Macroeconomic implications of switching to process-emission-free iron and steel production in Europe

Abstract

Climate change is one of the most serious threats to the human habitat. The required structural change to limit anthropogenic forcing is expected to fundamentally change daily social and economic life. The production of iron and steel is a special case of economic activities since it is not only associated with combustion but particularly with process emissions of greenhouse gases which have to be dealt with likewise. Traditional mitigation options of the sector like efficiency measures, substitution with less emission-intensive materials, or scrap-based production are bounded and thus insufficient for rapid decarbonization necessary for complying with long-term climate policy targets. Iron and steel products are basic materials at the core of modern socio-economic systems, additionally being essential also for other mitigation options like hydro and wind power. Therefore, a system-wide assessment of recent technological developments enabling almost complete decarbonization of the sector is substantially relevant. Deploying a recursive-dynamic multi-region multi-sector computable general equilibrium approach, we investigate switches from coke-to hydrogen-based iron and steel technologies in a scenario framework where industry decisions (technological choice and timing) and climate policies are misaligned. Overall, we find that the costs of industry transition are moderate, but still ones that may represent a barrier for implementation because the generation deciding on low-carbon technologies and bearing (macro)economic costs might not be the generation benefitting from it. Our macroeconomic assessment further indicates that anticipated bottom-up estimates of required additional domestic renewable electricity tend to be overestimated. Relative price changes in the economy induce electricity substitution effects and trigger increased electricity imports. Sectoral carbon leakage is an imminent risk and calls for aligned course of action of private and public actors.