The steel industry, notorious for its significant environmental impact, is undergoing a green transformation, and Europe is at the forefront of this change. By 2030, the continent is poised to house nearly 50 low-carbon steel projects, while the United States currently has only two such initiatives.
The Leadership Group for Industry Transition’s compilation of projects projects a substantial increase in green and low-carbon steel ventures in Europe, reflecting the region’s commitment to sustainability. In stark contrast, the United States lags significantly behind, indicating that Europe’s dedication to environmentally friendly steel production is unparalleled.
Colin Richardson, the steel lead at Argus Media, a commodities-pricing agency, explained, “There is certainly more investment in European green-steel capacity, driven by the fact carbon has a cost in Europe. EU policy is essentially designed to mean that cost rises over time, incentivizing polluters to reduce the amount of emissions [allowances] they need to purchase.”
Several factors are propelling Europe’s push towards green steel, with policies playing a crucial role. The European Union’s Carbon Border Adjustment Mechanism (CBAM), which entered a trial phase on October 1, stands as a prominent driver of change. CBAM is set to require importers to pay the bloc’s carbon tax on select imports, including steel, if they originate from countries without similar emissions taxes. As CBAM takes effect, free carbon allowances for EU steel producers are phased out.
According to the Brussels-based think tank Bruegel, by the end of the decade, a quarter of Europe’s steel requirements will be met from low-carbon sources, emphasizing the continent’s commitment to sustainability. In contrast, the United States is projected to derive just 10% of its steel from similar projects, as per research from the Rocky Mountain Institute, an energy think tank.
The necessity for transitioning to low-carbon systems is more pressing in Europe, where 57% of steel production occurs in coal-fired blast furnaces, compared to electric-arc furnaces. In the United States, the ratio is approximately 30% coal and 70% electric furnaces.
However, with most American steel mills relying on fossil-fuel-based electricity, European investments could enable the continent to leapfrog the U.S. in low-carbon steel production, securing a more substantial local supply of green steel.
“The European policy environment is much more advanced, which means we can be that [much] more ambitious,” noted Nicola Davidson, Vice President of Sustainable Development and Corporate Communications for steel giant ArcelorMittal. Davidson specifically cited the EU’s CBAM as a driving force behind the progress.
Cleaning up the steel industry is imperative for achieving climate goals, as steel plays a crucial role in developing the infrastructure and technologies required for the global energy transition. Steel production currently accounts for 7% of worldwide carbon emissions, according to the International Energy Agency. While the technology for producing low-carbon steel is available, scaling up production is vital to cost reduction. Investments in Europe are rapidly advancing due to carbon pricing, stricter emissions policies, and increasing customer demand.
Demand from steel buyers also plays a significant role in driving investment. Startups like H2 Green Steel from Sweden have secured deals to supply low-carbon steel to prominent companies like IKEA, Mercedes-Benz, BMW, and Scania. The company has raised over €5 billion in financing through private-equity and debt sources by lowering carbon emissions through hydro and wind power to fuel its operations.
Green steel not only benefits the environment but also allows car manufacturers and other buyers to reduce the embedded emissions in their products. Achieving net carbon neutrality often relies on decarbonizing the steel supply chain, an essential aspect of many companies’ sustainability goals.
Europe may lead the way in green steel, but it is worth noting that the Inflation Reduction Act offers significant tax incentives to establish low-carbon steel production in the United States. By 2030, it is anticipated that the IRA will encourage investments that produce approximately eight million tons of low-carbon steel, nearly 10% of U.S. steel demand.
Potential locations for green steel hubs in the United States include the Great Lakes, Texas, and the Pacific Northwest regions. However, these hubs will require expanded grid and renewable energy capacity to thrive.
While the U.S. and Europe are influential steel producers, it’s important to remember that over half of the world’s steel production occurs in China. The majority of Chinese production relies on blast furnaces, which are expected to decrease from 90% to 75% by 2030. Nevertheless, coal- and natural gas-powered operations are expected to remain dominant in China due to the economic efficiency of blast furnaces.
Efforts are underway to use more efficient raw materials and implement carbon capture and storage in China, but blast furnaces remain the most efficient and cost-effective choice for steel producers. As a result, the transition away from blast furnaces is expected to take time in China.