Greening the UK steel industry: behind the headlines

The British Chancellor, Jeremy Hunt, is expected to confirm this week that the UK’s two largest steel manufacturers, British Steel and Tata, will receive a total of £600 million in support to incentivise the decarbonisation of the sector, and will consult on further measures. The move speaks to the extent to which climate policies are interdependent on a global level.

The decarbonisation of heavy industry is a longstanding headache for policymakers. This is partly due to the sheer emissions intensity of sectors like steel, which alone accounts for nearly 8% of global emissions from the energy sector; the steel plant at Port Talbot in South Wales accounts for 2% of UK emissions.

There are various methods to make steel production less emissions-intensive — the question is how to incentivise steelmakers to invest in adopting them. One of the policy tools historically used to this end has been the carbon pricing mechanism, which charges industry for its emissions. But this approach has run up against issues of global policy coordination.

Take the example of China, the world’s largest steel exporter. In January 2022 Beijing published a strategy for decarbonising steel, with the aim of peaking emissions in the sector by 2030 using a range of measures. However, this 2030 target was scaled back from a previous target of 2025, and China has delayed plans to expand its emissions trading scheme to encompass heavy industry such as steel. The sector still accounts for around 15% of China’s overall emissions.

For a multitude of reasons, climate policies globally are implemented at different rates. And for as long as steel manufactured abroad is available more cheaply and subject to differing price signals, policymakers face the dual puzzle of reducing their emissions while ensuring their own manufacturing sectors remain competitive in international markets.

This led to the European Union reaching an agreement in principle in December 2022 on a carbon border adjustment. This proposes to tax certain imported goods, including steel, based on their ‘embedded’ emissions at a rate equal to domestic carbon pricing. London has now indicated that it will consider a similar measure, having previously trailed the matter in the 2021 Net Zero Strategy.

All this highlights something articulated in the OECD’s November 2022 report: ‘Steel decarbonisation is a global challenge that requires a global response’. Individual policy measures are not implemented in a vacuum, but arise from a complex nexus of geopolitical and economic factors. For this reason among others, understanding the global policy landscape is a critical component of policy formulation by any individual government.