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EU carbon price yet to move needle for steel, chemicals, cement

28 January 2022 Cristina Brooks

Significant swatches of European industry are still waiting to make necessary low-carbon investments as the EU tightens the vice on the carbon market.

This is because sectors like cement, steel, and nearly all basic chemicals did not have to pay carbon prices in 2020. They are also due to receive 100% of their required EU allowances (EUAs) for free in 2021.

But under the European Commission (EC)'s proposed overhaul of the EU Emissions Trading Scheme (ETS), part of its carbon neutrality legislative package, the sectors expect to see the number EUAs allocated for free reduced each year starting in 2026.

By 2036, they will not get any—and will pay the full extent of their emissions' carbon prices—potentially spurring more low-carbon investment.

The carbon price is meant to compel investments, for example in the use of expensive technologies like green hydrogen-fueled power generation and carbon capture and storage (CCS), that eliminate more carbon from fossil fuel-intensive high-heat manufacturing processes.

For the time being, the expense is so great that more is needed than higher carbon pricing alone, German think tank Agora Energiewende said in a report last year.

Even the record-breaking carbon prices of recent months are only influencing manufacturers weakly, and subsidies are still the main investment driver. "Investors—whether they are looking at power plants or industrial investments—want more visibility and certainty than the ETS can provide. As a result, the ETS is a signal but not a trigger for new investment," said Coralie Laurencin, who is senior director, gas, power, and energy futures at IHS Markit.

She said investment decisions were typically driven by government funding, for example capacity market tenders for thermal generation. "We are seeing the same for hydrogen for example. Lots of investment decisions seem to be attached to government or EU funding," she added.

Most of the green technologies needed by the steel, chemical, and cement sectors under the EU ETS in 2030 would only be viable if the carbon price stays well above even today's high level of around €80-€90 per metric ton (mt) of carbon. A carbon price of up to €131/mt will be necessary for some technologies, such as the CCS likely needed for most emissions from the cement sector, according to the report.

Addressing this, the EC proposals would set up a new kind of subsidy for industry: carbon contracts for a difference (CCDs) to guarantee returns on investment in this expensive technology. Germany is already moving ahead with this: CCDs were recently proposed to decarbonize industry.

Similar contracts were able to boost renewable energy development in the UK and France, according to a report from European think tank Bruegel.

Low-carbon steel

Steel is the highest emitter of the industrial sectors in Europe, comprising 5.7% of total EU emissions.

Green hydrogen is a "promising" way to decarbonize various steel production processes, according to an European Parliament briefing. It noted hydrogen for powering steel production is cheaper and more developed than other options such as carbon capture and utilization, but it is still expensive. It expects the high cost of hydrogen to fall when green hydrogen is mass produced.

A €100-€160/mt carbon price in 2030 would encourage investment in direct reduced iron (DRI) processes using hydrogen or hydrogen-gas blends, replacing CO2-emitting carbon monoxide, according to Agora Energiewende.

Steelmakers, now exempted from the carbon price, have still started to invest as they worry about the future. For example, Germany's Salzgitter is hedging its options by stocking up on EUA allowances before the prices rise.

Less expensive installations of electric arc furnaces are underway. "Several companies have begun undertaking decarbonization projects, particularly in northwestern Europe, with several methods, including converting blast furnaces to electric arc furnaces, carbon capture and conversion technologies, use of renewable electricity, and others," said Christos Rigoutsos, IHS Markit senior economist.

Electric arc furnaces remain a greener option than blast furnaces, but how green they are is also influenced by the level of carbon in the local electricity mix and what scrap materials need to be imported. Even so, they decarbonize steel production less than DRI with hydrogen, the Agora Energiewende report said.

Greening cement

In the cement sector, the most impactful technology might well be CCS using a process called "oxyfuel" that would require a carbon price in a €70-€131/mt range.

CCS technologies, while still costly, could reduce CO2 from cement making by 80%, an Imperial College study found.

Several CCS pilots involving cement plants are underway. For example, the Norwegian state-funded Northern Lights CCS project currently under construction will store emissions from a HeidelbergCement plant. The use of other emerging technologies, such as bioenergy with carbon capture and storage (BECCS) and carbon additives, have been mooted as ways to make cement carbon negative.

In the short term, substituting limestone in clinker with waste materials and by-products from other industries can lead to a smaller reduction in emissions.

Investment advisory firm and European allowances broker Vertis Environmental Finance has seen the future CBAM rules inspiring retrofits by cement industry clients, Head of Market Analysis Bernadett Papp told Net-Zero Business Daily.

Cement companies are already using a few techniques that will enable them to reduce their emissions over the next few years. "I think that the technology has been available for a while already, but of course, the implementation is very costly. This client of ours decided that with the increasing carbon prices, it makes more sense to them to implement the technology already," she said.

Hydrogen-powered chemical production

Using green hydrogen is one of the main ways that the chemicals sector could meet 2030 EU ETS obligations alongside electrification, according to Agora Energiewende. A €170-€430/mt carbon price in 2030 would encourage the industry to use green hydrogen, it found.

Hydrogen projects are already underway in the sector. The World Economic Forum in October announced a development company and incubator, backed by industry heavyweights including Mitsubishi Chemical Corporation and Dow.

One project will look into using hydrogen to generate power for chemicals processes, hydrogen in ammonia production, as well as the use of CO2 and biomass as feedstocks and electrification.

Insofar as "low hanging fruit" for chemicals technologies goes, electrification "can be important." But an EU framework is needed to support carbon price exemptions for industrial electricity consumers, association European Chemical Industry Council said in a recent position paper.

As an example of electrification, BASF, SABIC, and Linde will pioneer what they say is the first electrically heated steam cracker furnace for olefin production from mixed plastics waste in the incubator.

Posted 28 January 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

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