EAAERE2019 - Beijing
Date: 04-August- 2019

Decarbonizing the East Asian Steel Industry in2050 – An analysis performed using E3ME…
FTT:SteelPim Vercoulen
Cambridge Econometrics
Co-authored by
Soocheol Lee, Sunhee Suk, Yanmin He,
Kiyoshi Fujikawa and Jean-François Mercure

Research question and objective
Research goal:
It is the goal of this research to provide policymakers in China, Japan, Korea, andTaiwan with valuable insights on how low carbon policies such as carbon taxes
affect technological diffusion and emission reduction until 2050 in the iron and steel
industry.

Research Question:
What kind of decarbonisation can be achieved for the Chinese, Japanese, Korean, andTaiwanese iron and steel industries up to 2050 by imposing varying carbon taxes?

The Steel Industry’s contribution to GHG emissions
 Iron and Steel industry emitted ~5% of global CO2 emissions, ~32% ofindustrial CO2 emissions, and consumed ~30% of all coal
 East Asian countries produce most of all steel (61%)
 China: 49.2% (832 Mt of crude steel) Japan: 6.2% (105 Mt of crude steel) Korea: 4.2% (71 Mt of crude steel) Taiwan: 1.3% (22 Mt of crude steel)Development of steel production
Corex process
is probably alsousedCorex andDirectReduction
processes areprobably also
used

SR-BOF:
Corex

SR-BOF:
Corex

SR+-BOF:
Finex

SR+-BOF:
Finex

China’s crude steel output was on parwith Japan’s output in 1995, but has
since surpassed Japan and any othercountry
Korea and Taiwan gradually increased
their output.
Japan’s output remained constantDue to data gaps several uncommon
technologies are not represented (e.g.
technologies that use SR or DR)

Possible ways to decarbonise the iron and steel industry
 Incremental innovation: Improving energy efficiency through learning Switch fuel source: Fossils  Biomass
 Radical innovation:
 Switch reducing agent: Carbon-based  Hydrogen-based
 Carbon-Based  Direct electrolysis of iron ore
 Carbon Capture and Storage/Utilisation (+ Biomass = negative nett emissions) Recycling (i.e. Secondary production)

Policies to incentivise decarbonisation of the steel industry
 Market pull policies:
 Regulations
 Carbon tax
 Material tax / subsidy

 Technology push policies:
 Subsidies on capital investment
 Planned capacity additions
 Energy efficiency investments (prototype) R&D investments (prototype) Miscellaneous policies: Capacity utilisation regulation

Future Technology Transformations
 First developed by Jean-Francois Mercure for the power sector (FTT:Power) Followed by FTT:Transport (Aileen Lam), FTT:Heat (Florian Knobloch), FTT:Steel(me), and soon by FTT:Agri (Soeren Lindner)
 FTT simulates technological diffusion in a given sector by taking into accountexternal influences (E3ME)

tt + ΔtDomain of FTT:SteelIn FTT:Steel, the pathways illustrated
on the left were identified.
We assume that all precursor processes(e.g. coking of coal, or pelletising ironore), and ironmaking occurs on-site.
For each integrated steelmaking route,
several variants exists (see next slide).

Integrated steelmaking routes included in FTT:SteelIronmaking technology

Steelmaking technology

Integrated steelmaking
designation

Conv. BF
Conv. BF
BF TGR
DRI (gas)
DRI (coal)
SRI
SRI+
HFS
-OHF
BOF
BOF
EAF
EAF
BOF
BOF
EAF
MOE
EAF

Conv. BF-OHF
Conv. BF-BOF
BF TGR-BOF
DRI (gas) -EAFDRI (coal) -EAF
SRI-BOF
SRI+-BOF
HFS-EAF
MOE
Scrap-EAF

Total No. of technologies in FTT:Steel# of variations

1 (D)
4 (D,BB,CCS,CCSBB)
2 (CCS, CCSBB)
4 (D,BB,CCS,CCSBB)
4 (D,BB,CCS,CCSBB)
4 (D,BB,CCS,CCSBB)
4 (D,BB,CCS,CCSBB)
1 (D)
1 (D)
1 (D)
26

D = Default; BB = Bio-based; CCS = Carbon capture and storage/utilisation; CCSBB = Carbon capture andstorage/utilisation in combination with bio-based production

FTT Methodology
Conv. BF BOF

Conv. BF BOF

Conv. BF BOF

DR(gas) - EAFDR(gas) - EAFDR(gas) - EAFDR(coal) EAF

DR(coal) EAF

DR(coal) EAF

SR - BOF

SR - BOF

SR - BOF

HFS - EAF

HFS - EAF

HFS - EAF

Scrap - EAF

Scrap - EAF

Scrap - EAF

FTT calculates the Levelised Cost ofSteelmaking (LCOS)  (imperfect)
Investor preferences  Can be affectedby:Learning-by-doingPrices of raw materials
(Un)availability of scrap
Emissions (when carbon taxes areapplied)Market share changes are thenproportional to investor preferences, andtechnological and sectoral constraints

 integrated treatment that places
the economy inside the constraintsof society and the naturalenvironment

 well-suited to both short-term andlong-term analysis

 strong empirical grounding
through its econometric equations

 dynamic modelling of technology
take-up a track record of application over
25 years

 global coverage but highly
disaggregated at national andsectoral level designed to assess the key
challenges facing policy makers

 a publicly available model manual wide coverage of economic, socialand environmental indicators

 flexibility to test a diverse range ofpolicies

Structure of E3ME
E3ME is a macro-econometricmodel designed to assess global
policy challenges.

E3ME is a macro-econometric model designed
to assess global policy challenges. It is theconnectseconometric
Energy, Economy,andmostIt advanced
model in theworld
and Environment.
is widely used forpolicyassessment,Theinnovation
part isforecasting
andFTT
research
purposes.
done via
for specificsectors.

How does FTT:Steel fit within E3ME?
E3ME

affect all demand types

intermediatedemandinvestment
demand- fuel tax- carbon tax

FTT:Steel policies*

consumerdemandSteeldemand
FTT:Steelexport
demandimportdemand (ve)Steel flows tocalculate future
scrap availability

IO feedback

industry CO2
averagepriceinvestment
Employment
feedback to E3ME investment

Circular economy
fuel demanddifferent
production
methods

raw material
demandDecarbonisation scenarios
Baseline
scenario

No policies-Scenario aLow carbon tax case

10$2008 to 50$2008(2020-2050)

Scenario b

Medium carbon tax case

10$2008 to 100$2008(2020-2050)

Scenario cHigh carbon tax case

10$2008 to 200$2008(2020-2050)

Policies apply economy wide!

Technological diffusion
Investors in China mainly choose forvariations of the Conv. BF – BOF.
In Japan, the diffusion of SR and SR+ (BOF) and HFS-EAF gain minor market
shares
Korea and Taiwan mainly switch
towards the Scrap-EAF route (~50%market share) and, to a smaller
degree, towards HFS-EAF (~4%)

CO2 Emissions

ComparedtoChinaJapan

S1

S2

2005 levels(%)

2511912050
baseline (%)-13Totalaverted (GtCO2)

3.5

ComparedtoS3S1S2S349-23-49-62-51-63-26-51-68

7

13.6

0.5

0.9

1.4

S2S3

Korea

TaiwanS1S2S3S12005 levels
(%)

272

117-27160

91-342050
baseline (%)-16-51-83-11-35-77

Total
averted (GtCO2)

0.4

12

<0.1

0.2

0.4

Economic indicators
Steel import increases, especially in Japan
Steel export increases as well, most likely
due to exports to each other
GDP increases in the period after
implementation of carbon taxes (exceptJapan), but decreases afterwards
China takes the largest hit to GDP. Probably
due to its vast steel industry being required
to transform
The prices of steel go up, in particular inChina

Key messages
 Climate large scale decarbonisation, but not complete decarbonisation, can be achieved through carbontaxes

 Economy
 the East Asian countries can maintain a large-scale iron and steel industry
 carbon taxes: positive effects at first, negative effects later on Policies
 carbon taxes are not enough technology-push policies and regulations should be consideredThis is a general
conclusion ofE3ME!!!

Limitations of FTT:Steel Bad input parameters
 FTT is path-dependent and therefore susceptible to bad data that feed into the initial parameters
 presently uncommon technologies are not well reported

 Bad assumptions
 the iron and steel industry may not always follow an integrated route (e.g. in Brazil there are a
few independent ironmakers that supply to the independent steelmakers)
 due to lack of data, no variation in regional data on material consumption or capital investment
costs was applied biomass prices are poorly represented in the modelAn update of FTT:Steel Increased the number of regions (59 to 61)
 Historical data was updated to 2018
 Bottom-up description of employment
 Endogenous estimation of scrap availability
 Crude form of steel scrap tradeAny questions?

Calculation of LCOS•

Affected byPrice of commodity based on Levelised Cost Of Steelmaking (LCOS) calculationnecessistyfor
Affected by𝜏
𝐼𝐶 𝑡 +plants
𝑂𝑀 𝑡 + 𝐹𝐶 𝑡 + 𝐶𝑂2𝑇 𝑡 + ⋯learning and𝑁𝑃𝑉𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠 = precursor
෍𝑡1+𝑟scrap
0(un)availability
𝑁𝑃𝑉𝑖𝑛𝑐𝑜𝑚𝑒 = σ𝜏0

Affected bylearning
𝐵𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛:𝑁𝑃𝑉𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠=𝑁𝑃𝑉𝑖𝑛𝑐𝑜𝑚𝑒

Illustrates imperfectknowledge anddifference in theperceived costs byinvestors

σ𝜏0𝑃 𝑡 ∗𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛(𝑡)1𝜏σ=𝑃∗01+𝑟 𝑡
1+𝑟 𝑡

𝐼𝐶 𝑡 + 𝑂𝑀 𝑡 + 𝐹𝐶 𝑡 + 𝐶𝑂2𝑇 𝑡 + ⋯1+𝑟 𝑡=11
𝜏𝑃 ∗ σ01+𝑟 𝑡
Affected by learning

𝐿𝐶𝑂𝑆 𝑡 = 𝑃 =σ𝜏0sdLCOS =𝑠𝑑𝐼𝐶ൗ
𝐶𝐹

σ𝜏02

𝐼𝐶 𝑡 +𝑂𝑀 𝑡 +𝐹𝐶 𝑡 +𝐶𝑂2𝑇 𝑡 +⋯1+𝑟 𝑡
1
σ𝜏01+𝑟 𝑡+ 𝑠𝑑𝑂𝑀2 + 𝑠𝑑𝐹𝐶 2 + ⋯1+𝑟 𝑡1
σ𝜏01+𝑟 𝑡(decrease inemissions), andmaterialconsumption

How does E3ME compare to other models?
E3ME’s empirical approach means that we do not apply restrictive assumptions that are typical to CGE models…

Our Areas of WorkWhat are the typical model outputs of E3ME?

 GDP and its aggregate
components
 sectoral output & GVA, prices,trade & competitiveness effects
 sectoral international trade inbilateral format & can bepresented by trade blocs
 consumer prices & expenditures, &implied household distributional
effects

 sectoral employment by gender labour force and participation rateby gender and age groups energy demand, by users and byfuel energy prices

 unemployment rate and level power sector detailed results

 sectoral wage rate

 CO2 emissions by sector and byfuel real income of different
socio-economic groups
 GINI coefficients other air-borne emissions
 material demands (DMC, DMI, DE,M, X, TMR), by users and bymaterials