Climate change and the UK steel industry

Published: 13/11/2009

This short article summarises both the role that the steel industry can play in helping to reverse climate change and the risks to the industry's competitiveness from misguided policy initiatives.

With the Copenhagen climate change talks fast approaching, it is timely to reflect on the contribution that the UK steel industry can make to the struggle to decarbonise the global economy.

Iron and steel production is intrinsically carbon-intensive. Carbon is an essential element of the chemical reaction by which iron is smelted.

Western European blast furnaces are already highly carbon-efficient. So significant reductions in carbon emissions are impossible without a step-change in technology.

That is why the European industry is investing in a multi-million euro collaborative project to identify and develop these breakthrough technologies. The ambitious objective is to reduce CO2 emissions by 50% by 2050 compared with today’s best processes. The first pilot plant to test carbon capture technologies is under development.

It will be many years before we see the benefits from this research. In the meantime, the industry is already making substantial contributions by developing lighter weight steels that enable energy efficiency savings in their end-uses.

Of course, recycling of scrap steel can contribute enormously to emissions reductions. Today roughly 40% of the steel produced in the world contains recycled steel. The only limitation on increasing this proportion is the availability of scrap steel. The amount of scrap available depends on how much steel was consumed ten to 100 years ago. Thus as world steel consumption continues to rise, scrap availability will continue to lag.

Global decarbonisation will yield a potent source of new demand for steel. The new technologies that are central to fighting climate change, from nuclear to renewables to carbon capture and storage, all have a high steel content.

So there is no question that steel will continue to be needed and produced in ever increasing quantities. The only question is where it will be produced.

One of the most traded materials in the world, competition in steel markets is intense. Today China accounts for around one half of global steel output. Other emerging economies, such as Brazil, Russia, Ukraine and India, all have large steel industries.

This is where the fight against climate change poses a threat to the UK industry.

This threat comes less from the ambition of whatever targets may get agreed in Copenhagen, than from the means used to achieve those targets. If climate change related costs are higher in the UK and Europe than other regions, then it is the industries in the more cost-competitive countries that will prosper.

Cost-effective decarbonisation is supposed to be central to the Kyoto protocol. Yet already we have seen the UK and EU together produce a complex patchwork of overlapping and costly measures. The government estimated last year that existing climate change policies (covering the Climate Change Levy, Renewables Obligation and the EU Emissions Trading Scheme) have increased industrial electricity bills by 21%, rising to 55% by 2020.

Since then the government has announced a new tax on the combustion of fossil fuels to fund the Renewable Heat Initiative and an additional levy on electricity to finance carbon capture and storage demonstration plants. Each new measure, albeit with the best of intentions, is a further wound in the side of UK industry.

In Europe, the primary instrument applicable to sectors like steel is the EU Emissions Trading Scheme. Despite the good intentions of the Directive agreed last year, we still do not yet know whether the detailed operation of the new scheme to take effect in 2013 will enable cost-effective carbon abatement, or increase our costs further.

The omens at present are not good.

One route forward could be a global sectoral agreement. We would very much welcome the emergence from Copenhagen of a framework for such agreements.

But sectoral agreements must treat all members equally; they must result in equal effort and an equal shouldering of the costs for all participants. We can not and will not agree to measures that end up with European producers subject to higher cost measures than our competitors, whether in the USA or China, Russia or Japan.

Steel has a tremendous role to play in reversing climate change. Whether UK and European companies are allowed to contribute to this is in the hands of our legislators.

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