Daily Update: Innovation Empowering Steel Decarbonization Drive
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Measures such as the EU's Carbon Border Adjustment Mechanism have created a financial incentive for steelmakers to decarbonize, but emissions reduction efforts in the sector continue to face stiff headwinds. Beyond industry's usual fiscal concerns or resistance to change, steelmaking has historically relied on fossil fuels not just as a heat source, but as a key ingredient in the process. Fortunately, innovative production techniques offer solutions for these roadblocks.
The most common steelmaking process — which accounts for about 70% of global steel production, according to the International Energy Agency — uses a blast furnace fueled by coke to convert iron ore to pig iron, which is then converted into liquid steel in a basic oxygen furnace before being cast into slabs and billets and made into finished steel products. The coke, which is made from metallurgical coal in a CO2-heavy process, is a key component in the blast furnace step as it causes a reduction reaction that converts the ore's iron oxide into elemental iron. This use of coke makes the release of CO2 unavoidable.?
This blast furnace-basic oxygen furnace (BF-BOF) process comprises 56% of production in the European steel industry, which contributes 5% of the region's CO2 emissions. Lawmakers are keen to reduce that number as part of overall climate initiatives and have made the steel sector subject to the EU Emissions Trading System carbon market. With yearly free carbon allowances being phased out as net-zero goals near, and Emissions Trading System permits currently trading at about €80 per metric ton of CO2, European producers will increasingly face a very real cost unless they can cut emissions.
As in other industries, hydrogen could play a key role in those efforts. In the BF-BOF process, hydrogen can be used as an auxiliary reducing agent in the blast furnace to replace some of the coke. Even more CO2 savings can be realized if hydrogen is used to produce direct-reduced iron. Typically made in a plant powered by natural gas, direct-reduced iron can be used as feedstock for a basic oxygen furnace or an electric arc furnace (EAF), eliminating the blast furnace step. Emissions reductions are maximized in both use cases by using "green hydrogen", which is produced via electrolysis using renewable energy.
Such decarbonization enhancements do not come without a price, however, and steelmakers in Europe are concerned that mounting costs from retooling their operations or buying Emissions Trading System allowances will make them uncompetitive with imports. The EU's Carbon Border Adjustment Mechanism (CBAM) was introduced to level the playing field by charging imports the difference between the European carbon cost and the home market cost. Importantly, the tariff also encourages decarbonization as it only applies to steel with an emissions intensity of more than 2.1 metric tons of CO2 per metric ton of steel.
This carve-out greatly limits US steelmakers' exposure to CBAM. Unlike in Europe, most steel in the US is produced via EAFs. These so-called mini mills use heat from an electric arc to process a feedstock of scrap steel rather than iron ore, obviating the blast furnace reduction process and avoiding most of the CO2 emissions.; On average, EAFs produce 0.67 metric ton of CO2 per metric ton of steel versus an average of 2.3 metric tons of CO2 from BF-BOF, according to the World Steel Association. This disparity not only gives US producers unfettered access to the post-CBAM EU market, but also positions their product as a green alternative to traditionally produced steel. EAFs also stand to benefit from the proliferation of renewable energy. Producers can easily shrink their carbon footprint via power purchase agreements with renewable developers, utility green tariffs or unbundled renewable energy certificates.
While EAFs are more eco-friendly, they require an available pool of scrap steel and access to cheap power. Also, for certain applications, such as exposed steel for the auto industry, a product made via the BF-BOF route is still considered superior. Markets such as India are also not likely to abandon blast furnaces any time soon as the need for economic development is currently trumping clean energy aspirations. India has a net-zero target of 2070 but is aiming to nearly double steel production capacity by 2030. Given the country's iron ore and coal reserves, most of this planned expansion will likely be driven by BF-BOF mills. Fortunately, India is also the largest producer of direct-reduced iron, accounting for about 35% of global production in 2022. Building out green hydrogen infrastructure to support direct-reduced iron production would allow the country to meet emissions goals and avoid tariffs such as CBAM while still expanding its steel sector.
Today is Wednesday, November 29, 2023, and here is today’s essential intelligence.
Written by Adam Rihner.
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