-Zero Steel Initiative (NZSI) we support, is to create the business case for green steel
by mobilising key stakeholders across the whole value-chain. High-ambition steel producers are making strides in the right direction, but it will also take their energy and feedstock suppliers, their customers, their financiers, as well as the key governments that shape the steel market to profoundly transform the global steel market.
With the NZSI, we are finalising an industry-backed roadmap to net-zero emissions by 2050
– for release this summer . It will, for the first time, provide a bottom-up picture of how the industry can transition to zero-emission production on a global scale and what it will take to get there: the pace at which GHG emissions can be abated, when and where different decarbonisation strategies can be deployed, the investment and policy interventions needed to unlock them – all tested and validated with our industry partners.
Even if green steel is initially more expensive at a business-to-business level, the end-consumer will scarcely notice the price difference.
—Faustine Delasalle, Co-Executive Director, MPP
The roadmap is only a tool to an end: it will be the reference point for key stakeholders to agree tangible commitments to action that will change the business case for steel manufacturers in the 2020s, unlocking the profound value chain transformation the sector needs.
As our paper
Steeling Demand released today demonstrates, bilateral offtake agreements between green steel manufacturers and purchasers in the automotive and white goods industries can unlock investment in the first wave of commercial-scale green steel production plants. Combined with broader public commitments to greener supply chains from users down the construction value chain, this can create a fast-growing premium market for green steel. Even if green steel is initially more expensive at a business-to-business level, the end-consumer will scarcely notice the price difference. For example, using green steel in a passenger car would add less than 1% to the showroom price of a car while reducing material-related carbon emissions by up to 34%. As pressure mounts to meet voluntary and regulatory emissions targets, competition for materials with lower embodied carbon will intensify. Early movers already include Volvo’s partnerships with SSAB, BMW and BHP Ventures’ investment in Boston Metal, and Kingspan’s partnership with H2 Green Steel.
The finance community is also ready to support the transition of the steel industry. The investment needs are substantial. Transitioning the first plants to green steel in the 2020s, totalling 170 Mt of production capacity, will require $100 billion in investment. Leading lenders to the steel industry — ING, Société Générale, Citi, Goldman Sachs, Standard Chartered and UniCredit — are already working together to support steel sector decarbonisation. The NZSI Steel Finance Working Group will forge methodologies to set global best practices for financial institutions to align their portfolios with climate targets in the steel sector and facilitate investment in green steelmaking. This climate-aligned finance agreement will be released at COP26.
Government support also needed
Yet corporate action alone won’t drive transition at the pace and scale required. Policy interventions that incentivise green steel and support commercial-scale investment this decade are indispensable. Regional approaches are the most likely route in the absence of an international framework, but this should be a race to the top. Raising the carbon price that steel producers pay for emitting CO2 – while maintaining a level playing field with imports, as the EU’s Carbon Border Adjustment Mechanism hopes to do – constitutes a difficult but important step.
Government support will also be needed to de-risk investments in new technologies and to deliver the rapid scale-up of fossil-free electricity, hydrogen and carbon capture infrastructure that green steel requires. Public procurement initiatives, such as those being explored by the Clean Energy Ministerial, and product standards based on lifecycle emissions can also help to move green steel from a premium market to the mainstream.
Moving to clean energy is key to combating climate change, yet in the past five years, the energy transition has stagnated.
Energy consumption and production contribute to two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018 energy intensity improved by 1.2%, the slowest rate since 2010.
Effective policies, private-sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.
Benchmarking progress is essential to a successful transition. The World Economic Forum’s
Energy Transition Index, which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the world’s largest emitters, including US, China, India and Russia. The 10 countries that score the highest in terms of readiness account for only 2.6% of global annual emissions.
To future-proof the global energy system, the Forum’s
Shaping the Future of Energy and Materials Platform is working on initiatives including, Systemic Efficiency, Innovation and Clean Energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.
Mission Possible Platform (MPP) is working to assemble public and private partners to further the industry transition to set heavy industry and mobility sectors on the pathway towards net-zero emissions. MPP is an initiative created by the World Economic Forum and the Energy Transitions Commission.
Is your organisation interested in working with the World Economic Forum?
Find out more here.