Steel production is a major source of greenhouse gas (GHG) emissions. In this publication we analyse strategies to reduce these emissions using the example of Germany, which is the world’s eighth largest steel producer and has committed to achieve climate neutrality by 2045. We put forward a plan that would enable the German steel industry to transform its asset base with the course of its natural reinvestment cycle.
This plan involves substituting coal-based blast furnaces for climate-friendly production of Direct Reduced Iron (DRI) in addition to increasing steel recycling. DRI-technology operates with flexible combinations of natural gas and hydrogen instead of coal and offers significant CO2 emission reduction potential. Due to its flexibility, it can support the development of a renewable hydrogen infrastructure for other sectors.
However, building and operating DRI plants is initially more expensive than conventional blast furnaces. Carbon contracts are an instrument that can compensate for such incremental costs until climate-friendly steel is able to compete with GHG-intensive products.
We demonstrate how carbon contracts can be designed as an insurance mechanism against incremental costs arising from various changes: differences in the consumption and price of energy carriers as well as feedstocks, the effect of CO2 prices and the anticipated reforms to the EU ETS. In addition, we discuss how carbon contracts can generate a supply of climatefriendly steel to support and accelerate the growth of market-driven demand.
Our analysis shows that carbon contracts are an effective instrument for accelerating the steel transformation and ensuring the industry’s long-term competitiveness.
