Story | Market Insights
Carbon pricing set to turbo-charge lower carbon steelmaking
February 18, 2025
Carbon pricing is emerging as a key driver for adopting lower-carbon steel production, particularly in countries where robust carbon pricing mechanisms are reshaping the economics of feedstocks and production methods. The EU Emissions Trading System (ETS) and the Carbon Border Adjustment Mechanism (CBAM) are setting a precedent likely to be adopted elsewhere. While the impact remains concentrated in regions where carbon prices have reached levels high enough to affect industrial economics, the pressure on steelmakers to adapt to the need to decarbonize will only increase.
Steel is an indispensable material renowned for its durability, malleability, tensile strength, and load-bearing capability. This makes it a critical component in the global construction, automotive, transportation, and manufacturing industries, as well as in large infrastructure projects and a host of other uses.
Yet its production accounts for approximately 7% of human-induced greenhouse gas (GHG) emissions. Traditional blast furnace-basic oxygen furnace (BF-BOF) steelmaking relies heavily on coal and energy-intensive processes. With approximately 70% of global steel production—around 1.32 billion tonnes annually—using the BF-BOF route, the sector’s significant carbon footprint underscores the urgency for transformative change.
With a growing awareness of the need to reduce the build-up of atmospheric carbon emissions, plantmakers and steel producers have begun to chart various routes through to a lower-carbon future.
Cleaner steel production methods, such as those using scrap or DRI, have long been of interest in countries which lack domestic coal resources for BF steelmaking.
Although some BF-based steelmakers have been resistant to transformative changes, incremental efforts—such as greater scrap use, energy efficiency improvements, and hydrogen injection—are being explored to mitigate emissions.
Innovative technologies like the MIDREX Flex® and MIDREX H2™ provide a viable alternative. They enable steelmakers to produce high-quality metallic iron with significantly lower emissions by using natural gas or hydrogen as reducing agents.
There are many forces driving this evolution in steelmaking
A combination of regulatory, financial and market pressures is driving the decarbonisation of steel. Meanwhile, downstream industries like automotive and construction demand greener steel with lower associated CO2 emissions to meet their sustainability targets.
However, other forces are also coming to bear on steelmakers that originate entirely from outside the industry.
As the world moves closer to net zero emissions by 2050, pressure has increased on financial lenders to invest in lower-carbon businesses to minimise their exposure to potential stranded assets.
Moreover, almost all governments have submitted climate plans that include emissions reduction targets under the Paris Agreement. This means national regulators are under pressure to find ways to decarbonise emissions-intensive industries in order to meet ever-tightening emissions targets.
The recent withdrawal of the USA from the Paris Agreement under President Trump provides an example of how this kind of environmental commitment can waver and potentially have knock-on effects in other countries. Nevertheless, almost all countries continue to set climate targets. In most cases, this translates into industrial and environmental policy that industry must work within.
Carbon prices set to shift the economics of steelmaking
A major factor driving the need for the decarbonisation of steel is the emerging plethora of carbon pricing systems.
One of the clearest examples is the EU Emissions Trading System (EU ETS). The system requires carbon-intensive industries to hand over carbon allowances every year to match their verified CO2 emissions, and this places a cost on emitting CO2. Until 2018, the EU ETS had generated carbon allowance prices of less than €10 per tonne of CO2 emissions. This has radically changed in recent years, with prices surging to between €50 and €100 per tonne – a price that heavy industrial companies can no longer ignore.
However, an even more significant change is just around the corner.
Until now, EU-based steelmakers were given free carbon allowances to protect them from competition from countries that have not yet established carbon pricing systems. This is all set to change in the coming years, with the start of a phase-out of free allowances under the EU ETS in 2026, alongside the introduction of the EU’s Carbon Border Adjustment Mechanism (CBAM) which will place an equivalent charge on the carbon content of iron and steel imported into the EU.
In short, EU-based steelmakers will soon face a much higher price for emitting CO2 than they have been accustomed to, and in the long run, this is likely to change the economic calculus for the processes used to make steel. The EU’s CBAM is likely to push this cost out to other countries that trade with the EU.
Companies forge ahead with DRI and green hydrogen
Solutions are on the horizon that could allow steel production to remain profitable in a low-carbon world.
German steelmaker thyssenkrupp Steel is pioneering a hydrogen and renewable energy premium steel facility at Duisburg. This facility will use a direct reduction plant, moving beyond the coal-fired blast furnace approach. The company says that each tonne of green hydrogen will save 28 tonnes of CO2. This calculation will be highly relevant for production costs when free carbon allowances are withdrawn completely in the EU by 2034.
Meanwhile, Swedish steelmaker Stegra is developing a plant at Boden, northern Sweden, which includes a giga-scale electrolyser powered by renewable electricity, which will split water into its constituent parts, hydrogen and oxygen. The company says the facility will be Europe’s largest green hydrogen production plant. Stegra will refine iron ore into ‘green’ iron by switching from coal to green hydrogen, allowing it to produce near-zero emissions steel. Stegra expects the plant to reduce steel emissions by over 7 million tonnes per year. At a carbon price of €75/tonne, that would represent a theoretical saving of €525 million per year, other costs being equal.
Tata Steel’s Port Talbot steelworks in Wales closed its last blast furnace in September 2024. It is now investing in electric arc furnace technology that aims to drastically cut CO2 emissions. The plant is due to be operational in late 2027.
Carbon pricing goes international.
Traditional blast furnaces are likely to continue operating in countries without carbon pricing, although this is beginning to change as new carbon markets emerge.
Other countries operating national carbon markets include the UK, South Korea, New Zealand, China, and Mexico. Regional carbon markets also operate in the US, for example, in 10 northeastern states and a separate system in California, which is linked to the Canadian province of Quebec.
Other countries are developing carbon markets, such as Brazil, Indonesia, Vietnam, Malaysia, Turkey, Saudi Arabia, the UAE, Oman, Kuwait, and Jordan.
Carbon markets are just one of several factors driving a shift toward lower-carbon steel, sometimes described as ‘green steel’. The emergence of lower-carbon production processes represents a major lifeline for steel companies affected by carbon pricing policies, helping them reduce the mounting costs associated with emitting CO2.
Companies offering cleaner steel production technology and services include Midrex, a global company headquartered in North Carolina, US. The company is a world leader in Direct Reduced Iron (DRI) technology. The process converts iron ore into metallic iron – a high-quality feedstock for steelmaking. It works by passing reducing gases such as carbon monoxide or hydrogen through iron oxide to reduce the oxygen content. The process also requires lower energy consumption than traditional steel production methods. This can reduce CO2 emissions by up to 95% compared with a coke-based blast furnace, depending on the choice of feedstocks, reducing gases and energy source.
As environmental policy frameworks become stronger and more widespread, low-carbon steelmaking processes will likely benefit from increased demand as some steel companies seek to minimize their cost exposure to CO2 emissions.
Sources:
Midrex: About Midrex – Midrex Technologies, Inc.
Thyssenkrupp Steel: Climate-neutral steel – Our strategy | thyssenkrupp Steel
Stegra: Stegra – Decarbonizing at scale – Stegra
SPGCI: Direct-reduced iron becomes steel decarbonization winner
Transition Asia: Steel Explainer: Technology Pathways in the Steel Industry for Non-engineers – Transition Asia
Council on Geostrategy: Port Talbot blast furnace closure: What are the implications? – Big Ask