This is an extract from a recent report “Green Iron Corridors: Transforming Steel Supply Chains for a Sustainable Future” by RMI. In this extract, we specifically focus on Europe.

Key takeaways:

1. Iron ore quality will not constrain shifting to the direct reduction of iron (DRI) in the next decade.

2. Green iron trade can allow traditional steelmaking countries to maintain large parts of their skilled workforces into the future.

3. Restructuring half of primary steelmaking to use green iron could save >$25 billion annually across the 10 highest priority importers at today’s prices.

4. First mover producers and buyers, coupled with strong policy support, will drive initial green corridors.

5. Emerging economies possess strong opportunity to move into this market given their resource endowments.

6. Fast-tracking corridor opportunities between existing and emerging iron exporter regions to the EU and Asia.

EU Case Study: How policy can drive supply and demand

To understand how policies affect a potential Europe green iron corridor, it is necessary to consider a broad landscape of critical policies along the steel value chain and policies supporting renewable energy and hydrogen development. A robust policy framework for exporter countries involves incentives to support the production of hydrogen and the deployment of renewable energy. In contrast, importer countries have strong demand drivers for green iron and steel, including policies regulating the price of carbon pollution. The European Commission has recognized that to meet climate and energy security targets, it will need to import hydrogen, as demonstrated by its ambitious REPowerEU import target of 10 Mtpa by 2030. This target is generally considered an overestimate unlikely to materialize by 2030; however, it remains a significant public recognition from the European Commission that Europe cannot meet its hydrogen demand without imports. Green iron imports have an opportunity to complement these targets by offsetting the amount of hydrogen needed via import. If the EU were to replace its net imports of iron ore with green iron imports (from a H2 -DRI process and in the form of DRI, HBI, or granulated pig iron, which is the product from the ESF after the DRI), this would be the equivalent of importing 2.8 Mtpa of hydrogen, nearly a third of the bloc’s hydrogen import goal.

Within the EU, 57 primary BFs (at 27 sites) representing ~100 Mtpa production capacity are responsible for most of the industry’s 190 Mt CO2 equivalent emissions annually. To date, EU member states have offered capital subsidies (of ~€500 million–€850 million) for four of these BFs to switch to DRI using natural gas. Extending this strategy to the entire fleet would require €20 billion–€50 billion in capital subsidies and would result in a primary steelmaking fleet consuming ~7% of the EU’s natural gas (or approximately three to five liquefied natural gas import terminals capacity) at a time of critically constrained supply. Leapfrogging to hydrogen DRI could alleviate this challenge, and Europe has several supply-side incentives for hydrogen, but the current mechanisms do not have the same scale of funding as does North America (e.g., the European Hydrogen Bank in its first round yielded an average subsidy of €0.46/kg of hydrogen). To deliver on climate commitments, Europe has deployed several robust demand-side policies through strong mandates and carbon pricing mechanisms. The EU’s Renewable Energy Directive (RED III) requires member states to integrate a minimum of 42.5% renewables into their energy systems and use 42% renewable fuels of non-biological origin (RFNBO)- certified hydrogen as part of their total hydrogen use in industry by 2030. RED III will greatly strengthen the prevalence of hydrogen-based products within industry, and although it does not directly affect the iron and steel industry, its mandates could serve as a framework for consuming green iron within the steel industry.

The EU’s main demand lever for decarbonized iron and steel is the ETS, which utilizes a cap-and-trade mechanism to price carbon emissions. Currently, the iron and steel industry receives most of its carbon emissions allowances free, but as free allowance allocations are phased out between 2026 and 2034, the industry will be increasingly exposed to carbon costs. Additionally, the EU is accelerating the reduction of the ETS emissions cap (from an annual rate of 2.2% to over 4% from 2024 onward). These reforms will limit the supply of allowances and could push carbon prices up. Assuming this results in an aggressive increase in the carbon price of $130 per allowance, steel made with imported green iron will begin to outcompete conventional domestic steel as early as 2028. A new form of tariff has been introduced by the EU: the Carbon Border Adjustment Mechanism (CBAM), which places a tariff on the embedded carbon within imports of key sectors, including iron and steel. This measure is designed to prevent “carbon leakage,” which is defined as the potential reallocation of EU-based production, which is exposed to high carbon prices, to countries with fewer emission constraints (this was previously addressed via free allocation of allowances to domestic installations). Hydrogen-produced DRI has a greatly reduced emissions footprint, and the EU’s current import of un-agglomerated iron ore is not covered under CBAM, indicating that the biggest impact of CBAM will be on existing trade of agglomerated iron ore or carbon-intense finished steel products. As CBAM phases in and carbon prices increase, green iron has the opportunity to offset the carbon-intense imports as they incur the adjustment cost.

EU policy landscapes showcase blueprints of how to support and facilitate green iron corridors for exporters and importers, respectively. Beyond incentives within exporting countries, international collaboration and national targets for green iron are imperative in providing certainty to first movers that there is an early market for these goods. Current policies and incentive instruments such as RED III, European Hydrogen Bank and Carbon Contracts for Difference (CCfDs) have laid the groundwork for hydrogen deployment. However, to fully realize the systems and cost benefits of hydrogen-based iron import, an explicit integration of green iron with hydrogen targets, price support mechanisms, and bilateral green trade partnerships between the EU and iron-abundant countries, are needed for a quick ramp-up of green iron trade.

Recommended policy actions for Europe: 

• Ensure the longevity of the existing workforce by expanding funding to reskilling and upskilling programs such as those within the Net-Zero Industry Act with a focus on upstream and iron-related transitions specifically for equitable industry change and direct consultation with sector labor leaders. 

• Set binding targets for the usage of green iron within steelmaking, akin to hydrogen deployment targets under RED III. 

• Encourage the development of methodologies to define green iron, compatible with current steel sector standards (the most robust voluntary and compliance-based standards), and to establish expedited customs procedures for certified iron. 

• Strengthen international partnerships with green iron corridor export candidate countries, incorporating green iron into broader frameworks for green trade. 

• Expand hydrogen-based policy instruments such as the European Hydrogen Bank and H2Global to include international procurement of green iron.

Access the complete report here