Green steel taxonomy key to kickstart decarbonisation of India’s steel sector

With the decarbonisation of India’s steel industry in a nascent stage, the government needs to create the right policies to meet the net-zero by 2070 target.

Text by IEEFA

In September 2023, a joint report was released by the Institute for Energy Economics and Financial Analysis (IEEFA) and JMK Research & Analytics on the future decarbonisation of India’s steel sector. As India is the world’s 2nd largest producer of steel with a burgeoning stainless steel sector, decarbonisation is a huge challenge. The report emphasises that a clear definition of green steel is crucial for steelmakers to start investing in the right technologies. It also provides various policy recommendations for the government to lay a strong foundation for decarbonising India’s steel sector. “Decarbonising steel production in India requires a vision by policymakers whereby they can encourage the production of green steel,” says the report’s co-author, Vibhuti Garg, Director, South Asia, IEEFA.
“The first step is a definition for green steel, without which the technology track that the industry should follow remains unclear. India needs to clarify that green steel will mean eliminating the use of fossil fuels in the production process,” she adds.

Create demand for green steel

Given that green steel production technologies are yet to go mainstream anywhere in the world, the report finds that green steel costs nearly twice that of traditionally produced steel.
“Since steel is a highly competitive commodity, the market is unlikely to absorb the premium of green steel without a strong impact on its dynamics. Therefore, the government needs to formulate policies that create demand for green steel and penalise carbon emissions from traditionally produced steel,” says co-author Jyoti Gulia, Founder, JMK Research.
“Initially, in all government and public sector purchases, a certain quantity of green steel should be mandatory. Going forward, the government can also extend the percentage of green steel procurement to private consumers,” says co-author Kapil Gupta, Manager, JMK Research.
“Green Steel Certificates can be another way to create demand. The government can link green steel purchases with incentives through green steel certificates, which are tradable in the national carbon market for financial gain. This action will support the creation of a green steel market for domestic steelmakers,” says Gupta. The report also recommends viability gap funding (VGF) to help bridge the gap due to the high initial capital cost of low-carbon steelmaking technology. It notes that the government can provide this VGF to urge steelmakers to commit part of their capacity to green steel manufacturing.

Green hydrogen the answer?

Analysing the various technology solutions currently available to cut emissions from steelmaking, the report finds that green hydrogen is the cleanest option. Producing steel using scrap in renewables-powered electric arc furnaces (EAFs) is another option. Still, it cannot fully substitute other forms of production as there are challenges of high-quality scrap availability.
The report finds the key challenge with green hydrogen is its high cost. To address this, the government has launched an ambitious National Green Hydrogen Mission to encourage the domestic production of the fuel.
“To make hydrogen technology viable for expansion, the required price should be around USD1-2/kg and a carbon penalty of at least USD50 per tonne of emissions should be applicable on steel manufactured through traditional methods. This can make green steel competitive and catalyse a 150 million tonne shift from coal-based to hydrogen-based steelmaking, mainly the direct reduced iron (DRI)-EAF route,” says Gupta.
The report forecasts that green hydrogen will dethrone coal as the primary steelmaking route only by 2050, with its use increasing from 2030.
“Between 2030 and 2050, green hydrogen projects will be deployed on a large scale across India due to high demand. This is likely to phase out coal-based routes of steelmaking at a faster pace. We estimate that the steel industry will replace around 25-30% of its grey hydrogen requirements with green hydrogen in the early part of 2030-2050. This will increase to 80% by 2050,” says co-author Nagoor Shaik, Senior Research Associate at JMK Research.

Sustainable finance markets

“Global sustainable finance markets hold much promise to provide capital at scale for decarbonising large corporates. Sustainability-linked bonds and loans have been regarded as apt for financing industrial decarbonisation globally,” says co-author Shantanu Srivastava, Sustainable Finance and Climate Risk Lead, IEEFA.
“Innovative financing products, such as blended finance mechanisms, will play an important role in the initial growth of low-carbon solutions for the steel sector in the country. Support in the form of technical assistance grants, guarantees and risk insurance, and concessional capital will be needed at different stages of the technological lifecycle,” he adds.

India’s initiatives for decarbonisation

Both the government and the steel industry have realised the need for decarbonisation. While most efforts are in the nascent stage, the government and the private sector have already taken some key initiatives to cut emissions from this sector.
Central government initiatives include:

• In 2012, the PAT Scheme was introduced under the National Mission for Enhanced Energy Efficiency to incentivise the steel industry to reduce energy consumption.
• In 2013, the Indian steel industry adopted the Best Available Technologies (BAT) available globally to improve energy efficiency and mitigate GHG emissions. This resulted in a considerable reduction in CO2 emissions from around 3.1tCO2/tcs in 2005 to around 2.5tCO2/tcs in 2020.
• In 2019, the government introduced a Steel Scrap Recycling Policy to enhance the availability of domestically generated scrap and reduce coal consumption in steelmaking.
• In 2021, the government issued The Motor Vehicles Rule to increase scrap availability in the steel sector.
• In January 2023, the Ministry of New and Renewable Energy announced the NGHM for green hydrogen production and usage. It made the steel sector a stakeholder in the mission.
• In March 2023, the Ministry of Steel signed 57 MoUs with 27 companies for specialty steel under the Production-Linked Incentive (PLI) Scheme.
• The government has allocated Rs63.22 billion (USD763.9 million) under PLI to boost the steel sector.

Private sector initiatives for decarbonisation are actively underway. Many companies have set net zero targets and have started pilot projects and taking measures to reduce emissions from their production process. These include:

• Global steel giant AM/NS aims to reduce 25% of its carbon emission intensity by 2030 and hit net zero emissions by 2050.
• JSW Steel aims for net zero emissions by 2050
• JSPL plans to set an ambitious target of net zero emissions by 2035.
• Tata Steel has set a goal to become carbon neutral by 2045.
• RINL made a specific action plan to achieve carbon neutrality by 2047.
• SAIL announced its commitment to substantially reduce CO2 emissions, increase the share of renewable/non-conventional energy by 2030, and achieve net zero emissions by 2070.

To read the full report, visit: ieefa.org/newsroom