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Germany, IEA push for G7 "carbon bloc" trading green steel, cement, chemicals

19 May 2022 Cristina Brooks

The International Energy Agency (IEA) urged G7 countries to publicly finance hydrogen's use in industry and consider trading as a "carbon bloc."

Without these or similar measures, the group of economically advanced countries will not reach net-zero by 2050, the agency said in a report ahead of a G7 Climate, Energy and Environment Ministers' meeting in Germany next week.

The report, which noted no country was on track for net-zero in industry despite numerous pledges, was requested by current G7 President and top EU steel producer Germany.

About a quarter (25%) of the world's CO2 emissions related to energy use comes from industry, and most of its industrial emissions (70%) come from making cement, steel, and chemicals.

The G7—the EU, the US, the UK, Canada, France, Germany, Italy, and Japan—should set an example in cutting emissions from the difficult-to-decarbonize cement and steelmaking sectors, said the IEA.

More should be done to reduce the emissions created through fossil fuel use, especially as countries are clamoring to reduce fossil fuel dependency after Russia's invasion of Ukraine, it said.

Some G7 governments are seeking to break ties with Russian fossil fuel producers, for example through the German Easter Package of policies and the UK Energy Security Strategy, alongside policies that brighten the outlook for hydrogen.

Russia is also a major producer of steel, but EU sanctions banned imports of Russian rolled steel in March.

For reducing the G7's fossil fuel use and Russian supply dependency, the IEA's 10 recommendations targeted greener cement, steel, and chemicals production. "If they are implemented, I believe these steps can enable G7 members to accelerate the transition to a cleaner and, at the same time, more secure energy future," IEA Executive Director Fatih Birol said in the report.

The report noted that the sectors in question lack full-scale versions of technologies using hydrogen, direct electrification, and carbon capture utilization and storage (CCUS) they need to decarbonize.

Such green production technologies were in the "prototype phase" and cost more, but they should be commercialized by national policies right away and used to replace aging plants, said the IEA.

"Many of the technologies for significantly reducing emissions from heavy industry are still at large prototype or demonstration stage, and competitive international markets for heavy industrial products often result in profit margins that are too thin to cover the higher up-front costs of integrating low emission processes," the IEA said.

The agency also recommended that the G7 forms trade alliances to create markets for green production, possibly taking a page from last year's EU-US alliance proposed to boost their trade in low-carbon steel.

Platts assessed Northwest European hot-rolled coil prices were up 7% on 19 May since the start of 2022, having descended from a five-year high on 31 March.

Despite the recent high prices, global steel competition is "creating a disincentive for first movers to invest in the transition," said the IEA.

Strategies the IEA suggested to decarbonize imports included a "carbon bloc" of countries using carbon border adjustment mechanisms (CBAMs), cross-border industrial agreements, and international carbon prices.

Already, the EU is planning to decarbonize its steel and cement sectors through policies such as the EU CBAM, and boost hydrogen production via its REPowerEU proposal­­.

But European steel trade body Eurofer urged caution when rolling out the EU's proposed CBAM. It warned high energy prices, inflation, carbon prices, and wartime raw materials shortages may cause "another economic downturn."

German steel and cement industry's burden

Germany is the largest steel producer in the EU, according to 2021 data from Eurofer.

However, the country's automotive sector uses steel grades that cannot easily be produced using lower-carbon electric arc furnaces and recycled scrap, said the IEA.

Germany and the UK are the two G7 countries with the lowest combined steel production using electric arc furnaces, according to IEA data.

Germany's climate minister wants the G7 to act together on international incentives.

"[The report] brings us a big step further to jointly create an international economic and political environment that incentivizes investments in green and low carbon production facilities. We want the G7 to be a pioneer in this process," said Federal Minister for Economic Affairs and Climate Action Robert Habeck.

Countries with cheap natural gas that use more scrap, for example the US, may use more natural-gas-based direct reduced iron-electric arc furnace, which produce steel from recycled scrap in a less carbon-intensive way.

Germany was the largest EU cement producer in 2017 and it also produced the most lime, a CO2-intensive component of cement, according to a report from the European Commission.

Net-zero not possible without green steel

The IEA modeled a path that saw the world reaching net-zero by 2050 by cutting down on steel and cement emissions.

Under its net-zero scenario, heavy industries make direct CO2 reductions of 90% by 2050 from today's levels, with carbon-negative technologies used to take CO2 levels down to zero.

The carbon-negative technology that the IEA recommends is prototype-level bioenergy with carbon capture and storage, which the Intergovernmental Panel on Climate Change views as both necessary and risky, due to its potential to compete with agriculture.

Early leadership in industrial decarbonization could come from the G7. New, low-carbon technologies might be used for 10-20% of primary steel, cement and primary chemicals production in the G7 by 2030, and it could spread to the rest of the world by 2050, the IEA said.

For the steel sector, the IEA said the use of hydrogen, for example using it to replace coal in direct iron reduction, is set to be the G7's "leading" method to decarbonize steelmaking (65% of production) in 2050. CCUS would also be used (15% of production) to capture and store CO2 from blast furnaces.

The G7 would make steel production greener by using hydrogen for direct iron reduction technology that is in a prototype stage in Europe, North America, and Asia. Low-carbon natural-gas-based iron reduction has been used in the UAE.

On the other hand, for cement CCUS would be the most popular greening technology finding application in 12% of cement production in the G7 by 2030.

CCUS for cement production has reached a demonstration level in Norway and Italy as well as being piloted in Canada and Germany.

CCUS for chemicals is more advanced, and could apply to most (60%) of the primary chemicals production in G7 countries by 2050, the IEA said. It is already used commercially in ammonia and methanol production, and is now under demonstration for producing other chemicals.

Policies needed for net-zero cement, steel, chemicals

Policies needed to get key industries to net-zero should require uptake (demand) for net-zero steel and cement as well as subsidizing their production (supply), said the IEA.

Carbon Contracts for Difference (CCfDs) paying investors over 15-20 years should be used to address steel and cement producer investment risks, but governments may find them costly if they are used for more than the first near-zero emissions plants.

Likewise, government procurement of greener materials would drive producers to invest, but would not give them the same reassurance on financing risks long-term as CCfDs.

Public procurement is better suited for a longer timeframe, when investment risks are "hopefully declining," said the IEA.

"Possible tools within procurement policies include setting targets for embodied carbon, shadow carbon prices, and targets for shares of near zero-emission materials," the report found.

The report also presents a kind of green taxonomy, defining criteria for which investments match its scenario for "near-zero emissions" production of cement and steel, and calls on G7 governments to adopt them in thresholds for procurement.

But, recognizing that interim measures might be needed, it also proposes criteria defining "low-emissions" production.

Governments, it said, should rope other domestic and international buyers into the program by rolling out near-zero-emission material mandates, standards, and product labeling that reveals which steel, cement, and chemical products are "green."

Posted 19 May 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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