Non-governmental organizations (NGOs) are pushing for operators in the European Union who use scrap metal in steel production and clinker substitutes in cement-making to be handed free EU carbon allowances to spur decarbonization.

Clinker is a mix of limestone and minerals that is mixed with other materials to make cement, and the process of converting limestone is a carbon-intensive process. Clinker substitutes are available, however, and can be scaled up if EU policy encourages their use.

An EU Commission expert group on climate change policy composed of NGOs, industry associations and member states has met multiple times during the year to revise directives related to the different mechanisms of the cap-and-trade EU Emissions Trading System.

Representatives of Sandbag, a climate policy nonprofit, the European Environmental Bureau, a network of citizen organizations in the bloc, and the World Wildlife Fund European Policy Office (WWF EPO) said that the directives would be presented in the coming weeks or months to allow additional public consultation. The EU Council and Parliament will then choose whether or not to approve the measures by the end of the year.

Camille Maury, a senior policy officer on industrial decarbonization at WWF EPO, said that the allocation of free allowances, in place since 2005, has delayed the industry’s green transition.

“As steel and cement sectors will continue to receive free permits to pollute until 2034 [when the free allowance system is phased out for the two sectors], now is a crucial time to look at how these freebies are allocated and to whom,” Maury said.

“The EU ETS benchmarks must be revised to finally support circularity [and] improve energy efficiency rather than only carry on financing the incumbents. This [free allocation regulation] revision is an opportunity to translate the ambition of the revised EU ETS, agreed in 2022, and make sure it delivers the most ambitious outcome for the climate.”

Redirecting Free EUAs to Less Carbon-Intensive Steel

Riccardo Nigro, a senior policy officer with the European Environmental Bureau, said the steel benchmark currently rewards carbon-intensive processes involving blast furnaces, lime making, coking and inputs that include virgin iron ore.

Currently, there is no incentive to use scrap metal — and the EU Commission’s proposed reforms do not aim to change that — as free allowances are handed out on the basis of the tonnage of hot metal or direct reduced iron (DRI), said Adrien Assous, the executive director of Sandbag. Steel manufacturers that use more scrap metal as part of their input for flat steel production do not receive more free EUAs, while operators that rely on more virgin iron ore inputs receive large amounts of free EUAs.

“It definitely doesn’t cover scrap and our worry is that Europe, the number one exporter of scrap steel, doesn’t know what to do with all this scrap. We send it to Turkey and instead of that we could reuse it and turn it into flat steel products. That would avoid a lot of carbon emissions,” Assous said.

Assous explained that the EU Commission’s proposed revisions to the current rules disincentivize decarbonization or metal recycling by basing free EUA allocation on steel production processes, not the final steel product itself. Under the current free allocation rules, operators who use scrap metal in their steel manufacturing have to pay more than operators who use virgin iron ores, doing away with the incentive to turn to the less carbon intensive input, Assous noted.

“Free allocation [of permits] is given in proportion not of the steel output but of the most polluting component of steel: hot metal. [Hot metal is] an intermediary state of steelmaking and it’s produced in blast furnaces and uses a lot of coal,” Assous said. “But free allocation is given out per ton of hot metal and not of steel, so we’re trying to [convince the EU] that free allowances should be given per ton of steel [produced] and not of hot metal used.”

In a letter in May 2023 to the EU Commission expert group, Sandbag pushed for the inclusion of scrap steel.

“The use of scrap has indisputable climate benefits, roughly reducing emissions by two tons of carbon dioxide per ton of steel scrap used,” the climate non-profit wrote. “It also saves other scarce resources such as electricity compared to other techniques such as hydrogen [direct reduced iron]. Its use should therefore be encouraged at least as much as other abatement techniques.”

Focusing on the final steel product as opposed to the different processes involved in steelmaking will incentivize decarbonization in the sector and will provide operators who use steel scraps in their business with free EUAs, Sandbag argued.

Nigro remarked that the phasing out of free allowances by 2034 under the EU ETS is an important milestone, with the EU’s carbon border adjustment mechanism (CBAM) fully implemented by then and applying the bloc’s carbon price to
imports. With a decade left for free allowance allocation, Nigro said that steelmaking processes that reduce carbon emissions deserve free allowances.

“We’re…10 years away from [the phaseout of free allocation] and basically we want policy reflecting that there are other production processes that should be given more free allocation,” Nigro said.

Clinker-less Cement as an Alternative

Similarly, cement manufacturers do not receive the same amount of free allowances for using clinker substitutes in cement production.

According to the Alliance for Low-Carbon Cement and Concrete (ALCCC), a group composed of 18 low-carbon cement producers, clinker accounts for more than 90% of the sector’s carbon emissions and clinker in cement in Europe averages
around 75%, higher than the global average of 63%. Revising the current cement benchmarks under the EU ETS to include clinker alternatives would reward operators who use less carbon-intensive processes with free carbon allowances.

“The ongoing review of the allocation rules of free emissions under the ETS is a key opportunity for driving this change…the ALCCC is strongly in favor of updating the existing [cement production] benchmark…The current benchmark, based on clinker, has and will not incentivize clinker substitution,” the group said in a statement in August.

“Clinker is the most polluting component in cement and there isn’t really an incentive to reduce emissions even if there are alternatives to clinker,” Assous said. “The free allocation rules are now going to include more alternatives to clinker and this could possibly go quite a long way – though not fully — to solve the problem.”

The ALCCC has called on the EU to give preference in free allocations to processes with the “greatest mitigation potential” including clinker-lowering technologies and alternative binder technologies that rely on supplementary cementitious material or non-clinker based chemistries.

“In line with the ETS directive, it is important that the new [cement] benchmark is both process- and feedstock-neutral, as such putting the right incentives in place for types of technologies,” the ALCCC said in a July statement.

Joren Verschaeve, a program manager at ECOS, an environmental NGO based in Brussels, and affiliate of the ALCCC, told OPIS that the revisions to the EU ETS regulation would also be a chance to push decarbonization as the CBAM is
implemented.

“With the rollout of CBAM, at some point the [steel and cement] benchmarks will become irrelevant and there’s this discrepancy because Europe tries to push other markets to have their own emissions trading systems inspired by CBAM,”
Verschaeve said.

–Editing by Anthony Lane, alane@opisnet.com