Domestic primary steelmakers are on course to achieve their carbon emissions target of less than 2 tonne of carbon dioxide per tonne of crude steel (tCO₂/tcs) - around the current global average - by 2030 through measures such as energy transition and increasing production from less carbon-intensive processes.

Reducing emissions will broaden fund-raising avenues and improve export competitiveness, a positive for credit quality. That said, complete transition to low carbon steel, also known as green steel, remains a challenge.

The carbon emission rates of Indian steelmakers are currently higher than the global average mainly due to high reliance on traditional high-carbon production routes involving blast furnace-basic oxygen furnace (BF-BoF; accounting for around two-thirds of capacity) and dependence on coal in the direct reduced iron (DRI) - electric arc furnace (EAF) process. Globally, however, gas-based DRI-EAF, which is less carbon polluting, has a higher share.

Apart from capacity addition of ~35% over fiscals 2024 to 2027, Indian primary steel makers are also working to improve their environmental, social and governance (ESG) profile by reducing carbon emissions and enhancing disclosures. They have set a target of carbon emissions less than 2 tCO₂/tcs by 2030. As of last fiscal, reported carbon emissions by the steelmakers were down to ~2.35 tCO₂/tcs from over 3 in fiscal 2005. This translates to ~65% of the targeted emission reduction at a compound annual growth rate of ~1.4% over the 18 years.

Says Ankit Hakhu, Director, CRISIL Ratings, “Achieving the 2030 target will require players to step up annual reduction rate to ~2.3%, which is possible by raising the share of renewable energy and scrap-based EAF capacity and adopting carbon capture technologies. As things stand, there is government support through measures such as the Steel Scrap Recycling Policy (2019), National Green Hydrogen Mission¹, and setting up of task forces to focus on improving green steel production. In fact, the emission reduction rate accelerated to ~2.2% in fiscal 2023. In contrast, the global carbon emissions increased from 1.80 tCO₂/tcs in 2007 to 1.91 tCO₂/tcs in 2022.”

The narrowing gap in carbon emissions vis-à-vis global players will help Indian steelmakers retain their competitiveness even with a potential carbon tax² of around €100 per tonne of emission under the Carbon Border Adjustment Mechanism (CBAM) in the European Union. For the record, ~ 10% of the domestic steel output is exported.

The reduced emissions will also strengthen ESG profiles, which will improve access to additional funding avenues such as sustainable finance that has a lower cost of capital and long tenure. This is important, given the expected annual capital expenditure of Rs 55,000-60,000 crore between fiscals 2024 and 2027.

Says Ankush Tyagi, Associate Director, CRISIL Ratings, “Complete transition to green steel will remain a challenge as it requires measures like successful adoption of new technologies such as HYBRIT³/electrolysis, sustainable use of alternative clean fuels such as green hydrogen, and large-scale implementation of carbon capture utilisation and storage, among other changes. This means higher capital and operating cost - new technology for green steel is more than 2-3 times costlier than the BF-BOF route, which accounts for ~67% of the current installed steel capacity. Also, at the current price of green hydrogen ($4.0-4.5 per kg), operating cost will be 1.25-1.5 times higher.”

There are non-economic challenges, too, such as availability of scrap and high-quality iron ore, steady and round-the-clock renewable power, and market acceptance of green steel at higher prices. Companies will also need to step up on disclosures amid increased regulatory and investor push.

In this milieu, timely progress in achieving carbon emission targets, breakthrough in technology and the pace of its adoption, and ability to pass on the rise in cost will be crucial.

¹ Steel Scrap Recycling Policy is aimed at increasing the availability of domestic scrap, a key raw material in producing steel through the EAF route – a less carbon-intensive route. The National Green Hydrogen Mission is targeted at facilitating production and use of green hydrogen in the country, which can increase its economic viability in the steel sector
² Under CBAM, exporters will need to report emissions on quarterly basis starting October 1, 2023. In the absence of a carbon-neutral technology, industries have been allocated free allowance starting at 100% in 2025 and ending at 0% by 2034. Carbon tax would be gradually applicable to the portion that does not enjoy the allowance.
³ HYBRIT - Green hydrogen-based steel production in a DRI-EAF set-up