International Climate Change and its Outlook for the Steel Industry

Each year, nearly 1,000 industry leaders from the Latin American steel industry, representing 25 countries, come together at the Alacero Conference to discuss critical issues pertaining to promoting a sustainable steel industry across Latin America. This year, with strong interest in understanding the implications for steel of the upcoming climate change negotiations, the conference held the first ever session on climate change, which I had the honor to keynote.

Now is the time to convert policy into action. With over 170 countries having submitted Intended Nationally Determined Contributions (INDCs), there is a growing recognition that an effective outcome from Paris will bind all countries, developed and developing, to keep their emissions in check. The next step is for these INDCs to be converted to specific emission reduction policies, measures and finance-ready investment plans.

Energy intensive industrial activities like iron and steel production emit large amounts of greenhouse gas emissions and will need to be part of the global climate change response. INDCs from 36 countries already indicate plans to reduce emissions from metals and/or iron and steel. We can expect policies to lower emissions from iron and steel and schemes to encourage investment in putting the industry on a sustainable, low-emissions pathway.

Industry can and should get ahead. As a globally-competitive industry trading in commodities, the steel industry presents a clear collective action problem that a global agreement can help to resolve. If only some countries act to reduce emissions in the sector, there is a risk of leakage of investment from one country to another with less stringent rules. If all are planning to act together, the industry has a stronger incentive to adapt production to ensure its long-term viability.

In response to future emissions constraints, the industry will need to focus on innovative technologies that can significantly lower emissions over the long-term, many of which are already widely in use and well understood. Where there is access to scrap metal, new iron and steel installations can make use of cleaner and lower-emitting electric arc furnaces. Where natural gas resources are available, installations can use natural gas direct reduced iron (DRI) technologies. Existing installations should also look for co-generation and energy efficiency opportunities and invest in measures such as smelt reduction and direct casting.

The steel industry can get also out ahead of policy-making by advocating for policies that will create a level playing field, encourage the lowest cost mitigation options and provide funds for innovations towards lower carbon production.

Leading countries are already showing the way. For example, CCAP helped with the original design for the Emissions Trading System in Europe (EU ETS), the first and largest emissions trading scheme in the world. The scheme puts a cap on carbon dioxide emitted by power plants and industrial sources, including iron and steel, and creates a market and price for carbon allowances. The EU ETS also sets aside a portion of allowances in an Innovation Fund for investment in low-carbon innovation in energy-intensive industries. And for now, the EU ETS grants carbon-intensive industries free allowances at a level that reflects best practices in producing steel products. The European Commission has recently proposed a set of reforms for the post-2020 period to strengthen the EU ETS.

China has set goals for its steel industry to further reduce energy consumption per industrial value-added output by 18% over the current 5-year plan (by 2015) and to limit carbon emissions at this level by the end of the decade. China is also moving towards emissions trading, with 5 regions already setting caps on steel and other energy and industrial emissions. A national trading program is set to launch in 2017.

With Paris in mind, there are opportunities to observe international best practices, learn about new technologies and become proactive in the development of effective policies that create a level playing field. The Latin American region has shown leadership in putting forward some of the most ambitious and comprehensive INDCs. The region’s steel industry has the opportunity to join with its governmental leaders to craft incentive mechanisms that encourage and support innovation and sustainable investment. The GCF and its Private Sector Facility could be a partner in pursuing such an innovative pathway. Doing so will help prevent carbon leakage and ensure industry-wide sustainable development.