Implications of EU steel industry relocation

Introduction

This study, part of the IAM COMPACT project’s PRM-1 on “European Industry,” examines the potential relocation of industries due to high energy costs and EU climate goals. Through stakeholder collaboration, the research question was refined to focus on the impacts of trade restrictions on steel, specifically regarding EU steel decarbonization, costs, CO2 emissions, energy demand, and labor within the transition to a carbon-neutral EU. A multi-model approach has been developed to address this question, with preliminary results presented in December 2023, alongside an outlook for further model refinement.

Background

Traditional steel production methods, such as the blast-furnace route, rely on coke and coal for reducing iron ore to iron and generating the necessary heat. This process is responsible for 7% of global CO2 emissions (IPCC, 2022). However, less CO2-intensive technologies are either available or nearing market readiness. These include increased secondary steel production, hydrogen or natural gas-based iron ore reduction, and carbon capture and storage (CCS), all of which hold the potential for significantly reducing steel-related CO2 emissions in the coming decades.

As CO2 certificate prices rise in the EU and free allocations end, the economic incentives for low-CO2 steel production increase (Eurofer, 2021). However, this could lead to carbon leakage, where carbon-intensive steel production moves to regions with lower CO2 prices and fewer regulations, undermining EU climate goals (Yu et al., 2021). Additionally, low-CO2 technologies use energy sources like electricity, hydrogen, and natural gas instead of coke and coal, which affects the location of production and future investment decisions. Regions rich in renewable energy may attract these investments, a phenomenon known as the “renewables pull effect” (Samadi et al., 2023).

Both carbon leakage and the renewables pull effect could lead to the offshoring of industrial production, which poses challenges for climate change mitigation, domestic economies, and the security of value chains. Policymakers must determine whether to address these issues through industrial, trade, and climate policies.

Scenario Design

                                                           Figure 1: Steps of the analysis and models used in each step

To assess the issues mentioned in the previous section, five models have been (soft-)linked: three Integrated Assessment Models (GCAM, TIAM, WILIAM), a sector-specific bottom-up model (WISEE EDM-I), and an Input-Output model (MARIO). The study investigates the impact of varying levels of trade restrictions on steel under
three scenarios. In each scenario, all countries implement their current climate policies and meet the GHG reduction targets outlined in their respective NDCs and long-term commitments, while differing assumptions are made regarding steel trade constraints. More details are shown below in Table 1.