Paying a Premium for “Green Steel”: Paying for an Illusion?

• Published in: Journal of Benefit-Cost Analysis
• Main Authors: Johansson, Per-Olov, Kriström, Bengt
• Format: Article in Journal/Newspaper
• Language: English
• Published: Cambridge University Press (CUP) 2022
• Subjects: Northern Sweden
• Online Access: http://dx.doi.org/10.1017/bca.2022.20; https://www.cambridge.org/core/services/aop-cambridge-core/content/view/S2194588822000203

Abstract The iron and steel industry generates around 10 % of global greenhouse gas emissions. The bulk of the emissions originates from the iron ore reduction. In this reduction, coal is used as a reagent. Steelmakers could switch to hydrogen-based direct reduction using hydrogen instead of coal as a reagent to reduce iron ore to pig iron. This would eliminate the CO 2 emissions from the equivalent process in a traditional blast furnace. However, the process requires massive amounts of electricity. This paper looks at the economics of such a switch to “green steel.” We assess a marginal increase in the production of a hypothetical green steelmaker. We also undertake an investment appraisal of a green plant, based on an ongoing installation in Northern Sweden, but also briefly consider a possible/planned investment in the US. This appraisal is complemented by computing the survival function for the net present value in a systematic sensitivity analysis. It seems highly unlikely that a green steel plant can be socially profitable. If the green plant displaces conventional steel produced within the European Union’s cap-and-trade system for greenhouse gases, total emissions remain more or less unaffected; permits and emissions are simply reshuffled. Hence, if end-users of green steel pay a premium, they might pay for an illusion.