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10/12/2016

Steelmakers fear extra costs from ETS reform

Innovation & Industry

Steelmakers fear extra costs from ETS reform

A blast furnace at the UK's Redcar steelworks.

[Archangel12/Flickr]

Carbon market reform could greatly increase production costs for the steel industry from 2020, a difference the European Commission wants to offset with cheaper energy and carbon capture and sequestration technology. EurActiv France reports.

Since 2005, the European Union’s Emissions Trading System (ETS) has demanded that steel producers, like other industry sectors, make efforts to reduce their CO2 emissions. The steelmaking process, in which iron is fused with the carbon from coking coal, is highly carbon-intensive.

The EU’s 437 blast furnaces – or 620 including forges with related activities – are the largest industrial emitters of carbon in the 28-country bloc, producing 160 million of tonnes of CO2 per year. Steel accounts for an estimated 5% of total global carbon emissions.

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But due to the closure of some European blast furnaces, and cutbacks at others, the ETS has been a source of revenue for the industry over the last decade, rather than a financial burden.

This phenomenon has been put down to the economic downturn, and is not limited to the steel sector: similar observations have been made in other carbon-intensive and economically sensitive industries, like cement and petrochemicals.

According to a study published by CE Delft, an environmental consultancy, in March 2016, the steel sector has profited off the back of the carbon market, thanks to the overabundance of quotas available in certain countries, and the increased price at which manufacturers sell their steel, ostensibly to account for their carbon costs.

But the situation varies across the EU. Between 2008 and 2014, French steelmakers did not receive excessive quotas. In fact they had to buy an extra 11 million tonnes, for a total of 136 million tonnes of carbon emissions.

In the United Kingdom, the sector emitted considerably less CO2 than expected. Not only did it not have to pay for its CO2 emissions, but it was also able to sell its excess quotas on the carbon market. According to CE Delft’s estimates, the British steel industry made around €163 million by selling unused CO2 quotas over this period.

Costly constraint after 2020

With a more restricted ETS on the horizon, harder times are ahead for the industry. A proposed overhaul of the carbon market, unveiled by the European Commission last July, and currently the subject of heated debate, foresees a year-on-year reduction of the quotas allocated to the EU’s carbon-intensive industries. Under this reformed system, free allocation would largely become a thing of the past, with most of the available quotas being auctioned off to the highest bidder.

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But a study carried out by Ecofys on behalf of Eurofer, the European Steel Association, found that the sector could be desperately short of carbon quotas from 2020, leading to a steep increase in production costs. This gap would reach 31% of its carbon emissions in 2021 and would rise to 48% by 2030, costing the industry a total of €26.1 billion from 2021 to 2030, according to Eurofer.

This additional cost corresponds to the price of the carbon quotas and to the indirect cost of electricity consumption. In total, the industry estimates that the reformed ETS will increase the cost of producing steel by €28 per tonne.

Yet not everyone agrees with this projection. The NGO Sandbag has disputed Eurofer’s figures, saying its prediction of a 5% productivity increase by 2020 is too ambitious, and pointing out that it failed to take into account the surplus of CO2 quotas the industry currently has, which it could offset against future costs.

CCS still a theoretical solution

At a hearing with the European Parliament’s Environment committee on Tuesday (19 April), Climate Commissioner Miguel Arias Cañete stressed that while the European steel industry is undoubtedly in a difficult situation, the main factor is “not the price of carbon in Europe”.

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“The steel problem is largely down to Chinese steel production, as well as the high cost of energy in the EU, which we are trying to combat with the Energy Union,” the Commissioner said.

The Spanish politician added that the European Commission sees the development of carbon capture and sequestration technology (CCS) as a possible solution for the steel industry in the long term. This avenue was explored by the company ArcelorMittal, with the Ulcos project in the French region of Lorraine. The project was abandoned in 2012, although the company insists it is just lying dormant.

At the European level, the support mechanism for CCS projects still exists, in the NER 300 programme, which is, in theory, funded by the sale of carbon quotas. But the programme is in dire straits and most of its projects have been cancelled due to insufficient funds.

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