This is an extract from a recent paper “Investor priorities for transitioning the European steel sector” by IIGCC. IIGCC has worked with a group of investors to identify areas for enhanced policy interventions that would most effectively de-risk and support the transition of the European steel sector.
Introduction
The steel industry is responsible for 7-9% of global CO2 emissions and around 5% in Europe. Steel is a crucial input to construction, energy infrastructure, machinery, and transport, all strategic sectors that support jobs and economic growth across Europe. The steel sector’s decarbonisation is essential both for the economy-wide shift to net zero and for the alignment of investment portfolios with the transition. Creating a supportive policy environment for the transition of high emitting sectors is critical for achieving Europe’s commitment to climate neutrality by 2050. Investors committed to working towards a net zero and climate resilient future – in line with their fiduciary responsibility to their clients and beneficiaries – see a net zero steel sector as an opportunity for job creation and industrial innovation in Europe.
In this context, the European steel industry is facing a historic, strategic turning point with risks and opportunities ahead. Investors see Europe as well positioned to lead the global transformation of the steel sector. The EU is a large, highly developed economy with generally high-end steel production that can seize the opportunities and show what is possible, paving the way for other regions to follow. The EU has a window of opportunity to invest in the steel industry’s transformation. European steel producers will need to replace a significant amount of their long-lasting assets in the coming years: it is estimated that ~70% of existing EU steel capacity will reach its end-of-life by 2030. Action by regulators, policymakers, investors, customers, external stakeholders and steel companies has led all of Europe’s leading steelmakers to set net zero targets. However, much more is needed on all fronts to turn these targets into reality.
Policy recommendations
A. Improve circularity in the steel value chain:
1. Incentivise capital investment to switch to electric arc furnace (EAF) production.
2. Introduce enhanced measures to reduce contamination in recycled steel, particularly from copper wires.
3. Implement policies to increase market demand for high-quality recycled steel in the EU and incentivise efforts to improve scrap quality.
4. Align existing EU policies to remove disincentives to increase the use of recycled steel in steel production.
5. Support open and competitive international markets for recycled steel.
6. Incentivise reduced consumption through material substitution and the redesigning of products.
B. Develop a clean industrial strategy that delivers clean power at a low price and accounts for the steel sector’s capital-intensity:
1. Provide a transparent sector roadmap for European steel.
2. Accelerate action to grow Europe’s renewable energy infrastructure.
3. Accelerate efforts to boost the development and uptake of renewable hydrogen in Europe.
4. Design, harmonise, and implement carbon contracts for difference support schemes.
5. Clarity on the financial incentives and mechanisms to support the transition from coal-dependent blast furnaces to low-carbon steelmaking by 2050.
6. Transparent standards for a science-based and industry-wide definition for green steel.
C. Stimulate demand for green steel:
1. Use public procurement of steel as a tool of innovation and industrial strategy to drive volumes of decarbonised steel to market.
2. Establish quota systems to mandate the use of a proportion of green steel in specific products/sectors.
3. Provide financial incentives in the form of point-of-sale subsidies, tax exemptions, post-purchase rebates, or tax credits.
4. Define reporting guidance and requirements for life-cycle emissions standards for key steel-consuming products.
D. Manage human capital and the workforce:
1. Develop, in close consultation with social partners, communities, and companies, a more detailed framework and roadmap for the steel workforce integrated into a clearer transition pathway for the sector.
2. Integrate just transition planning into national, regional and sectoral plans.
Economic challenges: In addition to the investments needed to decarbonise, the European steel sector is also facing an extremely competitive international environment. Globally there is a rising imbalance between steelmaking capacity versus demand. Historically a net exporter, European steel faced a significant and seemingly permanent fall in demand after the 2008 global financial crisis. Since 2016, the EU has been a net importer of finished steel products. EU producers also deal with structurally higher average production costs (e.g. for energy, labour and input materials) compared to other major steel making regions.
Product types: While a range of steel products are made in Europe, European steel is mainly a premium market made up of high-quality manufacturing. There are generally two categories of steel products: flat products (e.g. sheets of steel used by the automotive sector) and long products (e.g. rods or beams used in structural applications). In the EU, demand for the former is notably larger than for the latter. In 2022, flat products made up 59% of European market supply and long products 41%. Flat products generally require higher quality steel to make. Producing premium flat steel products via scrap-EAF is more challenging due to the presence of tramp elements in steel scrap meaning it is generally downcycled.
Key off-taking sectors: Construction is the largest single steel consuming sector in Europe, representing 37% of finished steel demand. It requires mainly long products, potentially making it a strong candidate for growing demand for recycled secondary steel made via scrap-EAF. The automotive sector is the second largest steel off-taking sector with 17% of total finished steel demand. However, it is the largest end-user of those higher-quality flat steel products that generally require primary steel production.
Policy: The policy context for decarbonising the steel sector is set by the EU’s emissions reductions targets and its carbon pricing regime. The EU’s 2050 climate neutrality goal and 2030 55% emissions reduction target require deep and sustained cuts in industrial emissions. The key policy tool to stimulate these is the EU Emissions Trading System (ETS), which sets a price on carbon for in-scope sectors, including steel, through a cap-and-trade system of allowances. Steel producers have never paid the full ETS carbon price as they have always received a very significant percentage of their required allowances for free. This has largely achieved the aim of shielding the industry from financial costs that would disadvantage it compared to international competitors and risk ‘carbon leakage’. The recent revision of the EU ETS finally resulted in a decision to phase out free allocations between 2026-2034 and replace it with a carbon tariff on imports, known as the Carbon Border Adjustment Mechanism (CBAM). From 2026, EU importers of goods covered by CBAM, including steel, will have to pay a carbon price determined by the weekly average price of ETS allowances. This means that over time both domestic and imported steel will face the full carbon price signal of the ETS, with the intention that this will drive investments in green steel production.
European just transition policy: Europe’s just transition policies are generally comprehensive compared to most other regions. However, despite its long history of cohesion policy, until recently the EU had relatively few programmes focused specifically on a just transition. The just transition plans that exist, both at the European and national levels, are mainly designed to support areas most affected by the shift away from coal power generation and mining. This is the case even in Spain, the country with the most developed just transition policies in this domain, where support is centred on those impacted by the closure of coal mines and coal-fired thermal power plants. Europe’s just transition policy, including the Just Transition Mechanism under the Green Deal, has also been criticised on several fronts. These include fragmentation, inadequate legislative underpinning, and insufficient funding to meet the scale of transformation facing European workers and communities. Implementation largely rests with Member States. As such, there does not seem to currently be a clear policy plan, roadmap or support structure for the transition of Europe’s steel sector workforce at either the EU or national levels.
Recommendations for policymakers: For an effective transition, policymakers at the EU, national and sub-national levels must enhance their dialogue with companies, workers and communities in the steel sector. They should develop, in close consultation with social partners, communities, and companies, a more detailed framework and roadmap for the steel workforce that should be integrated into a clearer transition pathway for the sector. Integrate just transition planning into national, regional and sectoral plans. This should include requiring Member States to embed just transition elements more strongly into their National Energy and Climate Plans. These should emphasise future workforce planning and support in skills development at the national, sectoral and local levels to enable low-carbon steel production to be transitioned in as coal-based production is phased out.
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