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Section 2 Our decarbonisation strategy 2.4 Costs, investments, and funding. |
The Energy Transitions Commission, of which we are an active member, estimates that the required additional investments to achieve a zero-carbon-emissions economy in 2050 – while significant in absolute dollar terms – will amount to no more than 1% to 1.5% of global GDP (~US$1 trillion to US$2 trillion per year). |
The costs from the perspective of the steel industry however are significant, vastly exceeding the margins typically generated by the steel industry throughout the cycle. Even as costs decline as technologies mature and clean energy infrastructure is scaled up, the steel industry will not be able to absorb the extra costs under normalised market conditions. While the steel industry must take the lead on technology developments, a complementary and concerted effort will be needed from suppliers, customers, the energy industry and policy makers to create the right market conditions for the industry to transition to zero carbon-emissions steel. In section 2.5 we outline the policy conditions that are needed, and multiple stakeholder initiatives that are helping drive these changes. We will need to accelerate this collaboration to drive forward solutions in sufficient time to achieve our targets. |
To achieve ArcelorMittal’s 2030 global target of 25%, we estimate the gross capital cost required for the Group to be approximately US$10 billion. It is the expectation that 35% of this capex will be deployed up to 2025 with the remainder in the second part of the decade. |
The intention is clearly that over time low carbon technologies will become more competitive as the carbon price increases and is applied globally and the decarbonisation technologies themselves become more mature and efficient. |
Realistically however this will take at least ten years and therefore during that interim period policy support will be essential to both moderate capital spend and ensure operational competitiveness. |
In terms of support with initial capital spend, as these investments will not generate returns in the transition period, these technologies will require further development and refinement. There will be front end loading of Capex required in the next five years which is beyond the industry’s ability and further innovation will need to be supported and nurtured. Therefore, we believe that funding in the region of 50% would be appropriate. |
Additionally, the costs associated with operating these technologies will likely be higher in the short-to-medium term than higher carbon technologies. It is critical therefore there are policies in place to support regional and global competitiveness of assets that are first movers in the transition to low carbon steel. Policy instruments like contracts for difference, which were used to positive effect in the development a competitive renewable energy sector, have an important role to play. |
As a leader in developing technologies needed to transition steelmaking to net-zero, achieving our climate targets also requires us to play a leading and active role with policymakers in different geographies. This will allow us to promote policy ideas that will accelerate the development of these technologies and to create the necessary market conditions to ensure zero carbon-emissions steelmaking is commercially viable. |
In terms of our investment decision-making, each major capex project proposal is required to demonstrate its CO2e impact to the Investment Allocation Committee (IAC). The IAC considers both the potential future carbon cost as well as the capital cost of decarbonisation, to maximise our chances of achieving our targets while ensuring each project is economically justifiable and earns its cost of capital. |
ARCELORMITTAL • CLIMATE ACTION REPORT 2 30 |
2.5.1 The need for a supportive policy environment. |
Section 2 Our decarbonisation strategy 2.5 The role of policy. |
The most effective mechanism to transition the steel industry to net-zero would be a suitably ambitious and globally applied carbon price covering every region, country and market. However, there is little probability of that happening in the short to medium term. |
Instead, we are faced with a situation where each jurisdiction develops its own policy framework with no unified customer and GHG policy response for the steel industry globally. This has created a sub-optimal situation with often complicated and overlapping policy landscapes that do very little to advance the required market conditions to deliver competitive carbon-neutral steel. |
We do believe, however, there are many policies developed for other industries that can be implemented for the steel industry. One example is contracts-for-difference, which have provided valuable policy support and customer demand signal for the renewables industry for many years. New policies will also need to be developed, such as a carbon border adjustment mechanism that ensures domestic producers and imports share the same CO2e cost on the road to decarbonisation. |
We believe that policy instruments need to deliver five market conditions to ensure that low and zero carbon-emissions steelmaking is at least as competitive as higher carbon-emissions steel: 1. Measures to incentivise the transition to low and zero carbon-emissions steelmaking 2. A fair competitive landscape that accounts for the global nature of the steel market, ensuring domestic production, import and exports are subject to equivalent GHG reduction regulations 3. Financial support to innovate and make long-term investments and neutralise the higher operating costs of low and zero carbon-emissions steelmaking 4. Access to sufficient clean energies at affordable price level 5. Incentives to encourage the consumption of low and zero carbon-emissions steel over higher carbon-emissions steel. |
Policy has a key supporting role to play in transitioning the global economy to net-zero. Well designed, targeted policy can yield very significant results and enable new technologies to become competitive over a relatively short timeframe. The emergence of renewable energy as a competitive energy source is a clear example of this. |
We are similarly optimistic about the role policy can play in transitioning the steel industry to net-zero. Indeed, the right policy will, over time, be able to create the market conditions to make low and zero carbon-emissions steel more competitive than higher carbon-emissions steel. That will enable the steel industry to invest in and operate the low and zero carbon-emissions technologies required to meet the challenge of becoming a net zero industry by 2050. |
We must be clear about the starting point as the market conditions necessary for this transition are not yet in place. |
Steel is a globally traded commodity and not all regions of the world are moving at the same pace when it comes to the introduction of regulation to address climate change. Furthermore, the low margins and high capital costs associated with the industry mean there is limited headroom to make the investments required and remain competitive without policy intervention. |
Ensuring all market participants operate under the same competitive rules is key in these market conditions. The greater the level of global coordination in developing effective policies, the better progress we will make towards decarbonisation. |
Photo: © ArcelorMittal. |
ARCELORMITTAL • CLIMATE ACTION REPORT 2 31 |
There are multiple policy instruments that, when appropriately designed and applied, can be combined to encompass these five areas to allow for the smooth decarbonisation of the steel industry. These include: • Emissions Trading System (ETS) • Indirect compensation • Public funding via innovation awards, grants, loans etc. • Carbon Border Adjustment Mechanism (CBAM) • Carbon Contracts for Differences (CCfDs) • Consumer carbon charge • Clean energy policies • Green Public Procurement (GPP) |
It is important to understand how each policy instrument works and its purpose before looking at how they can be most effectively combined to incentivise and accelerate the decarbonisation of the global steel industry. |
Section 2 Our decarbonisation strategy 2.5 The role of policy 2.5.2 Creating the right steelmaking conditions. |
Emissions Trading System (ETS) |
A well-designed GHG emissions trading system – also known as ‘cap and trade’ – should incentivise firms to reduce their GHG emissions. A government sets a cap on the maximum level of GHG emissions and creates permits, or allowances, for each unit of GHG emissions (i.e. 1 tonne of CO2e) allowed under the cap. Firms must obtain and surrender a permit for each unit of their emissions. They can obtain permits from the government or through trading with other firms. |
When it comes to steelmaking, an ETS will only incentivise investment in decarbonisation if it combines a sufficiently-high CO2 price and a fully effective instrument to address carbon leakage. Ideally, ETS revenues would also flow back to heavy industries to provide further incentives – such as through the EU Innovation Scheme. |
The combination of all these measures is essential for steel to remain competitive where it is not supported with free allocations of units to prevent carbon leakage to higher GHG emitting jurisdictions. |
ARCELORMITTAL • CLIMATE ACTION REPORT 2 32 |
As a result, today’s EU ETS is an additional cost burden for European steel companies that is not yet complemented by a carbon border adjustment (CBAM), although we note this has now been proposed as part of the “Fit for 55” package as described below. As the price increases throughout Phase 4, this will become even more critical than it is today. It is also critical that the roll out and increase in the price of CO2 is aligned with the technology maturity and footprint realities in different countries. |
In July 2021, the European Commission published a package of proposals to make the EU’s climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030 called “Fit for 55”. To become EU law, this set of proposals now needs to be adopted by both the European Parliament and the Council of the European Union. Given the controversial nature of the proposals and the expected social and economic impact, longer negotiations and changes can be expected. |
The proposals should enable the necessary acceleration of greenhouse gas emission reductions in the next decade. |
The proposals are all interconnected and combine: • tightening of the existing EU Emissions Trading System, extending it to maritime and setting a new parallel ETS to buildings and road transport sectors; • increased use of renewable energy; • greater energy efficiency; • a faster roll-out of low emission transport modes and the infrastructure and fuels to support them; • an alignment of taxation policies with the European Green. |
Deal objectives; • a Carbon Border Adjustment measure (CBAM) to prevent carbon leakage; and • tools to preserve and grow our natural carbon sinks. |
The biggest impact for the steel industry comes from the ETS review and the introduction of a CBAM. |
In this respect, the ETS proposal increases the reduction ambition of the ETS sector from 40% reduction by 2030 to 55% (when compared to 1995 reference levels). To achieve this it plans to set a steeper decline of the cap, foreseeing as well stricter rules for the update of the benchmarks in the second sub-period of phase 4 (2026-2030) that could result in a reduction in the benchmarks of up to 50%. |
In addition, the CBAM proposal is intended to accompany a progressive reduction of the free allocation granted to sectors in its scope, with a yearly 10% decrease starting as from 2026. |
The implementation of an effective carbon-border adjustment mechanism (CBAM) in Europe, the continuation of free allocations, and the availability of public support, are all vital to ensure we can make sufficient investments to decarbonise our European assets. |
Today, Europe, California and other US states, as well as some Canadian provinces, have ETS systems in operation, resulting in an increase in carbon costs for steelmakers. Ukraine, Brazil, Kazakhstan, Mexico and South Africa are expected to implement an ETS over coming years. It is essential that experience gained from regions with a mature ETS is applied in the design and roll out of nascent ETSs so that they genuinely incentivise rather than just add additional cost burdens. |
ARCELORMITTAL • CLIMATE ACTION REPORT 2 33. |
The European Union Emission Trading System (“EU-ETS”) was launched in 2005 and completed its third phase in December 2020. In order to prevent carbon leakage, the ETS contains a system of allocation of free allowances based on a benchmark system that is periodically reviewed and indirect cost compensations (of part of the extra costs incurred by the installations covered by the ETS due to ETS application on energy production passed on). The EU-ETS sets a cap on greenhouse gas emissions, which is then reduced year after year. The build-up of a surplus of emission allowances in the EU-ETS kept prices below €10 per ton of CO2 equivalent (€/tCO2e) from 2009 until 2018. |
To boost the price of a European Union Allowance (“EUA”) – which gives the holder the right to emit one tonne of CO2 – and to provide an incentive to the steel industry and the power sector to cut CO2 emissions, the European Commission implemented reforms to the EU-ETS for the Phase 4 period which runs from 2021-2030. |
The adoption of the revised ETS Directive in 2018, defining the rules for the 4th trading period (2021-2030), anticipating a decline of the ETS cap, and the reinforcement of the MSR applying as from 2019, were considered to be drivers of the EUA price increase that in early 2018, surpassed the historical high of €25/tCO2 – a 360% price increase in less than a year. In early 2020, the pandemic-driven lockdown prompted the CO2 price to drop sharply, falling by €10/ tCO2e (40%) in a matter of weeks. Since then, the market has steadily recovered and ended the year at over €30/tCO2 with prices rising above €50/tCO2 in 2021. |
Q1 20 ¤ per tonne 50 40 30 20 10 Q2 20 Q3 20 Q4 20 Q1 21 Q2 21. |
Source: Refinitive. |
Carbon price development since Q1 2020. |
ETS in the EU |
When designed this way, a border adjustment has the added advantage of being more likely to stimulate other regions of the world to speed up the introduction of equivalent climate change legislation to accelerate decarbonisation of their industry. |
Over time, once the application of a CBAM is fully implemented and proven to work, free allocations can be gradually withdrawn. Before that can happen, European producers would need certainty that all decarbonisation costs, including full auction costs, can be passed through. |
The current proposal aims at meeting these goals; however, several details are not clearly spelt out yet and will only come in the implementation rules and whether it will achieve to be effective will need to be seen. It is supposed to be introduced in 2023 in a first phase as reporting and monitoring tool only and from 2026 producing its full financial impact. From 2026 onwards those installations covered by the CBAM will also see its free allocation gradually decreased by 10% each year. |
Carbon Border Adjustment Mechanism (CBAM) |
A carbon border adjustment mechanism, applied initially to primary goods, should ensure imports are subject to the same CO2e costs as domestic producers. Using the example of the EU, an effective CBAM would mean that steel imported into the EU would have similar CO2e cost as that borne by EU producers, creating a fair market and encouraging investment in lower CO2e emissions steel production. |
The European Commission’s proposal includes the introduction of a CBAM. As critical as its introduction is, to be genuinely effective, it must be designed in a way that takes away any competitive advantage from importers in regions with less ambitious climate change regulation. This means introducing a border adjustment that does not enable importers to be more competitive than any producer within a region with ETS just because it does not have the same carbon tax, including the least carbon-efficient producer today. Therefore, the carbon cost these producers will pay from the ETS should be the same cost charged on imports through the border adjustment. This will ensure all European assets will be able to decarbonise sustainably, without it being rendered uncompetitive. |
Public funding. |
Public funding supports the development and implementation of innovative technologies to reduce CO2e at scale, and may in some jurisdictions include funding streams from different levels of government. This may be provided in the form of grants, loans with favourable conditions, or equity investments in decarbonisation projects. |
For example, the EU Innovation Fund launched in 2020 is one of the world’s largest programmes and will invest up to €10 billion between 2020-2030 to support the commercial demonstration of innovative low-carbon technologies. |
Funded from EU-ETS receipts, it aims to bring market industrial solutions that could help to decarbonise Europe and support its transition to climate-neutrality. It will focus on: • innovative low-carbon technologies and processes in energy-intensive industries, including products substituting carbon-intensive ones; • carbon capture and utilisation (CCU); • construction and operation of carbon capture and storage (CCS); • innovative renewable energy generation; • energy storage. |
Indirect compensation. |
Indirect compensation schemes help heavy industry in regions with an ETS to remain competitive despite the impact of higher energy costs. |
The carbon costs incurred by the power sector from an ETS result in increased electricity prices for customers. This means that energy intensive industries exposed to an ETS not only have additional direct costs for their emissions, but also additional indirect costs from higher electricity prices. |
Electricity is a key competitive factor in heavy industry, particularly for commodity products exposed to global markets. The increased electricity costs resulting from an ETS also pose the risk that heavy industry would relocate from Europe to laxer GHG reduction jurisdictions without these additional direct and indirect costs. |
Indirect compensation schemes cover energyintensive industries participating in the ETS system such as steel, plastics and chemicals, cement, and aluminium sectors. They provide heavy industry with some support to remain competitive in international markets. |
Section 2 Our decarbonisation strategy 2.5 The role of policy. |
ARCELORMITTAL • CLIMATE ACTION REPORT 2 34 |
Consumer carbon charge. |
A consumer carbon charge on steel and other carbon intensive materials could be an instrument to fund the higher capex and opex funds needed to develop and deploy low carbon-emissions technologies. It would also incentivise customer behaviour to choose lower CO2e intensive solutions. |
While there is a significant amount, the CO2e reduction impact per investment dollar of the steel industry is significantly better than in the transition of the power and transport sectors. The European renewables sector, for example, receives more than US$80 billion annually in funding from customers to reach only 34% of electricity generation. Similarly, US$10 billion has been publicly funded in transport renewables, with only a 9% impact. |
A consumer carbon charge could be introduced at the point where steel is purchased as a raw material and then be passed through the value chain to the end customer of the finished product, for example a car. A charge of as low as US$75 per car could be sufficient to fund accelerated deployment of low and zero carbon-emissions steelmaking technologies. |
Carbon Contracts for Differences (CCfDs) |
Carbon Contracts for Differences (CCfDs) provide government-guarantees to those investing in innovative climate-friendly technologies that reward GHG emission reductions, by neutralising the higher operating costs of zero-emissions steelmaking. |
CCfDs pay out the difference between the price of emissions allowances (in Europe, EUAs) and the contract price, thus effectively ensuring a guaranteed carbon price for the project. In exchange for this insurance, investors are liable for payment if the carbon price exceeds the contract’s strike price. As a result, companies have an incentive to make climate-friendly, innovative investments and reduce their CO2e emissions. |
By lowering financing costs, CCfDs support the roll out of low and zero carbon-emissions projects that are not competitive in the existing market environment. CCfDs can also be combined with indirect compensation grants to further support investment. |
CCfDs have been used with great success in the renewable energy transition and could play a similarly important role in the decarbonisation of the steel industry. |
Section 2 Our decarbonisation strategy 2.5 The role of policy. |
Clean energy policies. |
Access to affordable clean energy will be critical to accelerate decarbonisation of the steel industry and policymakers can play an important role in incentivising the development of sufficient clean energy infrastructure and the necessary scale up of carbon-neutral technologies. This will require concerted cross-sector and government efforts to develop the necessary clean energy infrastructure and to guarantee sufficient supply of renewable energy for the transition of heavy industry. |
The clean energy infrastructure for each country and region will vary significantly based on the availability and effectiveness of different clean energies available, including wind, solar, bioenergy and CCS. Working with local policymakers to unlock the optimum clean energy infrastructure will be critical. An example of this is our work with the Brazilian government to ensure use of existing sustainable bioenergy in the steel industry is recognised and supported as a clean energy. |
Green public procurement. |
Public authorities are major consumers and if they use their purchasing power to choose environmentally friendly goods and services, they can make an important contribution to sustainable consumption and production. Green Public Procurement (GPP) or green purchasing can help stimulate a critical mass of demand for more sustainable goods and services which otherwise would be difficult to get into the market. |
Photo: © ArcelorMittal. |
ARCELORMITTAL • CLIMATE ACTION REPORT 2 35 |
Section 2 Our decarbonisation strategy 2.5 The role of policy 2.5.3 Supportive policy instruments. |
The impact of these policy instruments on steelmaking conditions. |
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