Carbon Control and Competitiveness Post 2020: The Steel Report

Brussels, 23 July 2014

Karsten Neuhoff, Ian Christmas, Arjan van Rooij, Misato Sato, Oliver Sartor ,

Manuel Haussner, Andrzej Ancygier, Anne Schopp, William Acworth

++++++ Project team

Scope of the project

• Independent, objective research on the evidence of state of industry and

past and current effectiveness of the EU ETS and other instruments for

Energy Intensive Industries

• Combine data analysis, interviews with senior industry managers and

CEOs and workshops

• Assess policy development necessary to advance portfolio of mitigation

opportunities outlined in low-carbon roadmaps whilst maintaining a

sustainable industry

• The study of the steel sector is the second stage of the project, following

a first study on cement.

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Outline

1. Present state of the European steel industry

2. Scope for and success with CO2 emission reductions to date

• Production Efficiency

• Break through technologies

• Tailored steel types

3. What is needed to unlock mitigation potentials?

• ETS

• Regulation

4. Broader Perspective

5. Next steps for the study

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• Efficient steel use

• Recycling

• DRI/EAF process

• Engagement of Consumers

• Innovation policy

Present state of the European steel industry

• In 2013 steel use in the EU still 25% below the pre-crisis

levels

• Steel demand unlikely to return to 2007 tonnage levels

• Closure of significant level of excess capacity required to

achieve adequate profitability

• Profit margins on average below level to justify re-

investment

• Gas prices in EU not competitive with North America.

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Present state of the European steel industry 1

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Data: World Steel Association, 2013, Global Steel Statistics; Eurostat Structural Business Statistics

Present state of the steel industry

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Data: Orbis

Scope for CO2 reductions – overview 2

Emissions / t steel

Process related emissions

Illustration B

F /

BO

F

Scra

p (

recy

clin

g)

Iro

n o

re

EAF

1,88 tCO2/t Steel

EU Steel Production

168 Mio. t

Fuel related emissions

4. Substitution/efficient steel use

2. Break through technologies (e.g. CCS)

3. Higher quality / lower weight steel

DRI /EAF

1. E

ner

gy E

ffic

ien

cy o

f p

rod

uct

ion

5.Higher recycling rates

Low-C Electricity

1- Energy efficiency

• 10-15% Emission reduction potential in Western Europe

• Investment limited by:

• Short pay back requirement (typically 2-4 years, now shorter)

• Low profits and growth prospects of industry

• Financial capacity of industry limited.

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2 - Breakthrough technologies pursued with ULCOS 2

• Expectation of climate policy initiated ULCOS project

Why have ULCOS projects stalled?

• CCS-based technologies only viable with permanent carbon pricing regime

• Steel firms not prepared to finance and take whole risk (EC was not prepared to take

risk share under NER 300 facility)

• (Political challenges of CCS in Europe)

R&D Demonstration

(Laboratory)

Pilot plant (small scale)

Pilot plant (large scale)

Commercial Installation

Electrolysis: laboratory scale only, requires C free electricity, very long shot

Top Gas Recovery: pilot plant proven, but €300 mio.

demonstration plan cancelled for lack of suitable funding

HISARNA pilot plant working at Ijmuiden but funding in doubt

for scale-up

CO2 free (power)

20-30% CO2 savings with CCS 60-75%

3 – Higher value steel products to deliver service

with less weight 2

• Automotive 30-40% savings in body weight over the last 10 years

• Innovative high strength steel & forming techniques (tailored blanks, hydroforming)

• With competitive pressure from alternative materials

• Facilitated by value chain integration & regulatory requirements

• UltraLight Steel Auto Body - private sector initiative 1990s

• To meet fuel efficiency standards lighter components required

• R&D expenditures maintained through crisis period

4 – More efficient use of steel in finished products

Example buildings:

• Many products made of steel could be 25-30% lighter (technically)

• Steel use in buildings can be saved, for example, by using tailored

shapes, supporting multiple loads with fewer structures, aligning

loads to avoid bending, avoiding over-specification of loads etc.

• But several barriers inhibit change:

• Excess use of steel can be cheaper than using less (e.g. risk of

component failure, higher cost during design, quality control)

• Fragmented value chain

• Existing standards and regulation (e.g. minimum requirements

instead of target requirements)

(Allwood et al 2012)

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5 – Recycling of scrap

• Recycled steel has emissions up to 75% below primary steel

• Availability increases with maturity of economy, EU scrap=64%

demand

• EU exports around 20% of its scrap because

• Typically BOF furnaces only use 25% scrap

• EAF can use 100% scrap, but share small outside Spain and Italy

• Global CO2 emissions not influenced – only regional increase

–> no need to constrain scrap-trade

• Recovery rates vary across products

• Cars (almost 100%), steel packaging (74 %), buildings (lower)

–> unlock improvement potential

• Declining quality of scrap due to increasingly complexity of products

–> explore options to improve separation during design & recovery.

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Switching to DRI/EAF process route 2

• DRI is not economic in EU due to high gas prices

• Combine DRI in North America with EAF in Europe?

• Still valid with methane emissions linked to North American shale gas?

BOFDRI / EAF

CCS (?) - coal

Carbon price

Gas price

CCS (?) - gas

Asssume (i) coal price of ### (ii) new investment

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US$

/mB

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Japan

Europe

US

Canada

What is needed to unlock mitigation potentials? 3

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Steel making

3. Tailored steel types

4. Materials Design

4. New/retrofit Size of structure

4. Tailored shapes

Incentive (ETS)

Regulate process

Building regulation

1. Efficient production

2. Breakthrough steel making tech.

Manu-facturer

Construction industry

Building users End of

life

Funding (C-price in value chain)

5. Recycling Regulate deisgn for easier seperation at recovery

Engage

Label / Engage

Innovation support

C-Price in value chain

EU ETS

Sufficient carbon price level necessary

• Early EU ETS triggered review of mitigation options / ULCOS

-> Higher carbon price necessary to guide low-carbon choices

Robust leakage protection required for credible carbon price

• Free allowance allocation on historic reference imprecise (some

steel companies selling €100 mln others buying some allowances)

• Uncertainty about level of future free allocation and activity level

requirements

Carbon price needs to be reflected in steel price for consumers

• To create incentives for tailored steel/efficient steel use

• To create commercial perspective for break through technologies

3a

Option 1: Shift to output based allocation (dynamic alloc)

• Simple allocation principle for corporate decisions

• Avoids large surplus allocation / distortions between companies

• Easier to implement than other options starting from existing system

Challenge

• Undermines carbon price signal for tailored steel & efficient use

• Uncertainty about level of future leakage protection

• Either cross-sectoral reduction factor adjusts allocation to cap

• Or, some sectors must „cross subsidize“ other sectors (e.g. extra

allowances taken from auctioning pot)

• Limited credibility of regime of continued funding from other

sectors/public budget for role out of break through technologies

3a

Options 2-4: Reflecting carbon price in product price

Three options that can be used without common global carbon price:

1 Border levelling

Non border levelling:

2. Consumption tax on embodied steel in product

3. Output based allocation & inclusion of consumption in ETS

Common Features:

• Competing commodities need to be included (cement, …)

• Requires clear strategy for use of revenue for climate action

3a

Option 2: Border levelling

• Applying best available technology benchmark to imports&exports:

• Allows for full auctioning and provides full leakage protection

• Incentives and revenue for low carbon options

• Challenge

• Concern about international repercussions;

• Question how far in value chain to apply adjustment:

3a

Primary steel production Intermediary product

Recycled steel

Car

Body, Engine Washing machine

body

Washing machine

Radio

Washing machine controlls

Beems

Border levelling for steel content

Option 3: Consumption tax on embodied steel in products

Tax on all steel bought by Europen consumers (irrespective of origin)

Option A

• Tax based on tracked carbon emissions (with fall back rate)

• Creates full incentives across value chain

Option B

• Tax proportional to steel volume times benchmark rate

• Creates incentives for tailored steel and efficient steel use

Challenge

• Politics of implementing a tax at European level

• Option A: Tracking emissions specific to product&confidentiality?

• Option B: Incentives for efficiency/break-through tech. in production?

3a

Option 4: Combine output based allocation with

inclusion of consumption in ETS

Develop fourth option for leakage exposed sectors in ETS Directive

• Incentives for efficient production from output based benchmark alloc.

• Combined with downstream charge on all steel consumed in Europe

Implementation:

• Steel produced or imported is recorded & transfer traced (tons of steel)

• Charge to climate action trust fund when steel moved to consumption

(steel weight * benchmark * quarter averaged ETS price)

Evaluation:

• Efficient carbon price, no WTO concern

• Administration: Open discussion, learn from existing systems (alc., tobac.)

• What threshold for products covered when imported (as with BTA)?

3a

Regulatory standards

• Use standards, specifications, and regulations to require final products /

buildings with less embedded carbon

• Consider Total Life Cycle Analysis to avoid distortions

• Maximize the collection and recycling of end of life steel scrap

3b

Ensure engagement of consumers

Engage consumers to facilitate innovation / diffusion of new products:

• Labels for carbon footprints to trigger customers’ consciousness

• Ensure life cycle analysis reflects all product phases

• Enhance awareness to improve recycling rates

Create platform for cooperation between steel and construction sector

3c

Catalyze innovation / strategic investment

• For processes: RD&D programme on long term breakthrough

technologies (NER300, EIB, Risk Sharing Finance Facility, H2020):

• Address high cost structure

• Address scale of investment and implied slow innovation speed

• Coordinate with investment cycle of refurbishments

• Ensure risk allocation that facilitates participation

• For bulk products: Enhancing value added / specialisation promising

strategy for steel industry:

• Innovation policy for new products, e.g. with public procurement

3d

A vision for the steel sector and it‘s customers

• Climate policy can neither resolve nor ignore surplus capacity

• Low-carbon roadmap could become a starting point for industry vision

• Develop joint strategy to unlock portfolio of mitigation options

• Translate roadmap into tangible investment and innovation framework

• Long-term credible leakage protection, carbon price & carbon price

pass through

• Flexibilty under ETS cap avoids controversy about sector target

• Explore complementary regulatory / engagement policies

• Provide public funding and support for innovation

• Innovation & engaging customers strengthens position of EU steel

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Next Steps and the Climate Strategies Programme

• Presentation / consultation of insights from study – July

• Draft report for review - early September

• Publication of final report - October

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