Toward a Tradable, Low-Carbon Product Standard for Steel: Policy Design Considerations for the United States
Steel production in the United States accounts for around 100 million tons of carbon dioxide equivalent emissions. Available and emerging technologies have the ability to significantly decarbonize the steel industry. A low-carbon product standard for steel in the United States can incentivize the adoption of these technologies and result in emissions reductions while preserving the international competitiveness of domestic steel manufacturers.
- A low-carbon product standard for steel in the United States that establishes an emissions intensity benchmark with tradable credits can drive a reduction in emissions intensity in the steel industry. The standard would provide incentives to adopt existing abatement options and to invest in emerging technologies.
- A low-carbon product standard for steel should maximize coverage of emissions related to steel production while minimizing administrative complexity.
- Addressing the barriers to abatement in the steel industry will require a suite of complementary policies. A low-carbon product standard can play a significant role, but additional policies will be needed to fully decarbonize the sector.
- This paper offers recommendations on key design considerations for a low-carbon product standard for steel, including what products and emissions should be covered by the standard, how to define an emissions intensity metric and set a benchmark, reporting requirements, crediting and compliance, and how to address the risk of leakage and competitiveness concerns. Due to a lack of publicly available data, this paper does not recommend specific levels for policy design elements.
Decarbonizing the Steel Industry
The United States must significantly decarbonize every aspect of its economy, including the industrial sector. Innovative policies will be required to provide strong incentives and to drive U.S. manufacturers to adopt technologies and practices that will lead to a reduction in industrial greenhouse gas (GHG) emissions. In recent decades, the United States has significantly shifted its production of steel from processes with high emissions intensities to ones with lower emissions intensities that predominantly use recycled steel as an input. However, steelmaking still accounts for over 80 percent of direct emissions due to metals manufacturing (EPA 2021), 5 percent of industrial emissions, and approximately 1.5 percent of total GHG emissions in the United States (EPA 2020b). Furthermore, steel production is estimated to account for 8 percent of global emissions, so it is important for global leaders in steel production, such as the United States, to take the lead in reducing steel emissions.
Commercially available technologies and new technologies offer opportunities to substantially reduce or even eliminate emissions in the steel industry. The use of green hydrogen; renewable energy; and carbon capture, use, and storage could offer near-term and long-term decarbonization opportunities. Furthermore, new electrolytic steelmaking processes, similar to those used in manufacturing other metals, have the potential to drastically alter low-emissions steelmaking.
A variety of policy tools will be needed to bring these technologies to market. These include policies such as government procurement requirements, a carbon tax, cap-and-trade programs, production tax credits, carbon storage tax credits, renewable energy standards, funding for research and development, and voluntary certification programs. Each of these policies performs optimally when applied to a certain phase of technology development. For instance, research and development funding programs are clearly most effective in the early phases of technology development. Renewable energy standards, production tax credits, and certification programs provide incentives for technologies in the diffusion phase of development. Finally, carbon pricing policies, such as a carbon tax or a cap-and-trade program, provide incentives for widespread, commercially available technologies.
While other policy mechanisms are well established and their potential impacts on decarbonization are well understood, low-carbon product standards have received less attention from policymakers. A low-carbon product standard is a sector-specific, market-based regulation that establishes an emissions intensity standard for a set of defined products. Companies that manufacture products covered by the standard either generate tradable credits or obligations based on the degree to which their emissions intensity is lower or higher, respectively, than the benchmark.
Design Considerations for a Low-Carbon Product Standard for Steel
A low-carbon product standard applied to the U.S. steel industry would advantage low-emissions steelmaking technologies and result in a shift toward these technologies and away from high emissions technologies. The design details of a low-carbon product standard for steel must be tailored specifically to the products and emissions profile of the steelmaking process. Crucially, a low-carbon product standard for a trade-intensive industry, such as the steel industry, must contain certain design elements that deter the relocation of production to unregulated markets.
Design recommendations for a low-carbon standard for steel in the United States:
- Product choice should include intermediate steel products in the form of sheets, plates, bars, beams, pipes, and tubes. These product categories correspond to the first sale of steel products from steel mills to consumers of steel mill products, which defines the point of regulation.
- Product benchmarks initially should be set to a fraction of the industry-wide average emissions intensity (tons of carbon dioxide equivalent emissions divided by tons of product produced) or to the average emissions intensity of top performers. The benchmarks should be reduced over time in regular and predetermined intervals according to an assessment of abatement opportunities and in line with emissions reduction goals.
- Reporting should be at the company level and include facility-level data regarding GHG emissions, material inputs, material outputs, electricity consumption, electricity generation, and fuel use by fuel type for each covered product manufactured in a facility that produces more than a certain amount of steel per year or releases more than a certain amount of carbon dioxide equivalent emissions per year. This facility-level data can be used to determine the emissions intensities of covered products.
- Emissions included in the product standard benchmark should be all Scope 1 (direct; generated on-site) and Scope 2 (indirect; due to purchased electricity) emissions as well as significant Scope 3 (indirect; offsite; upstream) emissions associated with the manufacturing of the product.
- Tradable credits should be generated by companies that have an emissions intensity lower than the benchmark, whereas companies with an emissions intensity higher than the benchmark should be required to surrender credits.
- Leakage and competitiveness concerns should be addressed by applying the low-carbon product standard to all steel products produced and sold in the United States. Importers of upstream products (such as coke, iron ore, steel slabs, and sheets) and downstream steel products (final products that contain steel, such as cars and appliances) must comply with the standard as well, subject to a cutoff threshold linked to the value of steel in the product relative to the total value of the product.