(Montel) A swifter end to free allowances distributed to industries in Europe’s carbon market is crucial for encouraging the embrace of technologies that can decarbonise steelmaking, climate think tank Sandbag said on Tuesday.
“The free allocation of emission permits under the EU ETS is an obstacle to a rapid transition to low-carbon steel,” Sandbag said in a report on the industry called “starting from scrap”.
The European Commission has proposed gradually phasing out free allowances to certain industrial sectors including steel by 2035 as it introduces a carbon border adjustment mechanism (CBAM). This would tax the carbon intensity of imports into the EU.
Yet Sandbag estimated around 74% of European blast furnace capacity needs to be renovated this decade – with free allowances providing little incentive to modernise.
“Most of the costs of transitioning towards low-carbon steel production fall within the range of carbon prices recently seen in the EU ETS, which suggests that market forces should be sufficient to incentivise the transition. However, the price signal created by the EU ETS is largely cancelled by the free allocation of emission allowances to steel plants, which tends to lock in existing production methods.”
Sandbag estimated Europe’s steel sector could cut its emissions 55% by 2030 if modernisations this decade involved a switch to electric arc furnaces. It estimated this in turn would raise power consumption by 45 TWh and increase either natural gas use by 18.2bcm or hydrogen by 4.2m tonnes.
EU plans to transition from free allowances to taxing foreign competition would need to take place “much faster” than proposed, Sandbag said.
“An immediate replacement would not negatively affect producers selling to the domestic market, thanks to the new protection brought by the CBAM.”
The European Parliament this week plans to make a second attempt at agreeing on proposals to align the carbon market’s rules more closely with international climate goals.
An initial attempt earlier this month collapsed on the vexed issue of when to phase out free allowances. A compromise reached last week looks set to suggest an end date of 2032.