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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.
0
2 2
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
0
• 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.
1
Present state of the European steel industry 1
5
Data: World Steel Association, 2013, Global Steel Statistics; Eurostat Structural Business Statistics
Present state of the steel industry
1
6
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.
2
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)
2
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.
2
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
tu
Japan
Europe
US
Canada
What is needed to unlock mitigation potentials? 3
15
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
4
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
5