The steel industry is pivotal to India’s ambitious decarbonization objectives. As the world strives to limit global temperature rise to 1.5 degrees Celsius, India has committed to achieving net-zero emissions by 2070 while reducing the emissions intensity of its GDP by 45% by 2030. Notably, the steel sector is responsible for a substantial 11% of India’s greenhouse gas emissions, making it the largest contributor among all industrial sectors. Furthermore, India’s steel production emissions intensity, at 2.5 tons of CO2 equivalent per ton of steel, exceeds the global average of 1.8 tons per ton of steel by a significant 30%.
Several factors contribute to this elevated emissions intensity, including limited access to scrap steel and natural gas, as well as the limited use of low-carbon production technologies. To address these challenges, Indian steel manufacturers must embark on a journey of decarbonization while simultaneously aiming for exponential growth—from approximately 120 million tons per annum (mtpa) in 2022 to approximately 300 mtpa by 2030.
The Indian government has taken steps to pave the way for decarbonizing the steel sector by implementing sectoral Nationally Determined Contributions (NDCs), the Performance Achievement Trade (PAT) scheme, and the Scrap policy. It now calls upon steel manufacturers to prioritize and drive emissions reduction projects.
Green steel offers not only environmental benefits but also significant economic value for steel manufacturers. The global market is witnessing a growing demand for certified green steel. Recently, the European Union formalized the Carbon Border Adjustment Mechanism regulations, requiring importers of steel to disclose the product’s carbon footprint at the installation level, beginning in October 2023. After this transition period, higher carbon emissions could lead to carbon taxes. India exported 3.5 million tons of steel to the EU in FY23, accounting for 2.5-4% of India’s production. A strategic approach could further increase these exports, while failure to do so might result in losing market share to other countries.
Climate-sensitive customers are willing to pay premium prices for green steel. In Northern Europe, premiums of €200-300 per tonne have been reported for green steel, with companies like SSAB estimating a premium of €300 for its low-carbon steel. Notably, Volvo has chosen to purchase low-carbon steel from SSAB. In India, Kalyani Steel is pioneering green steel through its Ferresta Brand, achieving green steel certification via ISO 14404-2:2013 and ISO 14064-1 (2018) through extensive scrap usage and renewable electricity. Several other steel companies are now exploring the green steel opportunity.
India’s steel industry is poised for remarkable growth, with projections indicating an increase from 120 mtpa to 300 mtpa by 2030, necessitating an investment of $150-200 billion over the next seven years. As investors increasingly consider Environmental, Social, and Governance (ESG) factors in their investment decisions, sustainability must be at the core of the steel sector’s growth plans. Deloitte’s 2022 ESG study highlights the positive correlation between a company’s ESG score and its valuation, with a 10-point higher ESG score associated with approximately 1.2x higher EV/EBITDA multiple. Furthermore, a 10-point increase in the ESG score results in an approximate 1.8x increase in the EV/EBITDA multiple.
The year 2022 witnessed a surge in sustainable debt issuance, totaling $1.5 trillion. Sustainability-linked loans and bonds, amounting to $400 billion, have become a rapidly growing form of sustainable finance, more than doubling since 2020. Unlike traditional green bonds and loans, sustainability-linked finance can be utilized for general corporate purposes, such as capacity expansion, with interest rates tied to the achievement of ESG or carbon emissions Key Performance Indicators (KPIs).
Setting an example in the steel sector, JSW issued the first Sustainability Linked Bond in India—a $500 million 10-year bond with a yield of 5.05%. JSW committed to reducing its 2020 CO2 emissions by 23% by 2030, with a 37.5 basis points step-up clause for non-compliance. This pioneering move by JSW serves as a clear example for other Indian steel companies to fund their growth through sustainability-focused financing.
Achieving a 50% reduction in emissions in the steel sector demands a multifaceted approach to decarbonization. Immediate measures encompass energy efficiency improvements, renewable energy adoption, increased scrap utilization, and the integration of biofuels. Longer-term strategies involve transitioning to green hydrogen and implementing carbon capture, utilization, and storage technologies.
Many of these decarbonization initiatives can yield cost savings through reduced resource consumption, including energy and raw materials. Historically, energy efficiency enhancements have resulted in 20-30% reductions in energy costs. Innovative applications of artificial intelligence and machine learning for process optimization promise similar cost reductions.
Nevertheless, some decarbonization initiatives may not meet traditional investment criteria, such as a two-year payback period. To bridge this gap, carbon credits can play a pivotal role, enabling steel companies to benefit from long-term resource savings. According to a McKinsey report, the global carbon credits market is expected to reach $30-50 billion by 2030, with 8-12 billion tons of carbon credits supplied, a quarter of which will originate from technology-based removals. Steel industry players can leverage carbon credits to fund their decarbonization efforts effectively.
To seize the decarbonization opportunity, steel companies must commence by rigorously tracking their carbon emissions using the three R’s: Recognized methodologies, Reliable data, and Robust calculation engines, all while ensuring a clear link to economic value creation.
Recognized methodologies: Carbon emissions can be monitored as either organizational or product carbon footprints, covering all three scopes of emissions. Each approach serves distinct purposes, such as supporting sustainability loans or certifying green steel products. Established methodologies for estimating carbon emissions in steel manufacturing are provided by the World Steel Association, with certifications available through ISO 14064 (organizational carbon footprint), ISO 14067 (product carbon footprint), and ISO 14404 (steel sector product carbon footprint). Additional disclosures and certifications are offered by Responsible Steel, BRSR, CDP, SSAB, GRI, and numerous others. Steel companies must strategically select the most appropriate methodologies based on their value creation objectives.
Reliable data: The accuracy of emissions calculations hinges on the quality of input data. Steel companies must prioritize understanding the factors that most significantly impact emissions, such as coal, iron ore, electricity, and transportation in the BF-BOF route. For purchased goods and services, it is increasingly important to gather actual emissions data from suppliers rather than relying on assumed global emission factors. Hence, steel companies must ensure that suppliers not only provide data but deliver accurate data to enhance the reliability of emissions calculations.
Robust calculation engines: Steel companies typically operate multiple sites, each featuring numerous processes, materials, or activities generating emissions. These processes emit seven types of greenhouse gases, resulting in millions of data points uploaded to the cloud. To support emissions calculations, data storage, and data security, steel companies require robust calculation
Shriram Housing Finance Partners with IFC to Promote Green Affordable Housing Finance in India
Leave a Reply