- The carbon markets and decarbonization will have transformational affect on the steel and metals industry in 2022 and the coming years.
- It will be driven by government regulations, international agreements, investor’s expectation regarding sustainability as well as availability of capital for investment.
- There will be a price for carbon emissions, and too, there will a price for carbon neutral steel, and there will be demand for steel in support of decarbonization.
Thousands of years ago, men were forging iron blades in wood charcoal fueled fires, alloying the iron with small amounts of carbon, and creating Damascus steel blades for battle. They were also creating CO2. Fast forward to today and steel is still used across the world for weapons and too, bridges, surgical instruments, and everything in between. In fact, over 1.9 billion tonnes of steel are being produced across the world.
This is what the chemical reaction looks like for the traditional route of blast furnace iron production: 2Fe2O3 + 3C => 4Fe + 3CO2 and according to the World Steel Association, one tonne of crude steel cast results in roughly 1.9 tonnes of CO2 being generated and total direct emissions from steelmaking around 2.6 billion tonnes of CO2 or 7-9% of global man made CO2 emissions in 2020 .
Imagine if the C source is replaced with hydrogen. We’ll get: Fe2O3 + 3H2 => 2Fe + 3H2O, FeO + H2 => Fe + H2O.
Iron ore and hydrogen gets us iron and water. No CO2. This is the ideal process behind the decarbonization of the steel industry. It is not about removing carbon from steel. It is about removing the carbon, specifically the CO2, from the process of making steel.
To be clear, the global demand for 1.9 billion tonnes of steel is not going to soon be met with clean, green, fossil free, steel
THERE WILL BE A PRICE FOR CARBON EMISSIONS, AND THERE WILL BE A PRICE FOR GREEN STEEL.
Now, we can all agree or disagree on climate change, the stated goals of CO2 emissions reduction and associated political rhetoric but one thing is always certain: money will have influence. Article 6 in the Paris accords outlines how carbon markets can work and the UK COP26 Presidency published a Climate Finance Delivery Plan to provide clarity on when and how developed countries will meet $100 billion annual climate finance goal.
You want to finance a green steel project? There is no shortage of interest in green steel investment. Spotify Technology SA’s founder Daniel Ek is one of Sweden’s H2 Green Steel early investors. And the HYBRIT project just received funding from EU’s 1.1 billion Euro Innovation Fund. On the other hand, need financing or investment to reline an old blast furnace? You get the idea… Or, let’s put it this way: the weighted average cost of capital for an offshore oil project is going to be a lot higher than for a renewable solar energy project. In other words, there are many investors and subsidies supporting green projects.
And article 6? That gets us to carbon markets and ultimately a price being placed in carbon. There are different markets yes. Europe operates under a cap and trade market. The US looks likely to operate under a voluntary market (though a cap and trade program is in place in California (see chart)). China? That’ll be dictated by the CCP, but too, People’s Daily, China, recently reported that the total trading volume of China’s national carbon market reached nearly 77 million tonnes and turnover in excess of 3 billion yuan.
produced using hydrogen. Hydrogen is an energy intensive product to produce and not enough renewable energy is being created to produce the amount of green hydrogen necessary. Storing it and transporting it is a whole other issue.
WHY WE ARE EVEN DISCUSSING THIS IN THE FIRST PLACE ?
The Paris Agreement (Paris Accords or Paris Climate Accords) was adopted in 2015 and is an international treaty by 196 parties that covers climate change mitigation, adaptation and finance. The idea behind the agreement is to limit global temperature rise to no more than 2 deg C and aim for 1.5 deg C. A goal of carbon neutrality by 2050 had been further established by 60 countries including the UK and EU. Notably the US, India, and China did not sign on to that UN pledge.
However, in September 2020 President Xi Jinping announced China’s 30/60 goal to achieve peak CO2 emissions by 2030 and hit carbon neutrality by 2060. India claims neutrality goal by 2070. The current administration of the US has set a goal of 50-52% reduction (from 2005 levels) in C emissions by 2030 and zero carbon emissions by 2050. The majority of global steelmaking capacity is located in countries with mid century net zero targets.
POSTED DECEMBER 15, 2021. NOTES:
- California and Québec held their first joint auction in November 2014.
- Current Auction Settlement Price is the price at which current vintage allowances sold at auction.
- Auction Reserve Price is the minimum price at which allowances can be sold at auction.
- Secondary Market Prices are a composite of commodity exchange futures contract prices for near month delivery and a survey of OTC brokered transactions for California Carbon Allowances. Secondary market prices are provided with permission of Argus Media Inc.
- Secondary Market Price data drawn on December 14, 2021.
So in consideration of all this, there will be a demand for green steel via regulations, investor expectations regarding sustainability, and/or accounting for your company’s emissions (scope 1, 2 and 3). There will be a price for carbon emissions, and there will be a price for green steel. You will need to know your carbon footprint. And you will need to consider options for offsetting your emissions.
In some respects this development of carbon neutrality and sustainability is analogous to the 1990’s and implementation of quality standards. Suppliers to automotive companies were first to get on board with certified quality systems. And eventually, this development made its way across the entire industry.
What is the time frame for this? 2022, and certainly the years to follow, have potential to be a transformational in the industry. Acting early may well help get ahead of life cycle CO2 emission regulations and too, potentially rising costs for carbon.
Automakers will be driving towards carbon neutral vehicles that include entire supply chain in addition to the vehicles being emissions free. Large customers may request sustainability audits. Architects can spec carbon neutral construction. Border Carbon Adjustment will likely be alternatives to tariffs and quotas. Finally, the voluntary carbon markets themselves, now having moved beyond formation and innovation, have become mainstream with transaction values potentially exceeding $1 billion in 2021.
