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The primary reason for the raft of steel plant closures over the past month is the slowdown in construction in China, not the small increases in electricity costs caused by green levies. Electricity costs are only ~6% of the costs of steel production,[1] and the government compensates companies for any rise in bills caused by the EU Emissions Trading Scheme (ETS), and from the UK Carbon Price Support. Moreover, the steel sector across Europe is massively oversupplied with free ETS allowances, worth almost €2 billion at today’s carbon price.[2]

Financial support for reducing industrial emissions through green technologies such as Carbon Capture and Storage (CCS) could help to support UK steel, by offering a bankable income source and inward investment at new low emission industrial hubs.[3]

The Steel Sector in the EU Emissions Trading Scheme

UK Steel ETS surplus

The steel sector in the EU Emissions Trading Scheme (ETS) is protected from the carbon price through rules to protect against ‘carbon leakage’. The ETS to date has only offered a carrot, albeit a weak and feeble one, not a stick. Steel installations do not have to purchase allowances to emit CO2, but are instead given them for free. These cumulative free allocations are in fact much greater than the sector’s emissions, so they have been able to accumulate a surplus. Sandbag calculates the surplus is currently 220.63 million allowances, each worth €8.59 at today’s prices (and much more if the steel installation chose to sell them when the carbon price was higher, or becomes higher in future).

In total, these surplus allowances represent a cash subsidy from EU governments to the European steel sector of €1.89 billion at today’s prices. The EU carbon market has in fact supported the European steel sector through a lean period, whilst rewarding the efficiency improvements that can make Europe more internationally competitive.

Electricity prices and the UK Carbon Price Support

Following the collapse of the EU ETS price due to over-supply in the market, the UK government unilaterally levies a top-up on the carbon price (currently £18 /tonneCO2) on all fossil fuels used for electricity generation.[4] This increases the cost of electricity from polluting sources, especially coal, and so incentivises the use of lower CO2 gas and zero CO2 nuclear and renewables. UK industry is protected from the extra electricity costs of this ‘Carbon Price Support’ thanks to a £250 million compensation pot.[5] Since 2013, the Department for Business, Innovation and Skills have given over £122 million in compensation to 56 businesses across the UK, including the now closed steel plants of SSI, Caparo, and Tata. The amount each company received is commercially confidential, but we know it was divided by £63m for the indirect costs of the EU ETS, and £59m for the indirect costs of the UK Carbon Price Support. 

The global steel price

Since 2011, the global steel price has been in decline, with a further halving of the global price this year.[6] The Redcar plant, bought by SSI in 2011, has never been profitable under their ownership.[7] Massive overcapacity in China as domestic demand falls has seen exports to the EU rise 49% year-on-year over the first five months of 2015.[8][9]The European Commission is investigating allegations that Chinese plants are selling steel to the EU at below cost price, making fair competition impossible.

China steel price and exports
Figure: The UK steel sector has a cumulative surplus of ETS allowances until 2020, and to 2021 if offset use is included

The advent of global carbon pricing

Carbon pricing schemes now exist in China, across much of North America including California and New York, in Mexico, South Korea and many other countries, and of course in Europe. There are fewer and fewer places that where industry is not being incentivised to cut its emissions in order to prevent catastrophic climate change.  This means the UK must look to permanently decarbonise industry. The technology is now available in the form of Carbon Capture and Storage (CCS) and through process change leading to radical emissions reductions. CCS hubs which offered industry the ability to continue operating without polluting, such as the proposed Teesside Collective, would encourage inward (green) investment whilst crucially not falling foul of state aid rules. Radical process changes in steelmaking are also possible, such as Tata Steel’s HIsarna project in Holland[10] which cuts emissions and makes CCS far easier and can create a UK steel industry that will thrive in a low carbon world.

To support CCS in the UK, the government needs to offer Contracts For Difference, both to the two power projects now almost ready to begin construction, and also to industry, set against the carbon price. Such a bankable support mechanism could help industries maintain an income stream in lean times, and also incentivise the use of their CO2 as a saleable product rather than waste.[11] More information on how this could work is available in Sandbag’s briefing “Financing Deep Decarbonisation in Industry”.

Phil MacDonald, CCS Analyst at Sandbag, commented:

“Far from killing steel, green subsidies could by the salvation for British industry. The government needs to support futureproof industry by encouraging the capture and storage of industrial CO2, whether deep under the North Sea bed, or as products that use CO2 as a feedstock and lock it permanently away, for example, as building aggregate.”

 


References

[2] The closing ETS carbon price was €8.41 on 20st October 2015. https://sandbag.org.uk/price/ The cumulative steel sector surplus is 220.63 million free allowances (including known waste gas transfers), over and above the free allowances received to cover steel emissions. Therefore total cumulative steel sector surplus if sold today would be worth €1.86 billion.  More information available in Sandbag’s October 2014 report, Slaying the Dragon https://sandbag.org.uk/reports/slaying-the-dragon-vanquish-the-surplus-and-rescue-the-ets/

[3] Financing Deep Decarbonisation in Industry (Sandbag, June 2015) https://sandbag.org.uk/blog/2015/jun/26/deep-cuts-industrial-emissions-are-needed-how-do-w/

[4] The UK ‘Carbon Price Floor’ vs The German ‘Climate Contribution’ (Sandbag, March 2015) https://sandbag.org.uk/reports/the-german-climate-contribution-vs-the-uks-carbon-price-floor/

[5] Compensation for indirect costs of energy and climate change policies (BIS, July 2014) https://www.gov.uk/guidance/energy-intensive-industries-compensation-for-carbon-leakage

[6] Britain's steel industry: What's going wrong? (BBC, October 2015) http://www.bbc.com/news/business-34581945

[8] Has Chinese steel demand peaked? (Barrons, Oct 2015) http://www.barrons.com/articles/has-chinese-steel-demand-peaked-1444900636

[9] ArcelorMittal sees Chinese steel demand shrinking this year (Reuters, July 2015) http://uk.reuters.com/article/2015/07/31/uk-china-steel-idUKKCN0Q51RF20150731

[10] Revolutionary ironmaking process cuts both carbon and costs  (Tata) http://www.tatasteeleurope.com/en/innovation/case-studies/hisarna-pilot-plant