How Europe’s steel industry made millions from the climate crisis

Steel works operated by Tata Steel Ltd. in Port Talbot in U.K. | Chris Ratcliffe | Bloomberg

Europe’s steel industry is in crisis again and there’s no shortage of reasons for all the financial losses and job cuts. Stagnating demand, surplus production capacity, higher iron ore prices and a surge in imports caused by trade conflicts are just some of them.
But when Tata Steel Ltd. announced 3,000 job losses at its European arm this week, the company also pointed to a “significant increase” in the cost of carbon emission permits.

Carbon Costs

Blaming the CO2 price has become a common yet questionable refrain in the industry. ArcelorMittal offered a similar excuse when it announced big production cuts in May. British Steel Ltd.’s collapse that same month was also linked to its obligation to purchase expensive carbon credits.

The reality looks rather different. Steel is responsible for about 7% of global emissions but even today the sector is mostly shielded from having to buy carbon pollution permits in Europe. Steelmakers are in a tight spot but they shouldn’t grumble about a policy that’s been lucrative for them in the past and whose purpose is to help them clean up their act.

To recap, the EU’s emission trading system was created more than a decade ago to help mitigate the climate crisis by making polluters pay. Utilities, industrial plants and airlines are required to obtain permits to match how much they pollute. The reason for the industry’s complaints now is that the cost of those allowances has more than trebled in the past two years after the European Union tweaked the system.

That’s theoretically difficult for steelmakers because they emit almost two metric tons of CO2 for every ton of steel produced. A roughly 50-euro ($55) CO2 price for each marginal ton of output is significant because the spread between steel prices and the cost of the raw materials needed to make it has fallen to about 250 euros a metric ton. “Considering that steel makers are barely profitable the pressure from CO2 prices is substantial,” says Benjamin Jones of CRU, a metals and mining consultancy.

 

Industrial Base

Yet all the steelmakers’ complaints ignore an important financial safety net for the industry. Because of the perceived threat of so-called “carbon leakage” (where companies decamp to places with cheaper pollution costs) the least polluting steelmakers still receive free allowances that cover 100% of their emissions.

“Given how generous free allocation has been, steel should be among the industries hurting the least from the carbon price,” says Jahn Olsen, a carbon analyst at BloombergNEF.

Output Gap

Furthermore, the production cuts after the 2008-2009 recession left steelmakers with large surpluses of emission permits which they were free to keep or sell at a profit. While the extent of the industry’s windfall profit from this is disputed, one study found it could be 8 billion euros ($8.8 billion). Some steelmakers are still benefiting today.

Tata Steel’s European arm generated 211 million pounds ($273 million) of income from selling surplus allowances in the fiscal year to March, its annual accounts show. It’s pretty bold of the steelmaker to call out the rising cost of pollution permits when it’s just booked a big profit from them. There are echoes here of what happened to British Steel, which sold emission permits only to discover later that it needed them.

“The European steel sector is in a tough spot but to blame carbon pricing is disingenuous,” says Sam Van den plas, policy director at Carbon Market Watch. For now the largest and most technically advanced steelmakers probably aren’t having to fork out much for allowances.

This will change gradually after 2021 when the so-called fourth phase of emissions trading begins. But the EU still expects to hand out 6.3 billion free permits to polluters during that period, worth more than 150 billion euros at current prices. For now ThyssenKrupp says the impact from carbon pricing is “marginal” and will probably remain so next year. It warns though of “considerable risks” in the post-2021 period.

Tata says it expects to spend more than last year’s 211 million-pound gain on permits in coming years, but didn’t provide more detail.

ArcelorMittal says it might have to pay out 5 billion euros between 2021 and 2030 at the current CO2 price. On an annual basis that’s about one-eighth of its analyst-estimated operating profit for 2021. This sounds a lot but it assumes the company makes no improvements in cutting pollution.

Emission cuts by companies bound by the EU trading system have been fairly impressive but recent progress has come mostly from the power sector. That makes the bloc’s task of reaching climate neutrality by 2050 — something ThyssenKrupp and others have signed up to — more difficult. Excluding power plants, the largest individual sources of carbon pollution in Europe are all steelworks.

 

Slow Progress

In fairness, there’s an absence of carbon-cutting technologies in sectors like steel and cement. Techniques such as replacing coal with hydrogen in steel production show promise but most are still being trialed. Making them viable commercially would require a higher carbon price and massive investments, including on huge new sources of renewable electricity.

Yet the free carbon allowances for steel companies probably didn’t motivate them enough to find more sustainable production methods. In her resolve to redouble the EU’s pollution-cutting efforts, European Commission President Ursula Von der Leyen has floated the idea of a carbon border tax on imports into the bloc to make sure domestic producers aren’t unfairly penalized.

The feasibility of such a tax is unproven: Measuring the carbon content of manufactured good is tricky and the levy would have to reflect the fluctuating price of allowances. Even if it complies with World Trade Organization rules, a carbon tax might inflame trade tensions with the U.S.

Naturally the steelmakers think a border tax is a great idea as it would expose them to less competition by deflecting “dirty” imports. Astonishingly, they’re lobbying to keep their free pollution allowances even if non-EU steelmakers are forced to pay the bloc’s carbon price. The local industry argues that its non-EU exports would become uncompetitive if it had to pay the full cost of permits while investing in emission-cutting innovations. Its lobbying sounds dangerously like an industry trying to have its cake and eat it.