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German Government’s action plan sets the path towards green steel through the use of hydrogen

  • Germany
  • Diversified industrials
  • Energy and infrastructure - Clean energy

13-08-2020

The German Federal Government has issued an action plan for a strong steel industry in Germany and Europe (“Handlungskonzept Stahl”) in July. The action plan has been developed by the Federal Ministry of the Economy and Energy (Bundesministerium für Wirtschaft und Energie, BMWi) together with industry stakeholders and contains proposals for measures at domestic, European and international level. The actions plan’s overarching goals are securing the German and European steel industry’s competitiveness in times of crisis and, at the same time, reducing the steel industry’s CO2 emissions as a step to make Germany, and the EU, climate-neutral by 2050. In this respect, the action plan is one of the steps towards implementing Germany’s National Hydrogen Strategy of June 2020 (see our review) and sets the path towards “green steel” through the use of hydrogen.

Key role of the steel industry in the decarbonization process

The steel industry is not only a key sector for the German national economy, with its 30% share in the German industry’s total CO2 emissions, it also plays a key role in the decarbonization process. For this reason, the steel industry is committed to the EU target to become climate-neutral by 2050. The necessary transformation to CO2-neutral or, ideally, CO2-free steel production will require huge investments (of EUR 10 billion by 2030 and further EUR 20 billion by 2050), which the industry will be unable to shoulder alone. In addition, the domestic steel industry is subject to harsh international competition and threatened by carbon leakage, i.e. the relocation of steel mills to other countries to avoid burdens caused by CO2 pricing or other environmental policy. Therefore, the action plan addresses political support at both ends.

Different ways of decarbonizing the steel production

The German steel industry’s efforts to switch to CO2-neutral/free production may in principle involve different methods:

  • Carbon direct avoidance (CDA) through the use of hydrogen instead of coke carbon
  • Carbon capture utilization (CCU) where the CO2 from the steel production is used for other industrial purposes
  • Carbon capture and storage (CCS) where the CO2 is stored, e.g. in underground caverns

The action plan points out that, in Germany, CCS is struggling with social acceptance. On the other hand, it underlines that CDA offers a great potential for the steel industry in Europe as well as for climate protection.

Focus on green hydrogen

Therefore, the Federal Government supports the development of a market for hydrogen technologies. As already set-out in the National Hydrogen Strategy, it underlines that it only considers “green” hydrogen (produced via the electrolysis of water using electricity from renewable energy sources) as sustainable in the long run. It acknowledges though that, over the next ten years, a global and European market for all types of hydrogen, including carbon-neutral “blue” hydrogen ( achieved from natural gas and involving CCS) and “turquoise” hydrogen (from natural gas by using sustainable energy and generating solid carbon), will emerge, and that these types of hydrogen will also be used in Germany transitionally.

Measures to support investment in CO2 avoidance

The action plan addresses diverse measures to support investment in CO2 avoidance and hence the production of green steel.

Carbon contracts for difference

As already set out in the National Hydrogen Strategy, the Federal Government will launch a pilot programme entitled “Carbon Contracts for Difference (CfD)”. From the generic description in the action plan, one can expect that under these contracts, Germany will provide funding amounting to the difference between:

  • the CO2 emission costs incurred without the decarbonization measure, i.e. costs calculated on the basis of the EU Emissions Trading System (ETS) price and the quantity of emission allowances necessary for the steel production, and
  • the costs for implementing a decarbonized steel production, which will, for the purposes of the CfD, be expressed through a hypothetical, higher ETS price (i.e. practically an ETS price that would trigger the investment decision for the decarbonization measure) agreed in the CfD.

Conversely, should the future ETS price rise above the contractually agreed price, the CfD counterparty would have to refund the difference to the State.

Therefore, this CfD instrument should, on the one hand, allow steel mill operators to plan safely and predictably and, on the other hand, avoid an excessive subsidy.

Stimulation of markets for carbon-neutral steel

In addition, the Federal Government is considering the labelling of climate-neutral steel and providing for preferential treatment of such steel, and products made from it, in public procurement. Also, as a mid-term goal for 2050, the possibility of introducing a quota for CO2-neutral or, to the extent possible, CO2-free steel in end-products.

Research and development programs

Finally, since technologies for substituting coke by hydrogen and similar aims are far from mature, various research and development programs are mentioned and promised to be funded, including a “National Decarbonization Program”, “Avoidance of climate-relevant emissions from processes in the manufacturing sector”, “Carbon2Chem”, and “reality laboratories of the energy transition”.

Additional measures to avoid carbon leakage and unfair competition

In addition to the incentives to produce green steel, the action plan contains several measures to avoid carbon leakage – thereby acknowledging that the decarbonization of the steel industry, and other energy-intensive sectors, will not be reached in the short term.

  • The German Federal Government will, in a potential review of the EU ETS, plead for continuing the free allocation of emission allowances “to the extent necessary in the respective case”. This allocation shall be construed in a way that, together with the EU ETS innovation funds, sets incentives for technological innovation and supports long-term transformation.
  • In addition to such free allocation to compensate direct CO2 costs, the Federal Government considers adequate compensation for indirect CO2 costs, namely those increasing the power purchase price for industrial off-takers, as an important means to avoid carbon leakage. It will therefore address this topic during the EU ETS state aid guidelines review for 2021-2030.
  • Furthermore, the German Federal Government supports the intention of the European Commission to examine a compensation scheme for CO2 prices at EU borders or similar carbon equalisation mechanisms, in line with WTO rules, until a level playing field with all steel-producing countries can be achieved.

Moreover, the action plan addresses the necessity of measures against unfair trade practices in general, including EU measures against subsidies and dumping under WTO law.

Assessment and outlook

The action plan could be seen as a wish list; whether those wishes come true depends on several factors. From a technical and commercial perspective, the production of “green” hydrogen, and steel, depends on innovations and cost reductions still to be made. The emphasis on research and development projects is therefore no surprise. From a legal and political perspective, many of the intended measures are not in the hand of the German Federal Government but require consensus at EU and WTO level. For example, the intended carbon contracts for difference will raise questions of EU state aid law and might ultimately not be implemented at domestic but at EU level, which is the preferred option foreseen in the European Commission’s strategic roadmap for the development of a European hydrogen economy (see our review).