A GREEN FUTURE
FOR STEEL
74% of EU steel blast furnace capacity
needs reinvestment by 2030
Use of scrap metal can rapidly
reduce emissions
Technologies to transition
the steel sector already exist
Transitioning the EU steel sector to net zerorequires relatively low CAPEX investment

Prepared by Climate Bonds Initiative.

Summary
74% of EU steel blast furnace
capacity needs reinvestment
by 2030.1
The 2020s offers a perfect opportunity for the
steel industry to transition in Europe. Blast
furnaces have a life span of decades and coming
investment cycles will lock plants into a specificproduction process. As the next investment cycle
will not happen for at least two decades, failingto transition the steel sector could threaten
government pledges to reach net zero by midcentury. Policymakers must guide industry
and investors onto a climate-aligned pathway
for steel. Green hydrogen and electrification,
together with carbon capture use and/or storage
technologies, present an opportunity for the steel
industry to transition.

Steel accounts for 22% of EU
industrial CO2 emissions but
has not been subject to the full
price of carbon pollution under
the ETS.2
Free emission allowances cover 80% of steel
industry carbon emissions subject to the ETS, due
to carbon leakage concerns. The proposed Carbon
Boarder Adjustment Mechanism (CBAM) would
address this, and free allowances could be phased
out for sectors covered by the CBAM by at least
2030, much earlier than had been planned (2035).

Transitioning the EU steel
sector to a net-zero aligned
pathway requires a relatively
low CAPEX investment.

The 2020s
offers a perfectopportunity fortransition

It is estimated that EUR21-31bn in CAPEX
is required to transition the European steel
sector and meet the 2030 climate targets.4 This
investment should be made within the next
decade to meet emission reduction targets
and avoid a commitment to high-emission
production pathways. The green bond market
reached cumulative volumes of EUR1.8tn by theend of 2021 and continues to grow rapidly. It is
well positioned to absorb additional supply fromentities in the steel sector, and investors would
welcome diversification opportunities from anincreased variety of sectors.5

Increasing the use of steel scrap
can rapidly reduce emissions.
Strengthening environmental criteria and circular
economy requirements for steel waste treatment
would encourage reuse of steel scrap. Blast
furnace-basic oxygen furnace (BF-BOF) production
emits 2.3 tons of carbon dioxide (CO2) per tonof steel produced, compared to 0.7 ton of CO2/
ton of steel from steel scrap production (global
average intensity for scope 1 and 2 in 2018).3

Technologies to transition thesteel sector already exist andmust be scaled-up.

Transitioning the EU
steel sector requires a
relatively low investment

Establishing Carbon Contracts for Difference (CCfDs)
improves the investment potential for nascenttechnologies and long-term offtake certainty.

Use of steel
scrap canrapidly reduce
emissions

A Green Future for Steel - Climate Bonds Initiative

Companies need assurance ofthe viability of the expenses
required to transition to green
steel production.
Public procurement can drive the market
for green steel. The EU has set green public
procurement (GPP) criteria, but these are only
voluntary. Setting a timeline for introducing
mandatory criteria in line with the Green Dealwould enable preferential spending to beembedded in ministerial budgets. Aligning GPP
standards with the EU Taxonomy will ensure
consistency of green public investment.

2

Contents

List of acronyms

Summary 2

BF-BOF blast furnace basic oxygen furnace

IEA International Energy Agency

1. Crucial opportunity for steel
decarbonisation 4

CBAM Carbon border adjustment mechanism

IPCC Intergovernmental Panel on Climate Change

CCfD Carbon Contracts for Difference

ITRE Industry, Research and Energy

CEF Connecting Europe Facility

KPI key performance indicator

CLT Cross-laminated timber

LCA life cycle assessment

CO2 carbon dioxide

Mt million tonnes

CSRD Corporate Sustainability
Reporting Directive

NFRD Non-financial Reporting Directive

6. Conclusions 21
Appendix I: EU Stakeholders 22

DNSH Do No Significant Harm

Appendix II: European Just Transition 23

DRI direct reduced iron

Appendix III: Central Bank policy tochannel investment flows 24

DRI-EAF direct reduced iron electric arc furnace

2. Importance of the EU steel sector 5
3. Ensuring a credible transition 11
4. Mobilising investment for 1.5°C 17
5. Opportunities for transition finance 19

Appendix IV: Role of Financial Markets
Supervisors and Regulators 24
Endnotes 25

EAF electric arc furnace
EC European Commission

NGEU Next Generation EU
PCIs Projects of Common Interest
PSF Platform on Sustainable Finance
RED II Renewable Energy Directive II
RRF Recovery and Resiliency Facility

ECB European Central Bank

SDE++ Stimulation of Sustainable Energy
Production and Climate Transition

ECSC European Steel and Coal Community

SFDR Sustainable Finance Disclosure Regulation

EIB European Investment BankSLB Sustainability Linked Bonds

EOR enhanced oil recovery

TEG Technical Expert GroupESTEP European Steel Technology Platform

TEN-E Trans-European Networks for Energy

ETS Emissions Trading System

TRL technology readiness level

EU European Union

TSC technical screening criteria

EUROFER European Steel Association

UNFCCC United Nations Framework Convention
on Climate Change

GHG greenhouse gas
GPP green public procurement
GSS Green, Social and Sustainability

UoP Use of Proceeds
WSR Waste Shipment Regulation

HYBRIT Hydrogen BreakthroughIronmaking Technology

A Green Future for Steel - Climate Bonds Initiative3

1. Crucial opportunity for steel decarbonisation
Steel is a crucial input for multiple key sectors suchas construction, renewable energy production
and transport and is a fundamental element of a
successful economic transition to net zero.
The 2015 United Nations Framework Convention
on Climate Change (UNFCCC) Paris Agreement
is a testament to the global determination tolimit increasing global temperatures to 1.5°C.
To achieve this limit, all sectors of the economy
must decarbonise rapidly, reducing emissions by
nearly half by 2030 and to net zero by 2050.
However, only a few economic activities operate
at or near zero emissions today. In addition,
most sectors require substantial financing, clear
guidance, and a framework of supportive policies
to transition to net zero. For some sectors, known
as hard-to-abate, and including chemicals, fossil
gas, cement, and steel production, the pathways
to this decarbonisation are less obvious. Greaterattention is now being paid to these hard-to-abate
sectors, and detailed decarbonisation plans,
and pathways are being published showing thatfeasible low/zero-emission solutions are possible
within a reasonable timeframe.
To date, the European Union (EU) has led the way
in the race to net zero with the ambitious Green
Deal strategy and associated Fit for 55 Policy
Package. The challenge is not only in developing
the technology but also in overcoming financial
and political barriers. The suite of EU policies
and legislation supporting the net-zero transition
must be coherent and mutually reinforcing, andrapid enough to meet climate targets.
This paper aims to support the EU in defining
the necessary policy framework for financing
the transition. While primarily focused on the EU
context, many of the policy tools apply globally.
The decarbonisation pathways used in this paper
follow both the EU’s climate targets (2050 climate
neutrality and 2030 55% emission reduction target),Intergovernmental Panel on Climate Change (IPCC)
guidance and the 2021 International Energy
Agency (IEA) Net Zero Roadmap. In the latest
IPCC Working Group III report, Climate Change
2022: Mitigation of climate change, IPCC scientists
forewarned that without immediate and deep
emissions reductions across all sectors, limiting
global warming to 1.5°C is beyond reach.6

A Green Future for Steel - Climate Bonds Initiative

Investing in the transition of the hard-to-abate
sectors presents a unique opportunity for the
EU to continue to lead on the climate agenda
by supporting the development of innovativetechnologies and scaling up renewable energy.
Failure to grasp this opportunity, and acontinuation of business-as-usual, will expose
the EU to the risk of missing vital climate targets,and facing physical climate-related damage. It
would also lock in stranded assets worth billionsof Euros, and a disorderly and chaotic transition,
exposing the real and financial economies totransition risks and possible financial crisis.
Climate Bonds Initiative (Climate Bonds) has
embarked on an ambitious transition programme
to provide the industrial pathways, sustainablefinance standards, policies, and investment
guidance required to deliver credible transition in
the hard-to-abate sectors. The financial markets
must implement the results of this work to
support the decarbonisation of the sector. This
paper is part of a series focused on the policies
and regulations needed in the EU to facilitate theflow of finance necessary for the transition.
These policies will be complemented by the
Climate Bonds sustainable finance criteria for the
steel sector expected in 2022.7

This paper aims to address thefollowing question:
How can the EU ensure agreen future for steel throughpolicy and sustainable financeframeworks?

1.1 Methodology
This policy package aims to support the EU
in defining the necessary policy frameworkfor financing transition to net zero in the steel
sector. It is based on an analysis of existing EU
policies and a literature review of steel transition
policies. It is supported by an assessment of theEuropean steel sector, including a summary of
the technologies and solutions allowing for deep
emission reduction.
This policy package is supported by extensive
stakeholder analysis, identifying vested interests
and assessing views and commitments on thesteel industry transition. The results of thisanalysis are summarised in Annex I.
EU policies relevant to the sectoral transition
were identified and analysed against the Climate
Bonds Credible Transition Principles, and thedecarbonisation pathways set out by the IEA andother international organisations to assess theirsufficiency in facilitating the sector’s transition.8
Particular attention was paid to the Fit for 55
policy package, which aims to deliver rapid
decarbonisation in the next decade, including
the European Emissions Trading System (EU-ETS)
and Carbon Border Adjustment Mechanism(CBAM) legislative proposals.
A literature review informs the policy suggestions.
Several policy recommendations anddecarbonisation pathways for the steel sector
have been identified by public and private sector
stakeholders including Agora Energiewende,
E3G-PNNL, IIGCC, IEA, ResponsibleSteel, Mission
Possible Partnership, EUROFER, World Steel
Association, Roland Berger, CEPS, and the workof the EU Platform on Sustainable Finance.

Section 2 summarises the size, emissions
contribution, technologies, challenges, and pathways
to transition of and for the European steel sector.
Section 3 examines how policymakers canensure the credibility of this transition, drawing
on existing EU policy and strategies andrecommending how these can help to deliver acredible transition.
Sections 4 and 5 propose how investment flows
may be channelled into the steel sector transition.

4

2. Importance of the EU steel sector
2.1 Steel accounts for 22%
of EU carbon emissions
Currently, steel accounts forapproximately 22% of EU
industrial CO2 emissions and
4% of total EU CO2 emissions.
Around 90% of these emissions
are generated by coke andiron in steel production and come from less than
40 integrated steel plants accounting for nearly
70% of the EU’s steel.9 The coke-making process
consists of converting coal to coke by heating
at high temperatures in the absence of oxygen.
Heating coal allows for the removal of volatile
matter such as tar, oil, and nitrogen.10

Figure 1: Total Crude Steel Production Process in the EU
100

22%

90
BOF

Million metric tonnes

80
70
60

Electric

50
0
2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Source: https://www.eurofer.eu/publications/archive/european-steel-in-figures-2020/

Figure 2: Steel production in the EU (EUROFER)
Blast furnace and basic oxygen
Blast furnace only
Basic oxygen Furnace only
Electric arc furnace

Natural gas
22.3%

A Green Future for Steel - Climate Bonds Initiative5

In 2020, Europe accounted for 7.6% (139.3
Mt) of world crude steel production andsupported over 2.6 million jobs (326,000
directly and 1,620,000 indirectly). Steelis integrated into the supply chain of key
sectors, such as construction, automotive,
and machinery.11 The construction industry
represents 38% of European steel demand,
while automotive, mechanical engineeringand metalware activities account for 16%, 15%
and 14%, respectively.12 The decarbonisationof steelmaking production processes is criticalto the transition of these sectors and theachievement of their emission reduction targets.

Total crude steel production in the EU fell between
2010 and 2019 from 172,785,000 metric tons to
157,553,000 metric tons. However, global steel
production grew over this period, with much of the
production shifting to China. Whilst in Europe, theBlast Furnace – Basic Oxygen Furnace (BF-BOF)
process has consistently accounted for around 60%
of total EU crude steel production, see Figure 1, andElectric Arc Furnaces (EAF) production at around40%, in China, production is 90% BF-BOF.13 This
proportion is of interest as BF-BOF CO2 emissions
intensity is 2.3 tons of CO2 per ton of crude steel(global average intensity for scope 1 and 2 in 2018)
whilst the figure for EAF production is 0.7 tons of

CO2 per ton of crude steel (global average intensity
for scope 1 and 2 in 2018).14 Increasing the share of
EAF production using renewable electricity would
enable rapid emission reduction because of theprocess’ lower carbon intensity. Such an increase
would be dependent on supplies of scrap steel andrenewable electricity, as well as EAF capacity.
Steel making can be classed as primary (making
new steel from iron ore) or secondary (using mainly
recycled steel). Primary steel production in the EU isdominated by the BF-BOF process, with secondary
production using mostly EAF, see Figure 1.15

Figure 3: Blast furnace steelmaking (EUROFER)

Pellets

Scrap
Ladle
(refining)

Iron ore
SinterLimestone

Coal

Blasts furnace(iron making)Coke

Converter(steelmaking)Continuous
casting

Figure 4: Electric arc furnace steelmaking (EUROFER)
Pellets

Iron ore

Ladle(refining)

Electric arc furnace(steelmaking)Continuous
casting

Coal/Fossil gas
Directreductions

A Green Future for Steel - Climate Bonds Initiative

Scrap

6

Table 1: EU countries indescending order of crude
steel production
2020
(1000
metrictonnes)%shares2020

Germany

35658

25.6

Italy

20379

14.6

France

11596

8.3

Spain

11142

8

Poland7856

5.6

United Kingdom

7099

5.1

Austria

6765

4.9

Belgium

6119

4.4

Netherlands

6054

4.3

Czech Republic

4450

3.2

Sweden4383

3.1

Finland3498

2.5

Slovakia

3444

2.5

Romania2790

2

Others2203

1.6

Luxembourg

1886

1.4

Hungary1513

1.1

Greece1308

0.9

Slovenia623

0.4

Bulgaria

484

0.3

Croatia

45

0

TOTAL

139295

99.8

Multiple studies and pathways for steel
decarbonisation have been modelled.16 Thesepathways centre around increasing recycling
and steel scrap use, reducing emissions throughincreasing secondary production, changing
production processes (via electrification andhydrogen), and capturing emissions through
Carbon Capture and Storage (CCS) technology.
With a legally binding EU goal of a 55% reductionin emissions by 2030, there is a politicalimperative to make meaningful reductions thisdecade. The time is ripe as 74% of EU blast
furnace capacity is due for renewal in the nextten years. The EU is therefore presented witha narrow window to implement the policies
required for the sector to transition to net zero.
As regulations are tightening globally to
reduce emissions and limit climate change,
many steel companies have started to outline
decarbonisation and net-zero targets.17 Pilot
projects are being introduced to test and scale
A Green Future for Steel - Climate Bonds Initiative

up new and emerging technologies. There havebeen announcements to build around 36 Mt
of DRI capacity in the EU and the Green Steel
Tracker has logged over 20 projects focusedon piloting low-carbon production, mostly inEurope.18 Steel companies representing around
20% of global primary production capacity haveset climate targets reflecting their asset base,technology portfolio strategy, and locationspecific resource circumstances.19 Moreover,important steel-producing and -consuming
countries and regions, such as the EU, UnitedStates of America, South Korea, Japan, and China
have also set net-zero targets, giving a clear signal
to invest in the technologies needed to transition
the whole economy, including the steel industry.
Credible and 1.5°C-aligned science-based
standards for steel transition are needed urgently
to prevent greenwashing and provide confidence
to the industry and investors. Climate Bonds isaddressing this by developing credible, 1.5°C-aligned,science-based transition finance standards for the
hard-to-abate sectors including steel.

2.2 Urgency of investing ingreen steel
The ageing fleet of EU blast
furnaces represents anopportunity to innovate anddrive the transition, gaining
a competitive advantage bydeveloping new and innovativetechnologies. Over 70% of the EU’s steel furnaces
are due for renewal in the next ten years. As such,
the EU has a narrow window to implement thepolicies necessary to help the sector transition
and reach its climate targets.20 74 Mt of EU blast
furnace capacity needs reinvestment by 2030. As
of April 2022, total industry plans for low-carbon
steelmaking technologies investment amount toaround 36 Mt of primary steel production.21
The industry also faces an ageing steel plant
fleet. Substantial CAPEX is needed to renew
and refurbish steel plant assets. Roland Berger
estimates that the CAPEX of Direct Reduced
Iron Electric Arc Furnace (DRI-EAF) production
with hydrogen required to transition theEuropean steel and meet the 2030 climate
targets totals EUR21bn, while EUR31bn would
be needed to finance the CAPEX of Blast
Furnace – Basic Oxygen Furnace (BF-BOF)
with CCS technologies.22 The associatedinvestment essentially locks that plant toa specific production process for up to five
decades. A study commissioned by the European
Parliament’s committee on Industry, Researchand Energy (ITRE) found that new, low-carbon
technologies to transition the steel sector will
require an investment of around EUR50-60bn and
EUR80-120bn of annual capital and operating
costs.23 McKinsey estimates that European steel
companies will need to invest up to EUR100bn by
2050 to decarbonise their production processes.24

The European steel sector has faced several
challenges in the last decade. Following the
global financial crisis in 2008-2009, the steel
industry witnessed a demand loss of around
35 Mt.25 Such a loss was mainly driven bylower demand from the construction andautomotive sectors, as well as an increase ininternational competition.26 More recently,
COVID-19 aggravated some of the challenges
faced by the European steel industry. In 2020,
steel consumption in the EU decreased by 11%(on top of a 5% decrease in 2019) year-on-year.27
In particular, EU passenger car sales dropped
by around 23% year-on-year in 2020.28 However,thanks to the removal of lockdown measures andstronger demand from steel-using sectors, EU
steel consumption increased by more than 13% in
2021 and is expected to grow more moderately in
2022 and 2023 (+3.2% and +1.7%, respectively).29
Steel capacity utilisation in the continent is
expected to reach 70-75% of overall capacity inthe medium term, with demand levels of around140-150 Mt of steel per year.30 According to a
McKinsey study, a reduction of around 30 Mt
of extra capacity would be necessary to reachsustainable levels, corresponding to at least
85% of capacity utilisation.31 Even though OECD
studies estimate that steelmaking capacity will
likely increase in Europe in the next few years, theEU is witnessing some steel plant closures. For
instance, in October 2020, ArcelorMittal Poland
closed its Krakow blast furnace with a capacity
level of 2.6 million metric tonnes.32 ArcelorMittal
stated that its Krakow operations had become
economically unviable for multiple reasons, suchas high energy costs.
Despite being one of the most efficient
steel industries compared to international
competitors, European steel producers are facedwith higher costs. Such costs are mainly driven
by higher energy, labour, and raw material costs. In
particular, raw material prices are expected to remain
volatile and uncertain, as they have since 2019.33
Global steelmaking capacity increased by 1.6%
year-on-year in 2020 mostly in Asia, but withsmaller increases in the Middle East, North
America, and Africa. Meanwhile, steelmaking
capacity decreased in Europe and Latin America.34
The global steel industry witnessed increasinglevels of debt in 2005-2014, although this trend
has reversed in recent years.35 The global steel
sector’s average operating profitability - theratio of earnings before interest, taxes anddepreciation to sales revenues (weighted by total
sales) - amounted to 12% in 2020, up from 9%
in 2019.36 However, OECD studies estimate thatprofitability is still below sustainable levels formany firms. According to McKinsey, the EU steel
sector should undertake a targeted divestment of
unprofitable or low-profit products and non-core
assets or businesses.37

7

2.3 Transition pathways
for steelClimate Bonds has designed
science-based guidance
for industry stakeholders
to identify 1.5°C-aligned
pathways and support
informed investment decisions
consistent with the IIGCC net-zero steel
investment approach.
In the absence of formal consensus bygovernments or industry bodies, the wide varietyof actions, targets and commitments emerging
from industry players may not align with a 1.5°C
future. Risks include only addressing emissions
from production processes rather than theentire supply chain, as well as overreliance ontechnology such as CCS.
Several studies and pathways for steel
decarbonisation have been modelled. Each ofthese pathways is based on different scenarios andassumptions and varies depending on the regional
focus. The pathways differ, but provide a usefulindication of the potential to reduce GHG emissions
and the role of low-carbon technologies. Thissection analyses the pathways to transitioning theEuropean steel sector. Particular attention is paid tothe studies carried out by E3G-PNLL, IIGCC and IEA.
According to E3G-PNNL, an orderly 1.5°C scenario
requires EU steel sector emissions to fall by at least
48% by 2030 and by 97% by 2050, from 2020 levels.38
The steel sector transition to a 1.5°C-aligned
pathway requires several technologies. The mixof technologies will vary from plant to plantin relation to context and none of them could
reduce emissions to net zero alone.
E3G-PNNL’s 1.5°C scenario for the EU sees large
scale demand reduction, 64% EAF production
from scrap (from 40%), 15% hydrogen-based(75% green and 24% blue hydrogen) DRI anda small but important role for Carbon capture,
use and/or storage (CCUS). 60% of electricity
used in the sector will need to be produced fromrenewable energy by 2030.39

Demand reduction and circular economy
Material efficiency and steel recycling canreduce emissions by up to 55% in the EU.40
These measures can be implemented directly
by steel companies but also need stakeholder
support and behavioural change across the value
chain.41 Material efficiency improvements can
reduce steel production by 22-28% in Europe by
2050 compared to a BAU scenario.42
Steel is 100% recyclable, and its circularity
is already exploited in today’s production
processes. Around half of EU steel is produced
from scrap metal. Increasing steel recycling andresource efficiency, hence reducing the energy
needed to manufacture steel, would rapidly
reduce the sector’s emissions.43
A Green Future for Steel - Climate Bonds Initiative

The European steel industry has reduced its
emissions by 26% since 1990 with energy
efficiency measures and higher recycling rates(currently 85% end-of-life steel).44 In 2020, exports
to non-EU countries of ferrous metals waste (ironand steel) amounted to 17.4 Mt, representing
more than half of all waste exports, with Turkey
accounting for 68% (11.8 Mt) of the ferrous
metal waste exported from the EU.45 Steel scrap
is already widely recycled due to its economic
value. 130 Mt of steel scrap worth EUR30bn isrecovered annually in the EU.46 On average, steel
scrap recycling reduces CO2 emissions by 58%,
air pollution by 86% and water use and pollution
by 40% and 76%, respectively.47
Scrap availability in the EU is estimated to be as
much as total EU annual steel needs, with thepotential to be used for most demand, provided
that the quality is good enough.48
Challenges to further increasing the percentageof recycled steel use remain, and more efforts
must be made to improve recycling processes.
Some elements, such as copper, cannot
currently be removed during steel production.49
Some applications such as car manufacturing andstructural steel in buildings need low levels of copper
content, making it difficult to use secondary steel.50
Improving production efficiency and delaying theretirement of steel-based products and buildings arealso important aspects. The IEA’s Energy Technologies
Perspectives report indicates that resource efficiency
reduces global demand for new steel by 29% under
the Sustainable Development Scenario comparedwith the Stated Policies Scenario.51
As private companies are unlikely to voluntarily
lower production volumes, the forecasted steadyor decreasing demand for steel products in
Europe must be addressed by regulation.52
The 2020 EU Commission Communication A new
Circular Economy Action Plan stated that priority
would be given to addressing products such as steel,cement, and chemicals. As part of this legislative
initiative, the Commission will consider establishingsustainability principles and other ways to regulate
this issue. However, there is a lack of coherent
and comprehensive policies to increase material
efficiency and the steel sector’s circular economy.
Applying circular economy principles acrossEurope could increase EU GDP by an additional
0.5% by 2030, creating around 700,000 jobs.53

The Regulation also aims to establish simpler
procedures for recycled materials to re-enter thevalue chain. Full digitalisation of all procedures
governing waste shipments between EU Member
States would boost intra-EU-trade of metal scrap.
Substitution could reduce steel demand
Cross-laminated timber (CLT) can substitutesteel, cement and other carbon-intensive
materials traditionally used in construction.
Regulatory and production barriers such as
the lack of standardisation remain, creating
confusion and requiring individual building
design. CLT currently has a low market shareof less than 0.1% of homes in this sector, andthere is the potential for this to increase to
20-60%.56 The global CLT market could reacha compounded annual growth rate of 13.2%
between 2021-2026, reaching a global market
size of USD2.7bn, USD1.5bn in the EU.57

Carbon direct avoidance technologies
Carbon direct avoidance (CDA) replaces highemitting coke or fossil gas with alternative ironore reductants, including hydrogen or electric
current, potentially producing 100% green steel.
Currently, these solutions are more expensive thanconventional approaches, indicating untapped
potential to scale up investments in technology
and increase economic competitiveness, as seenin the renewable energy sector.58
95% of the 70 Mt global annual hydrogenproduction is currently produced from fossil
fuels leading to nine to 12 tonnes of CO2 emitted
for every tonne of H2 produced.59, 60 Only theuse of green hydrogen produced from renewableelectricity, or blue hydrogen produced from fossil
gas with high CCS and minimal supply chain
leakage, can reduce emissions in CDA production.
The largest challenge for ramping up CDA
production is the availability of low-carbonhydrogen. Climate Bonds’ Accelerating the Fossil
Gas Transition to Net Zero addresses this.61

Long-term roadmaps for the reduction of waste
and for the reuse of raw materials with clear
targets for improving the circularity of carbonintensive industries and materials such as plastic,
steel and cement could be introduced.54
The Waste Shipment Regulation is aimed topromote a circular economy in Europe andavoid excessive waste shipment in a range ofsectors including metals.55 Illegal exports of scrap
metal amount to 30% of all waste shipments
in Europe and are worth EUR9.5bn annually.
8

Figure 6: Steel production change needed to meet EU 2030 climate targets
Necessary production capacity transformation in Mt to achieve -30% emission reduction target
Direct carbon emissions
60

1.8

50

1.5

40

1.2

30

0.9

20

0.6

10

0.3

DRI-EAF with hydrogen is the most efficientmethod in terms of the scale and level ofemissions reductions achieved (-98%), see Figure
6. Total CAPEX of DRI-EAF with hydrogen required
to transition the European steel and meet the2030 climate targets is estimated at EUR21bn.66

Figure 7: CAPEX requirements of steel transition to meet 2030 EU targets(Roland Berger)

The full amount of emissions reduction that
CCUS technologies can achieve depends ontheir efficiency rates. As high rates still need to be
proved, especially with regards to steel plants,
CCUS technologies do not completely eliminate
GHG emissions and, given the long lifecycles ofsteelmaking assets, the associated investment
risk of locking those plants to these specificproduction processes for up to five decades
needs to be considered. The implementation ofincreased circularity, CDA, or CCUS technologies
make decarbonising steel production processes
expensive but the price of doing nothing is higher
and would likely result in increased investment risk.

A Green Future for Steel - Climate Bonds Initiative

BF-BOF
with CCS

DRI-EAF with DRI-EAF withfossil gas
hydorgen

DRI-SAFBOF withfossil gas

DRI-SAFBOF withhydrogenCapex requirements in EUR bn

Million tonnes

40

100%

30

75%

20

50%

10

25%

0

0%
Do-nothingcase

BF-BOF
with CCS

DRI-EAF with DRI-EAF withfossil gas
hydorgenThis technology can be retrofitted to today’s
BF-BOF steelmaking production plants but there
still are some limitations, mostly around scale,cost, and efficiency. Firstly, CCUS has only beensuccessfully used at small scale, and the only
fully operational CCS plant for steelmaking asof June 2022 is Emirates Steel’s DRI unit in the
United Arab Emirates. This facility can capture up
to 800ky of CO2 annually, which is then compressed,
dehydrated, and transported to an onshore oil field
for enhanced oil recovery (EOR) through a pipeline.70
Secondly, CCUS will require new investment.
Total CAPEX of BF-BOF with CCS technologies
required to transition the European steel sector
and meet the 2030 climate targets is estimated

DRI-SAFBOF withfossil gas

Percentage% of emission reduction compared to do-nothing case

CCUS technologies can contribute to reducing
hard-to-abate sectors’ emissions.

CCUS technologies should use low-carbon
electricity (100g CO2e/kWh declining thresholdin the EU Taxonomy) and apply technical criteriasuch as the EU Taxonomy on Transport of CO2
and underground permanent geological storageof CO2 in order to qualify as transitional.68,69

0
Do-nothingcase

Carbon capture, use and/ or
storage technologies

The Intergovernmental Panel on Climate Change(IPCC) and the International Energy Agency (IEA)
estimate that without CCUS technologies, theworld is not likely to keep the temperature levels
in line with the Paris Agreement.67 The IEA Net
Zero Emissions Roadmap envisages the captureof 0.7 Gt CO2 annually from steelmaking processes
by 2050, with around 50% of global primary steel
production equipped with those technologies.

0t CO2/t steel

At least 29 Mt of steel production would
have to be converted to greener production
processes to meet targets for 2030.64 At thesame time, 70 Mt of EU blast furnace capacity
needs reinvestment by 2030. As of April
2022, total EU industry plans for low-carbon
steelmaking technologies investment amount toaround 36 Mt of primary steel production.65

Million tonnes

Green hydrogen production is currently very
low at around 5% of total hydrogen production.
This points to an investment opportunity
due to the expected growth in demand fromindustrial and transport sectors globally andbecause of numerous high-profile government
industrial strategies, scale-up, and subsidy
announcements. Tools to ramp up low-carbonhydrogen production include CCfDs proposed by
the European Commission’s (EC’s) REPowerEU or
India’s Renewable Purchase Obligations that canbe met with green hydrogen purchases. 62,63

DRI-SAFBOF withhydrogenat EUR31bn.71 The green bond market reachedcumulative volumes of EUR1.8tn by the end of2021 and continues to grow rapidly. It is well
positioned to absorb additional supply fromentities in the steel sector, and investors would
welcome diversification opportunities from anincreased variety of sectors.72
Finally, CCUS can only capture CO2 fromproduction and has a limited impact onemissions along the supply chain. Fossil gas andcoal have substantial fugitive methane emissions
from production and transportation that need to befactored into overall greenhouse gas steel life cycle
assessment (LCA). They could lead to stranded
assets if emissions are unable to be controlled.

9Public institutions should not promote an
overreliance on CCS technologies. Scenarios
developed by E3G-PNNL indicate that CCUS has
an important role to play in decarbonising steel
production globally but a more limited role inEurope. Under E3G-PNNL’s 1.5°C scenario, CCUS
technologies contribute to a 13% reduction in
CO2 emissions compared to a BAU scenario –corresponding to 21 Mt of CO2.73
CCS projects have mainly tested implementationin conventional blast furnaces, as these represent
the largest source of emissions. Blast furnaces
not nearing the end of their life can be retrofittedwith CCS for short-term emissions reduction.74
Legislation on CCUS remains limited and far
from being adequately adopted. The risksof evolving regulation should be carefully
considered by investors since any changes
could result in stranded assets.

Box 1. Low-carbon steel projects
H2 Green Steel has announced that it is on
course for large-scale green steel production
from 2024, aiming to build a large-scale
green steel plant.75

The company acknowledges that the maintechnological barrier to using DRI made withhydrogen as the reductant is its commercial
viability which is expected within the decade.82

Hydrogen Breakthrough Ironmaking
Technology (HYBRIT), launched in 2016,is a joint venture between SSAB, LKAB,
and Vattenfall with financial support fromthe Swedish Energy Agency. It aims to usehydrogen instead of coal in the production
process to eliminate around 90% ofemissions.76 Swedish steelmaker Ovako
claims to have already finished trials usinghydrogen to produce steel.77 EUR136m havebeen invested in the pilot phase of the HYBRIT
project.78 In 2021, HYBRIT delivered the firstfossil-free steel made from hydrogen-reducediron. HYBRIT plans to bring fossil-free steel tovolume production in 2016.79

In April 2021, ArcelorMittal announced
that it had agreed on an amendment to a
USD5.5bn revolving credit facility to alignwith its sustainability objectives. The facility
was agreed in 2018, and to date remains
undrawn. Future loan margins would be
calculated according to the achievement ofsustainability performance targets, which
will assess progress towards the company’s
emission reduction targets. The interest
payments will depend on ArcelorMittal’s ability
to decarbonise its production process.83

In July 2021, ArcelorMittal and the Spanish
government committed to invest EUR1bn ingreen steel. A DRI unit and hybrid EAF will be
installed at the company’s Gijon site, to enable
the input to be either basic oxygen furnacesteel or DRI and scrap.
The company envisages the government
contribution will cover around 50% of thecost. The completed project should reduce
ArcelorMittal’s emissions in the country
by 4.8mn t/yr. The new DRI unit will be inoperation by 2025 and will rely on the Hydeal
consortium, which is backed by the EIB, tosupply green hydrogen. By 2030, Hydeal
expects to supply Europe with 3.6m t/yr ofgreen hydrogen at EUR1.5/kg thanks to solar
capacity of 95 GW and electrolyser of 67 GW.
ArcelorMittal expects that the consortium
will be able to produce green hydrogen by2025, and the nearby Sestao plant would becompetitive with other steel plants at EUR1.5/
kg. The company plans to transport 1.1m t/
yr of the DRI produced in Gijon to its Sestao
facility and reduce the site’s CO2 emissions tozero by 2025, with an additional investment of
EUR50m, producing 1.6 mn t/yr of zero-carbon
steel at the Sestao site by the same year.80

In September 2021, the European
Investment Bank and ArcelorMittal
announced an agreement on a EUR280m fundfor research and innovation projects pertaining
to the company’s transition. These funds will
be invested in France, Belgium, Luxembourg,and Spain. The loan is guaranteed by theEuropean Fund for Strategic Investments.84
In 2020 ArcelorMittal Belgium implemented
innovative technology to capture CO- and CO2rich off-gases emitted from its blast furnace
which are then transformed into ethanol. This
technology would allow the fossil carbon
currently used as an input to the blast furnace,
to be substituted with waste wood, treated
to become bio-coal, as a part of a circular
economy process. The European Investment
Bank (EIB) has agreed a loan of EUR75m to
support this project.85
Volkswagen Group and Salzgitter AG signed
a Memorandum of Understanding underwhich Volkswagen will become one of thefirst customers for the low-carbon steel that
Salzgitter AG plans to produce by 2025.86 Suchlow-carbon steel will enable over 95% of CO2
emissions avoidance thanks to hydrogen andrenewable energy.

At its site in Hamburg ArcelorMittal is also
testing the use of DRI made with hydrogen
reductant, aiming for 100% hydrogenensuring a production of 100,000 t of clean
steel each year. The company will initiallyuse fossil hydrogen and intends to run on
green hydrogen as soon as is feasible.81

A Green Future for Steel - Climate Bonds Initiative10

3. Ensuring a credible transition
In December 2019, the EU Commission presented
its European Green Deal (EGD), a roadmap formaking the EU’s economy sustainable and thefirst climate-neutral continent by 2050. The
EGD aims to transition the region to a clean
economy while fighting climate change andsocial inequalities, and it includes a descriptionof investment needs and financing tools.87
The European Climate Law, a central elementof the EGD, sets a binding target of achieving
climate neutrality by 2050. This requires current
greenhouse gas emissions to drop substantiallyin the next decades. As an intermediate step
towards climate neutrality, the EU has raised its 2030
climate ambition to cutting emissions by at least 55%
by 2030.88 The policy proposals to achieve thesegoals are known as the Fit for 55 package.
To support the Fit for 55 package and economic
recovery from COVID-19, the EU has earmarked
EUR1.8tn in the 2021-2027 budget, including the
Next Generation EU (NGEU) recovery package.
More specifically, the Recovery and Resiliency
Facility (RRF), the most important part of the
NGEU, makes EUR672.5bn of loans and grants
available to EU Member States. Countries aredrafting and approving plans detailing how they
will invest such funds, which must allocate at least
37% and 20% of investments respectively, to thegreen and digital transitions.89 The RRF represents
a unique opportunity for the EU to rapidly advanceits transition to a climate-neutral economy inline with the objectives of the Paris Agreement.
European industry, including hard-to-abate
sectors, should take advantage of the opportunity
to finance the decarbonisation of their production
processes through innovative technologies, suchas green hydrogen-based steelmaking, CCS as well
as developing infrastructure.90

3.1 Strengthening carbon
pricing to drive action
Carbon pricing has
been touted as an allencompassing solution to
the competitiveness of green
technologies. However, while
it can improve the economic
case for green investments, other policies are
required to overcome inertia, uncertainty,
and demand issues. Carbon pricing must be
introduced alongside other measures to ensure
speed of transition, as markets are not solely
driven by price. Carbon pricing should be seen
as a supportive mechanism for other regulations
and subsidies as seen in the Fit for 55 package
which will prevent over-reliance on pricing
signals to enable the transition.

/tCO2

Carbon pricing is implemented to fix market
distortions and capture the external costs of carbon
emissions by charging emitters, either with a tax
A Green Future for Steel - Climate Bonds Initiativeon emissions or a cap and trade system whereby
sectors are allocated emissions allowances. Part ofcarbon pricing’s value is its technology neutrality,
enabling the market to find the most cost-effective
solutions to carbon-intensive activities.
Carbon pricing can improve the businesscase for green technologies and incentivise
efficiency gains by placing an economic value
on emissions. To do so, prices need to be highenough to have a material impact and not be
weakened by free emissions allowances, as iscurrently the case.
The EU Emissions Trading System (EU-ETS)
is the world’s first and biggest internationalemission trading system. It represents one of
the main EU policies in its fight against climatechange and the cost-effective reduction of GHG
emissions. The ETS works on the cap and tradeprinciple; within this cap, companies buy or receive
allowances that they can trade with each other.91
It currently covers energy-intensive industry,
fossil fuel power generation and commercial
aviation, while the Fit for 55 package proposes
an extension to include buildings, transport fuel,and the maritime sector.92
Another proposal is an increased rate of emission
reduction to 61% from 2005 levels by 2030 for ETS
sectors, lowering the annual emissions cap in linewith the 2030 targets.93 The 61% reduction will be
encouraged by removing 117 million allowances
while increasing the linear reduction factor,
which is the rate at which the overall numberof allowances is reduced, to from 2.2% to 4.2%
per year.94 The ETS is being extended to building
and transport fuel producers from 2026. The
scheme focuses on upstream fuel suppliers. The
proposed revision is intended to increase the ETS
allowances price, to provide green steelmakers
with a competitive advantage, as they would nothave to bear costs of increasing allowances andwould also be able to sell their free allowances.95
The ETS is designed to limit emissions, letting
the market set a price and enable the mostcost-efficient methods of cutting carbon
emissions. However, this creates price uncertainty,
particularly given uncertainty over reductions ofallowances.96 A carbon price floor would provide
a price stability mechanism, to reduce pricevolatility and ensure financial system’s resilienceto carbon pricing. Germany plans to introduce aminimum domestic carbon price of EUR60/tCO2 if
an EU-wide floor price cannot be implemented.97
The EU should also consider supporting the
IMF staff proposal for an international carbon
price floor.98 This suggests a differentiated pricefloor of USD25, USD50, and USD75 depending
on development levels. A carbon price floor was
introduced in the UK in 2013, requiring power
generators to pay a minimum carbon price.99

The EU carbon price, established via the
Emissions Trading System (ETS), doubled in 2021,
from EUR33.69/tCO2 on 4 January to EUR79.38
on 20 December.100 A carbon price of USD60-150/
tCO2 is needed to make hydrogen cost effective
compared to fossil fuels.101 Near zero green steel
will cost 40% more and the carbon price will help
close the cost gap.102
However, the steel industry in the EU has notbeen subject to the full price of carbon pollution
under the ETS due to concerns about carbon
leakage and EU steel production becoming
uncompetitive with lower-cost, higher-emissions
imports.103 Under the EU-ETS, sectors such as
steel that are exposed to the risk of carbon
leakage are eligible to receive free allocation of
up to 100%. The steel sector still receives around
80% of free emissions allowances.104
As the EU Commission seeks to phase out freeallocations in this era of higher climate ambition,
the Carbon Border Adjustment Mechanism(CBAM) has been proposed. It would imposea border tariff on high-carbon steel imports,
enabling EU steel production to feel the impactof an EU carbon price while retaining protection
from lower-cost imports. The allocation of freeallowances has been effective in addressing therisk of leakage. However, it also dampens the
incentive to invest in greener production in the
EU and in non-EU countries.105
One of the most important sectors that will
be affected by the CBAM is the steel sector.
The CBAM applies to steel products – among
others – imported into the EU and has significant
implications for the steel industry. The main
obligation lies with importers who need todeclare and purchase CBAM certificates tocover the GHG emissions associated with the
production of steel products. This sets a carbon
price aimed at imports of non-EU products
equivalent to the one paid by EU producers formaking the same products. EU importers will beobliged to buy certificates related to the carbon
price they would have paid if their imports had
been produced within the EU. However, should
EU importers demonstrate that they have alreadypaid a carbon price to produce those goods
in a non-EU country, this amount would be
deducted. To give private companies and non-EU
countries enough time to test this new system,
the CBAM would be implemented gradually andonly for a few sectors (iron and steel, cement,
fertiliser, aluminium, and electricity generation).
The CBAM would be applied from 2023, and EU
importers would only be subject to payments
in 2026.106 The EU Commission has proposed a
reduction of free allowances currently allocatedto energy-intensive sectors with the eliminationof allowances covered by the CBAM from 2026
and completely phased out by 2035.

11

One challenge facing the proposed CBAM is its
compliance with WTO and other internationalrules. In the view of the Commission, the CBAM
design is in line with such rules, especiallybecause EU importers will not have to buy
certificates if they demonstrate that they havealready paid a carbon price for the production of
the imported goods in a non-EU country.
As the CBAM is intended to substitute freeallowances under the ETS, concurrently using
two of those policies to address the risk of carbon
leakage (CBAM and free allowances) would risk
overcompensating EU-based companies.107
Nevertheless, steel exported from the EU toregions with lower or no environmental policies
might be disadvantaged as free allowances are
reduced. The EC proposal does not include
compensations or refunds for the export of goods
covered by the CBAM to non-EU countries. In
the view of the Commission, should the CBAM
combine an import tax or import certificateswith a refund for exports, it would not be in linewith the overarching climate objective of themechanism to reduce GHG emissions in the EU
and globally. The inclusion of refunds of a carbon
price paid in the EU would undermine the global
credibility of the EU’s raised climate ambitions
and further risk friction with trade partners.
Nevertheless, the potentially negative impact on
EU exports should not be underestimated. The
EC should assess it and, if necessary, present a
legislative proposal to address such risks.
The European steel industry is not entirely on
board with the current CBAM proposal. EUROFER
has emphasised that it should cover both direct
and indirect emissions, calling for more clarity
on the emission scopes to be considered whencalculating the goods’ carbon content. The
steel industry also underlined that removing
free allocations under the ETS will result inhigher industry costs and reduce investments indecarbonisation technologies in the next decade.
According to the industry estimates, the steel
sector would need to invest around EUR144bn by
2050 to fully decarbonise its production processes,
as steelmaking costs could rise by 35% to 100%
compared to today’s levels.108 Nevertheless, eventhough free allocations address the risk of carbon
leakage, they also affect the price of allowancessold and traded under the ETS, reducing the
incentive to lower emissions.109 Even though it isnoted that the steel industry has warned about
the risks associated with the removal of freeallocations under the ETS, the CBAM is intended toaddress such concerns.
According to EUROFER the CBAM needs to berecalibrated because EUROFER claims thatthe additional direct carbon costs for the steel
industry, with the combined effect of CBAM/ETS on the free allocation phase out, willreach EUR14bn in 2030 with business-as-usual
emissions, or EUR8.4bn if the sector can reduce
its emissions by 30% by 2030.110
A Green Future for Steel - Climate Bonds Initiative

After the publication of the EC proposal in July
2021, the European Parliament referred the fileto the ENVI committee, which adopted its reporton 17 May 2022 with 49 votes in favour, 33 against
and five abstentions.111 The report suggested
radical changes to the EC’s proposal, which are
aimed at implementing a more ambitious CBAM,
calling for an expansion of the sectors coveredby the CBAM, including hydrogen, organic
chemicals, and polymers, and all the EU-ETS
sectors by 2030. The ENVI committee favours
the inclusion of indirect emissions and a quicker
phase out of free allowances under the ETS (tobe eliminated by 2030). As the steel sector is oneof the sectors included in the first phase of the
CBAM implementation, the changes suggested
would impact steel companies – especially the
inclusion of direct emissions and the quicker
phase out of free allowances. The committee
also called for a CBAM-focused central authority
at the EU level. Such an authority would be more
efficient, transparent, as well as cost-effective, in
implementing the CBAM, instead of 27 national
authorities as envisaged in the current proposal.

consistent with a rapid transition to a low-carbon
economy. Taxonomies such as the Climate
Bonds Taxonomy have been designed toaddress this need and easily identify the assets,
projects, and expenditures needed to deliver a
low-carbon economy in line with the goals of
the Paris Agreement.

3.2 Policies to guide
green investment

Taxonomies provide clear guidance to investors
on what constitutes a green activity, and toissuing entities on the assets, projects, andexpenditures eligible for inclusion in a credible
green bond. Taxonomies can also underlie
climate credit risk assessment: an organisation’s
exposure to climate risk depends on its assets’carbon-dependency, location, and physicalresilience. Any entity can use the Climate Bonds
Taxonomy to identify which assets, activities, andassociated financial instruments are compatible
with a trajectory to net zero by 2050.113

Institutional investors
increasingly indicate support
for action to address climatechange through investment
decisions. However, there
are still too few tools to help
ensure that their investments are making an
impact, particularly for debt investments. The
market would benefit from science-driven
guidance on which assets and activities were

The sustainability reporting regime underpins
the EU sustainable finance strategy, as shownin Table 2, with the Non-financial Reporting
Directive (NFRD) (soon to be replaced by the
Corporate Sustainability Reporting Directive(CSRD)), the Sustainable Finance Disclosure
Regulation (SFRD) and the Taxonomy Regulation
and Delegated Acts. Mandatory disclosure ofclimate risks is an important prudential tool andcan facilitate information sharing between thereal and financial economy; CSRD reporting isdesigned to inform SFDR reporting. Central banks
and supervisors are seeing increasing demand
for mandatory disclosure regimes, especiallyfrom investors who are highly aware of the risks
posed by the lack of visibility of climate exposure
and impact in their portfolios.112

Table 2: EU Sustainability Disclosure Regime for financial
and non-financial companies114
Instrument

Corporate
Sustainability
Reporting Directive(CSRD) proposal

Sustainable Finance
Disclosure Regulation(EU) 2019/2088

Taxonomy Regulation(EU) 2020/852

Scope

All EU large companies
and all listed companies(except listed microenterprises)

Financial market
participants offering
investment products,
and financial advisers

Financial market
participants; allcompanies subject to
CSRD

Disclosure

Report on the basisof formal reporting
standards and subject toexternal audit

Entity and productlevel disclosure on
sustainability risks
and principal adverse
impacts

Turnover, capital, andoperating expendituresin the reporting year fromproducts or activities
associated with Taxonomy

StatusUnder negotiation,
expected to apply from
2023

Applies from 10 March
2021

Applies from January
2022

12

Figure 8: Taxonomy development around the world

RussiaUK

CanadaEuropean Union

Kazakhstan

Mongolia
China

MexicoDominican Republic

Sri Lanka
Malaysia
Indonesia
ASEAN

Colombia
Taxonomy in place

India

BrazilSingapore

Australia

Taxonomy in draft
Taxonomy in development

Japan
South Korea
VietnamThailandPhilippines

Chile

South Africa
New ZealandTaxonomy in discussion
National taxonomy developers increasingly
recognise the value of alignment andinteroperability in enabling international
investment flows. EU Climate Diplomacy canencourage this and hold other countries to a highstandard to safeguard the global transition, possibly
leveraging the IPSF Common Ground Taxonomy.115
Taxonomies can also assess what constitutes acredible transition investment or activity. Climate
Bonds Standards are being developed for atransition of hard-to-abate sectors. The work of
the EU Platform on Sustainable Finance (PSF)
on extending the Taxonomy to cover negativeand low-impact activities is expected to inform
assessments of companies’ or activities’ positionon the transition pathway.116

3.3 The role of the EU Taxonomy
In 2016, the EC accepted arecommendation by the EU
High-level Expert Group on
Sustainable Finance to develop
an EU Sustainable FinanceTaxonomy. Its development
has been supported by the work of the TechnicalExpert Group (TEG) and its successor, the Platformon Sustainable Finance (PSF). The Taxonomy
Regulation entered into force in July 2020, withthe first Delegated Act, covering climate change
mitigation and adaptation activities, from 1 January
2022. The EU Taxonomy has been developed aspart of the wider EU Sustainable Finance Strategy.
Its primary use is to support the mandatory
disclosure of sustainable investments and assets
by investors, banks, and corporates in the EU.117
The Taxonomy will eventually provide criteria forthe contribution of activities to six environmental
objectives, covering sustainable water use,
circular economy, pollution prevention and

A Green Future for Steel - Climate Bonds Initiative© Climate Bonds Initiative 2022

biodiversity, climate mitigation, and adaptation.
The Commission is also considering extending
the scope of the Taxonomy to cover significantly
harmful and low-impact activities and social issues.
This will be informed by the work of the PSF.118

for inclusion in green bonds Use of Proceeds (UoP)
under the EU Green Bond Standard. As the EU
Taxonomy lays out long-term standards, it also
encourages investment in innovative technologies
and transition-friendly investments.119

Agreeing on standardised criteria for high-emitting
activities is fundamental to support credible
transition activity for investors, asset owners’
engagement, and for policymakers to incentivise
the transition. Governments can draw from criteria
to design regulation or recommendations for
decarbonising the sector. The EU Taxonomy isparticularly relevant because it will ensure thatinvestments falling under its criteria will be eligible

The EU Taxonomy technical screening criteria(TSC) recognise the most climate-friendly
production processes, which also comply with
the Do No Significant Harm (DNSH) principle.
The TSC provide a vision permissible GHG
emission levels in steel production compatible
with 1.5°C-aligned production process. They,
therefore, provide the endpoint for production,
providing an objective for a transition pathway.

Box 2. EU Taxonomy Technical Screening Criteria for steel
Activities with substantial contribution toclimate change mitigation in the iron and steel
sector shall involve manufacturing one of thefollowing products:

b. steel in electric arc furnaces (EAFs)
producing EAF carbon steel or EAF high alloysteel, where the steel scrap input relative to
product output is now lower than:a. iron and steel where GHG emissions
reduced by the amount of emissions assigned
to the production of waste gases do not
exceed the following values applied to thedifferent manufacturing process steps:

1. 70% for the production of high alloy steel;and2. 90% for the production of carbon steel.

1. hot metal =1,33, tCO2e/t product;
2. sintered ore = 0,163 tCO2e/t product;
3. coke (excluding lignite coke) = 0,144
tCO2e/t product;
4. iron casting = 0,299 tCO2e/t product;
5. electric arc furnace (EAF) high alloy steel =0,266 tCO2e/t product; and6. electric arc furnace (EAF) carbon steel =0,2091 tCO2e/t product.

Where the CO2 that would otherwise be emitted
from the manufacturing process is captured forthe purpose of underground storage, the CO2 istransported and stored underground.

13

Climate Bonds developed criteria such as thoseunderpinned by recognised pathways developedby the IEA, ResponsibleSteel, and MPP, in its effort
to design guidance for both issuers and investors
around the globe on what credible transition
activities in the steel sector look like.
The EU Platform on Sustainable Finance has
recently published a report calling for a possible
extension to the Taxonomy beyond green to classify
a wider range of activities. 120 Indeed, a carefully
structured and scientifically sound extension may
offer stakeholders a common language to debate
the optimal means of achieving Europe’s climate
and environmental ambitions.
Such an extension of the EU Taxonomy, including
the proposed intermediate/amber transition
category, could be extremely relevant to the steel
industry, as some required investments might
not immediately reach the steel criteria identified
in the EU Taxonomy, which are based on the top
10% performers under the ETS. An intermediatetransition could represent a valid tool for specificassets and would impact the whole sector
emission reduction if combined with an overall
entity-level credible transition strategy.

3.4 Increasing the circularity of
EU steel production
A circular economy aims tomaintain the value of products,
materials, and resources by
returning them to the productcycle at the end of their use,
minimising waste generation.121
In December 2019, the EC adopted theCommunication on the European Green
Deal, setting out its vision to transform the
EU into a sustainable economy and climateneutral continent.122 The European Green Deal
Communication stated that the Commission
intended to revisit the rules on waste shipments
so that the EU would stop exporting its waste.
In 2020, the EC published a Communication on a
new Circular Economy Action Plan, announcing
a series of initiatives along the entire life cycleof products.123 The Circular Economy Action
Plan identifies steel as a priority thanks to its
untapped potential for circularity. The Plan is
aimed at providing an agenda for future actions
to be taken by the EU, in order to accelerate
the changes required to reach the 2050 climate
neutrality target and achieve the objectives laidout in the European Green Deal.

On 17 November 2021, the EC released its
proposed revision of the Waste Shipment
Regulation (WSR).126 The revision identified
three key objectives aimed at ensuring that:• Shipments of waste for reuse and recycling in
the EU are facilitated.
• The EU does not export its waste challenges to
non-EU countries.
• Illegal waste shipments are better addressed.
The EC has decided to revise the WSR sinceincreasing volumes of waste are exported outside
the EU, often without sufficient monitoringprocedures and supervision, especiallyin emerging markets. This can exacerbate
environmental and public health challenges inthose countries, and the WSR did not adequately
address these issues.127
Steel is a 100% recyclable material, and its
circularity is already exploited in today’s
production processes. In Europe, around halfof the steel produced comes from recycled
sources, such as scrap metal. Increasing steel
recycling and resource efficiency, reducing theenergy needed to manufacture steel, would help
reduce the sector’s emissions, with an immediate
positive impact.128 As mentioned in section 2, EAF
steel production allows for substantial emission
reduction compared to the BF-BOF process.
BF-BOF CO2 intensity is 2.3 tons of CO2 per ton of
crude steel (scope 1 and 2) whilst the figure for
EAF production is 0.7 tons of CO2 per ton of crude
steel (scope 1 and 2).129
In 2020, EU waste exports to non-EU countries
reached 32.7 Mt, a 75% increase since 2004,
while imports of waste from non-EU countries
accounted for 16 Mt, a 10% decrease since 2004.
In 2020, exports of ferrous metals waste (iron andsteel) to non-EU countries amounted to 17.4 Mt,
representing more than half of all waste exports,
with Turkey accounting for 68% (11.8 Mt) of theferrous metal waste exported from the EU. The
EU imported 4.1 Mt of ferrous metal waste.130

Figure 9: Exports and imports of waste from/to the European Union,
by waste category, 2020
Exports

Imports

Iron and steel
Paper and cardboard
Plastic (incl. rubber)
Copper, aluminium & nickel
Textile waste
Wood waste
Animal and vegetal waste
Municipal waste
Glass waste
Precious metals
Other waste
0

2

4

6

8

10

12

14

16

18

Million tonnes

Blast-furnace slag and by-products of primary
steel manufacture can be used in cement
production as supplementary cementing
materials, replacing the clinker with moresustainable materials. 124,125

A Green Future for Steel - Climate Bonds Initiative14

In 2020, iron and steel were the most exported
waste goods from the EU and the potential torecycle more steel scrap within the continent
must be fully exploited. Steel scrap can play afundamental role in the sector’s transition andcan be implemented quickly.
More specifically, the Commission’s Impact
Assessment assumes that OECD countries’
quality of waste management is higher than
non-OECD ones. Hence, the WSR revision does
not require OECD countries to provide evidence
or verification of that.
The European Steel Association (EUROFER)
and environmental NGOs have warned that theCommission’s assumption that OECD countries’
quality of waste management is higher than
non-OECD ones is not justified, especially inthe light of the EC’S acknowledgement that
OECD countries apply different standards.131 In
order to prevent more waste being exported
from the EU to OECD countries instead of nonOECD ones, a robust mechanism verifying thatthe relevant human health and environment
criteria are applied to waste management inevery non-EU country needs to be put in place.
However, the EU can take the opportunity to
reduce its steel scrap export and integrate it more
into steelmaking processes, avoiding the lossof materials that could help the bloc reach its
circular economy objectives.

3.5 Accelerating renewableenergy investment
The Renewable Energy
Directive II (RED II) was
adopted on 11 December 2018as part of the Clean Energy
Package for All Europeans. The
revision sees a strengtheningof RE targets to 40% by 2030, bringing thedirective in line with the 2030 emissions target.132
In the EAF route, energy costs make up to 20%of the whole steelmaking production process,so secure, affordable, and clean energy (mainly
green hydrogen and electricity) is crucial to thesteel industry transition.133 The revision of theRenewable Energy Directive is one of the regulations
included in the Fit for 55 package proposal.
RED II increases the current EU-level target ofat least 32% of renewable energy sources in
the overall energy mix to at least 40% by 2030,
doubling the current renewables share of 19.7%
in just a decade. This revision focuses on sectors
where progress in integrating renewables has
been slower to date (such as transport, buildings,
and industry) and includes measures toaccelerate renewable energy deployment. These
include new provisions to facilitate collective
renewable energy Power Purchase Agreements,
simplifying administrative procedures, labelling
methodology for industrial products produced
using renewable energy and a cross-border
A Green Future for Steel - Climate Bonds Initiative

pilot project to foster regional cooperation. The
revision also targets an increase in renewablehydrogen usage.
The revised RED II sets a new benchmark of
a 1.1% annual increase in renewables use inindustry, but this is not a binding target.134 The
EC’s impact assessment report accompanying its
legislative proposal to revise RED II recognises
the need to seize the opportunity to replace
the current use of fossil-based hydrogen withrenewable hydrogen, especially in the steel
sector. For example, it is acknowledged how
the Paris Agreement Compatible Scenarios forEnergy Infrastructure (PAC) estimates a potentialof 71 TWh of direct use of renewable hydrogen to
replace fossil-based hydrogen and a potential of 68
TWh for replacing fossil fuels in steel production.135
The revision also includes measures tosimplify administrative procedures and reducebottlenecks, for example by accelerating thepermit process. The proposal seeks to enable
EU energy systems to become more flexible,
making it easier to integrate renewables into thegrid as efficiently as possible. The proposal also
supports the uptake of renewable hydrogen,where electrification is more difficult. New rules
are proposed to strengthen the sustainability
criteria for forest biomass. However, it stillrecognises the burning of wood pellets as a zeroemissions renewable energy source and a green
alternative to coal.

3.6 Strategic infrastructuredevelopment
On 15 December 2020, the EC
adopted a proposal revisingthe 2013 regulation on
Trans-European Networks
for Energy (TEN-E). As
the steel industry is highly
energy-intensive, the proposed review of the
TEN-E Regulation will impact steel companies’
business, particularly the electricity, hydrogen,and CO2 networks, as well as the proposed future
exclusion of traditional fossil gas projects fromthe PCIs lists.
As mentioned above, access to secure,affordable, and abundant low-carbon energy(especially green hydrogen and renewableelectricity) is necessary for the steel sectortransition. In the EAF route, energy costs are 20%of the whole steelmaking production process,with material costs accounting for 58-68%. In the
BF-BOF route, material costs cover 65% of total
costs and energy accounts for 17%. The costof CO2 currently represents around 2% of total
production costs. However, these will increase
rapidly as free carbon allowances (presently
covering up to 80% of all carbon emissions)
under the ETS are withdrawn.136

the sector’s energy use and providing a chemicalfunction in the production processes, its planned
phase-out in many of the EU Member States overthe coming decade makes access to affordable
and abundant low-carbon energy indispensable.
Moreover, steel industry decarbonisation
pathways indicate that electricity and greenhydrogen – together with recycling and resource
efficiency – will play a crucial role.137 In the IEA’s
Energy Technologies Perspectives report, iron andsteel emissions will fall by about 90% by 2070 in
the Sustainable Development Scenario, mainly
because of the massive deployment of CCUS
technologies and hydrogen-based steelmaking.138
As no sector can be excluded from the transition
to a low-carbon economy, the steel industry
will not be alone in needing greater access toabundant and affordable decarbonised energy,
as its demand will significantly grow in the next
decades: the deployment of renewable energy
sources, as well as related infrastructure, are needed.
One of the biggest challenges facing theenergy transition is related to the fact that, inmany cases, industrial energy demand is not
located where renewable energy sources canbe deployed at scale. This will put pressure on
the grid infrastructure and must be addressed withlong-range electricity transmission and hydrogentransport solutions. The whole regulatory frameworkneeds to ensure that the EU industry has access toabundant and affordable low-carbon energy.
The TEN-E Regulation focuses on developing
cross-border infrastructure in the continent.
The TEN-E aims to regulate this infrastructuredevelopment, ensuring EU energy policy
objectives, security of supply, energy efficiency
and sustainable growth. A significant part of the
TEN-E Regulation is the so-called Projects ofCommon Interest List (PCIs). This list is updated
every two years, and those projects can receive
EU financial support (for the years 2014-2020,
more than EUR5bn is available under theConnecting Europe Facility (CEF)). The EU Green
Deal acknowledges the need to review the TEN-E
Regulation to support the transition at affordable
prices and align its objectives with the ambitious
climate targets.139
Projects included on the PCIs list benefit fromsome advantages, including:• streamlined permit granting procedures;• improved, faster, and better streamlined
environmental assessment;• a single national competent authority
coordinating all permit granting procedures;• a procedure allowing for the allocation of
investment costs;• eligibility for financial assistance under the CEF.140

As coal still represents the majority of the steel
industry energy demand, with around 75% of15Eleven priorities are indicated in the revision of
the TEN-E Regulation, and the projects linked
to them will be part of the next PCIs list, which
can be financed under the Connecting Europe
Facility 2021-2027. Support for new fossil gas
and oil projects was supposed to be excluded, as
the EU is introducing mandatory sustainability
criteria for the PCIs. However, PCIs will go undera transitional period until 2029, when hydrogenready gas infrastructure could be approved.141
Therefore, the TEN-E Regulation allows for
subsidising fossil gas pipelines until the endof 2027, as long as it contains an unspecified
amount of hydrogen, and if they plan to ceasetransporting fossil gas by 2030, which leaves thedoor open to do very little at a decisive momentin time and reduce incentives for fossil gas
phasing out. The Commission must send stronger
signals for the post-2027 phase out of fossil gas
in gas infrastructure. Gas blending should not beentertained as a solution in the longer term.

Six key policy recommendations
1. Phase out free allowances under the
ETS to sectors covered by the CBAM by2030 at the latest, much more rapidly
than planned (2035), removing the overlap
between CBAM and ETS free allowances. The
CBAM will help to mitigate carbon leakage
concerns as a mechanism aimed at addressing
inconsistencies in the climate ambitions of theworld’s trading blocs.

4. Strengthen environmental criteria andcircular economy requirements for steel
waste treatment under the WSR, as the WSR
revision does not require OECD countries toprovide evidence regarding their quality of
waste management. This would reduce GHG
emissions and allow the EU to increase waste
re-use and recycling within the bloc instead ofexporting its waste challenges.

2. Establish a CBAM-focused central
authority at the EU level. This would be amore efficient, transparent, and cost-effective
way of implementing the CBAM.

5. Address the mismatch between thelocation of steel production and renewableelectricity production through the TEN-E
revision.

3. Broaden the CBAM’s scope to include
indirect emissions to further protect EU-based
companies from international competition andreflect the good’s carbon content.

6. PCIs need to be prioritised according tocontribution to the energy transition, withthe planning of electricity and hydrogen gridsaligned to maximise storage potential.

Cross-border energy networks, on average,
have a life expectancy of 80 years for gas pipes
and between 40 and 80 years for electricity
infrastructures or equipment. Consequently,
current investments determine the structure of
the EU energy system for the coming decades.
Directing these investments towards theinfrastructure necessary for the clean energy
economy is an important element of energy
transition policymaking.
In November 2021, the EU Commission
published the new PCIs list (the 5th), including 67
projects in electricity transmission and storage,
20 fossil gas projects worth around EUR13bn,
as well as five smart grid projects and six CO2
network projects.142
The number of fossil gas projects on the PCIs list
was reduced from 32 projects in the previous list
to 20. The EU Commission has stated that theseprojects are necessary to secure supply for all
Member States. As soon as those projects arecompleted, there will no longer be any fossil gas
projects on the PCIs list. It should be noted thatno new gas infrastructure projects are supportedwith PCIs status, only existing ones.143 As the
proposed new TEN-E Regulation has not yet
been adopted (according to which no fossil oil
and gas projects could be included on the PCIslist), the current TEN-E Regulation allows for it.
Nevertheless, as mentioned above to support thesteel sector’s transition, the new PCIs list needs
to be revised, eliminating support for fossil gas
projects and aligning it with the newly proposed
TEN-E Regulation.

A Green Future for Steel - Climate Bonds Initiative16

4. Mobilising investment for 1.5oC
4.1 Improving green steel
competitiveness

Figure 10: CCfD (CFM)

Carbon contracts fordifference (CCfDs) can
facilitate private sector
development of breakthroughtechnologies, especiallyduring the incubator phase.144

A carbon contract for difference (CCfD) represents
a subsidy agreement between a regulator and acompany to finance a decarbonisation project.
The amount of such subsidy depends on the
difference between the carbon price in a specificcontext (in the case of the EU, the average ETS
price) and the strike price. The price agreed upon
between a regulator and a company equals
the carbon price necessary for the project tobe economically profitable. In this way, a stablecarbon price reduces investment risk in breakthroughtechnologies needed to transition European hard-toabate sectors, such as the steel sector.147
Regardless of which eligibility criteria arechosen for CCfDs – the strike price can either
be negotiated between public authorities andcompanies or competitive tendering can be held
– carbon lock-in in the medium term needs to
be avoided and technologies allowing for deep
emission reduction should be favoured.148
Similar schemes have been implemented
in some EU Member States. Germany plans
to implement pilot CCfDs to promote
green hydrogen in the steel and chemical
sectors.149 In April 2021, the Federal Ministryof the Environment, Nature Conservation
and Nuclear Safety in Germany publisheda whitepaper listing funding programmes
supporting the country’s decarbonisation,
where the importance of such a scheme was
acknowledged.150 In May 2022, the German
government published a call for expressionof interest in CCfDs, to support innovative

A Green Future for Steel - Climate Bonds Initiative

Agent pays
Strike price
Govt. pays

EUR/tCO2

A contract for difference is an agreement
between two parties whereby one agrees to pay
the other the difference between the value of adetermined commodity (its market price) anda specific value agreed upon by the two parties
in the CfD (the strike price).145 Hence when theagreed price is higher than the market price,
the first party is obliged to pay the difference
to the other one. In the case of a two-way CfD,
the second party would be required to pay thedifference in the reverse situation where thestrike price was lower than the market price. Suchcontracts provide long-term price stability tosupport the large-scale development of nascenttechnologies, especially more sustainableproduction processes. However, being a
subsidy-type instrument, CfDs can be extremely
expensive for public authorities.146

Carbon priceTime
Source: https://climatestrategies.org/wp-content/uploads/2021/03/Carbon-Contracts_CFMP-Policy-Brief-2020.pdf

technologies contributing to the decarbonisationof the hard-to-abate sectors, including steel.151

4.2 Encouraging green
public procurement

Elements of the Dutch Stimulation of Sustainable
Energy Production and Climate Transition (SDE++)
could be incorporated into CCfDs, the two sharecommonalities. The SDE++ is the newest versionof the SDE+, which has been in place since 2013
and only supported renewable energy generation
projects (in 2021, a budget of EUR5bn wasavailable).152 The scope of the SDE+ was extended in2020 and the new SDE++ includes other technologies– renewable heat, renewable gas, green hydrogenproduction and CCUS. Such a scheme provides
organisations with a subsidy equal to the difference
between the cost of the technology and the market
price of the products delivered. Projects competein auctions to be granted an SDE++ subsidy,
which is awarded for 12-15 years.153

Public procurement can be ahuge incentive for developing
a green steel market favouring
scrap steel, gradually increasing
demand at the EU level. It
accounts for around 15% of
the continent’s GDP and represents a high shareof European consumption in key sectors for steel
activities, such as construction and energy. Green
public procurement (GPP) can increase demandfor decarbonised steel goods and its wholevalue chain.156 The key to effective GPP is thedevelopment of common criteria within the EU
so that the Member States can avoid distortion of
the single market and limit competition within the
bloc.157 In the EU, GPP remains voluntary meaningthat each public authority can decide whether tofollow the EU guidance, but it has the potential todrive demand for sustainable goods and services.
The EC and some Member States have definedsome general guidance through national criteria
on different sectors.158

EUROFER has outlined how dedicated sector,
and project-specific CCfDs for the steel sector
should be designed asserting that auctioning
procedures, especially if dedicated to different
sectors, would not represent a viable solution
for steel-related investments.154 EUROFER alsosuggests that the size of the subsidy should notconsider the ETS price but the difference between
the production cost of the new technology andthat of conventional ones, without discounting the
avoided ETS-related costs.155
Since steel sector investment cycles tend to bequite long (up to 20 years) EUROFER proposesthat the duration of the CCfDs should cover theentire investment period. There should be clear
rules on the volume of product and emissions
reduction calculation methodology, which would
need to be agreed on at the EU level.

The EU GPP criteria have been developed onan evidence-based approach and collaborative
stakeholder consultation with input fromindustry, civil society, and the Member States.
The EU identifies two types of criteria: core andcomprehensive criteria. The first ones are meant to
be used by public authorities without additional
assessment when evaluating the environmental
impact of a purchase. The comprehensive criteria
address more specificities and are intended
to establish the best environmental products.
Nevertheless, such criteria require public authorities
to collect more information and bear more costs.159
17

Green public procurement can be divided into
different categories, among which project-leveland product-level GPP are probably the twomost important ones.
Project-level targets are meant to assess
a whole project sustainability instead ofindividual features. This evaluation is usuallymore comprehensive than product-level ones,
as it considers emissions reduction in morecomponents of the project. Nevertheless, this canbe harder to assess because a project-specificenvironmental assessment should be carriedout for each project.160 Product-level targets areeasier to implement and only account for specificproduct sustainability with regard to standardisedtargets. Those usually relate to circular economy
and emissions reduction levels.161

4.3 Spurring innovation
The EU Innovation Fundaims to fund projects testing
low-carbon technologies,
including in the hard-toabate sectors such as steel.
The Innovation Fund should
comprise EUR18bn in the next decade. The maintechnologies relevant to steel to be tested under
this programme pertain to hydrogen, CCUS,
recycling, and resource efficiency.162
The InvestEU Fund is another funding source
to finance sustainability focused investmentsin the EU including CO2- and energy-intensive
sectors. It is part of the InvestEU Programme andincludes EUR26.2bn, with additional public andprivate investment totalling EUR370bn as part of the
Next Generation EU and the Multiannual Financial
Framework 2021-2027. The programme could offer
either loans or equity guaranteed by the European
Investment Bank Group and other partners.163

None of the EU Funds are specific to the steel
sector so the steel industry is only likely to receive
limited funding.165 The Research Fund for Coaland Steel is the only sector-specific funding
mechanism and is supposed to be financedwith EUR111m each year until 2027 from theEuropean Coal and Steel Community (ECSC)
assets in liquidation. The Clean Steel Partnershiprelies on creating synergies between funds andwill reach EUR700m coming in equal parts from
Horizon Europe and assets of the ECSC. By 2027
it will implement at least two demonstration
projects that could cut CO2 emissions by
50% compared to 1990 levels and achieve
technology readiness level (TRL) 8 by 2030 in atleast twelve areas funded by the partnership.166
The Clean Steel Partnership was presented inJune 2021 by the EC as part of 11 European
Partnerships with the private sector amounting
to EUR22bn.167 However, a report commissionedby the European Parliament warned about
the enormous funding gap in low-carbon steel
related research and the transition to the steel
sector to net zero. The report points to a required
EUR50-60bn investment to roll out new lowcarbon steel technology and up to EUR120bn a
year to cover capital and operating costs.168 169

Key policy
recommendations• Establish a Europe wide market
for CCfDs.
• Implement GPP as a matter ofurgency. The EU should establish atimeline for mandatory criteria in linewith the EU Green Deal.

According to the European Steel Technology
Platform (ESTEP), even when combining
different EU financial support mechanisms suchas Horizon Europe, Clean Steel Partnership,
Research Fund for Coal and Steel, LIFE
Programme, and Innovation Fund, around
EUR2bn would be available to the steel sector
decarbonisation as grants for the period 20212030.170 This falls far short of the investment
needed to transition the European steel sector.

All sectors, including those classified as hard-toabate, transitioning to low-carbon production
processes need private financing, adequately
supported by public funds and R&D programmes.
In some cases, EU State aid rules allow Member
States to directly support R&D projects dedicatedto innovation and climate-friendly technologies.
EU Guidelines on State aid for environmental
protection and energy indicate that State aid canbe authorised in the case of the developmentof climate-friendly projects. To protect faircompetition within the EU, State aid can be only
applicable to the additional costs related to theenvironmental impact of the technologies, iscapped to a maximum amount, and needs to beawarded through tenders.164

A Green Future for Steel - Climate Bonds Initiative18

5. Opportunities for transition finance
Massive investment is needed to develop and rollout low-carbon steelmaking technologies for an
overall transformation of the EU steel sector. The
transition is supported by the emission reduction
goals established by the EU governments andassociated policies.
According to the Green Steel for Europe
Consortium, the steel sector net-zero transition
will require around EUR50-60bn investment
in new technology deployment and between
EUR80-120bn a year to cover capital andoperating costs. 171 EUR2bn of EU grant, mostly
from the European Green Deal, will be available
to the steel industry to combat climate change
and reduce carbon emissions between 2021 and2030. Applying the EU’s Projects of Common
Interest (PCIs) program in the steel sector could
contribute another EUR2bn. More generally,
the EU has approved a stimulus package of
EUR1.8tn in the framework of the 2021-2027
budget, including the Next Generation EU (NGEU)
recovery package.172
So far, the EU has only allocated EUR700m of
the EU budget –including from Horizon Europespecifically to the transition of the steel sector,
which in turn should mobilise EUR1bn from theprivate sector. Other parts of the EU budget canbe dedicated to the transition of steel.
Public funds represent a tiny fraction of thesector needs, and private investment needs tocover most of both direct CAPEX investment
in steel making assets and wider enablinginfrastructure investments in the scaling up
of green hydrogen, renewable energy, andelectricity storage.

A Green Future for Steel - Climate Bonds Initiative

The Mission Possible Partnership’s Steelsector transition strategy states that thescale of investment needed in enabling
infrastructure such as CO2 pipelines,
hydrogen infrastructure, and zero-carbon
electricity production is likely to dwarf thatof the steel assets themselves.173 For example,
delivering sufficient zero-carbon electricity tomeet the needs of the steel sector, including
the generation of the necessary volumes ofgreen hydrogen, will take approximately USD2tn
in cumulative investment over the next three
decades. That equates to 3% of the total expected
investment in electricity generation, transmission,and distribution in a net-zero economy.
As low-carbon steel is expected to becomecompetitive within the coming decade theindustry must rapidly assess the transition
pathways open to them and start the transition
journey to avoid holding stranded assets.

5.1 Growth of transition
finance instruments
The sustainable financial
markets are booming. Climate
Bonds databases captured
USD1.1tn of green, social andsustainability (GSS) bonds,
sustainability linked bonds(SLBs), and transition bonds in 2021. The Useof Proceeds (UoP) transition bond segment is thenewest theme, with 18 bonds with a combined
volume of USD9.6bn outstanding at the end of 2021.
S&P Global Ratings estimated recently that global
transition finance, including bonds and loans,
could contribute up to USD1tn annually, or 30%of the estimated USD3tn per year required tomeet net-zero emissions over the next 30 years.174
BNP Paribas suggested that transition financeinstruments could outgrow the green bondmarket by the mid-2020s.175

Given their forward-looking key performanceindicators (KPIs), SLBs are also very transition
focused. For a decarbonisation transition
specifically, SLBs represent a fantastic opportunity
for entities to link their net-zero targets with accessto sustainable finance. In June 2021, Swedish steel
manufacturer SSAB, which accounts for 10% of
total carbon dioxide emissions in Sweden, priced
a SEK2bn (USD239m) SLB. The company will pay
a penalty at its 2026 maturity if it has not met
its CO2 emission reduction targets of 10%. The
proceeds of the deal will be used for general
corporate purposes.
Notably, 62% of issued SLBs have hadgreenhouse gas emission reduction targets
in place because this is something which isrelatively easy to measure, and improve, e.g.,through energy efficiency measures, or a switch
to renewable energy sources. Sustainabilitylinked loans (SLLs) link the interest margin to
an improvement of the entity’s sustainability
metrics. Unlike the UoP model, whereby theproceeds must be earmarked to finance specified
types of assets, projects, or expenditures, SLLs
carry no restrictions on how the proceeds can beused, making them a viable option for companies
in a broader range of sectors.
However, many early examples of SLBs andtransition bonds have raised concerns in
the market because the targets were notambitious enough to contribute to the goalsof the Paris Agreement, and in some cases
had been achieved or almost achieved before
the instrument had been priced.176 There areother concerns around the transition pathways
relevance, and reliability. KPIs are set by theissuing entity and are therefore difficult tobenchmark against peers or wider goals such as
the Paris Agreement targets. While the market has
seen impressive growth, it has often been difficult
to assess the impact and ambition of each bond.

19

Figure 11: Financing credible transitions
A starting point – 5 principles to protectfrom greenwash

To drive this ambition, we propose the following 5 principles for atransition with impact.

To achieve ambition, we need transition pathways that have end-goals
for environmental factors that are consistent with planetary boundaries
and have sufficiently ambitious trajectories to get there. A prerequisite
is developing transition pathways to move from today’s high GHG
emissions to levels commensurate with meeting the goals of the Paris
Agreement. That is our ‘climate mitigation transition’.

Importantly, any entity, activity or project meeting these principles issubstantially contributing to meeting the goals of the Paris Agreement
and should therefore be eligible for capital that has a climate orenvironmental mandate. This provides wide scope to support
the growth of a large, liquid market for both already net-zero andtransition-related activities.

1. In line with 1.5 degree trajectory
All goals and pathways need toalign with zero carbon by 2050 andnearly halving emissions by 2030.
2. Established by scienceAll goals and pathways must be
led by scientific experts and beharmonised across countries.
3. Offsets don’t countCredible transition goals andpathways don’t count offsets,
but should count upstream scope
3 emissions.
Climate Bonds provides clear guidance andcommon understanding to stakeholders on thepractices, actions, and required disclosures whenraising funds for climate transition.
Climate Bonds’ Financing Credible Transitions
paper established five principles for anambitious transition (figure 11). These aredesigned to ensure the transition is science-led
and ambitious and will reduce overall emissions
by excluding the use of offsets.
Recently, Climate Bonds’ Transition Finance forTransforming Companies sets out Five Hallmarks

4. Technological viability trumps
economic competitivenessPathways must include an assessmentof current and expected technologies.
Where a viable technology exists, even if
relatively expensive, it should be used todetermine the decarbonisation pathway
for that economic activity.
5. Action not pledges
A credible transition is backed byoperating metrics rather than acommitment/pledge to follow a transition
pathway at some point in the future. In
other words, this is NOT a transition to atransition.

that companies must adhere to when setting out
an entity-wide transition plan for investors.177
These embody the credibility, clarity, andtransparency necessary to create an active
market (see figure 12). This ground-breaking
guidance is also the first step in the certificationof whole entity transition which will enable
investors to preference investments based on thequality of the entity level transition strategy andexecution plan.
In 2022 Climate Bonds will launch the first Use ofProceeds and entity transition finance criteria forsteel (as well as cement and basic chemicals) toprovide clear, credible, and specific guidance toboth issuers and investors regarding the types ofactivities and investments that are aligned witha 1.5°C transition pathway for steel. The financial
criteria are crucial to prevent greenwashingand provide confidence to the market that
their investments are science-based. Thematicissuance from sectors like metals and mining,
oil and energy, and chemicals is expected toaccelerate rapidly once the required standards
and definitions in place.

Figure 12: Five hallmarks of a credibly transitioning company

1. Paris-aligned targets

2. Robust Plans

3. Implementation
action4. Internal reporting

5. External reporting• Select sector-specifictransition pathway alignedwith Paris Agreement goals• Set the strategy and plan
to deliver on those KPIs

• Capital expenditure,operating expenditure• Track performance• Prepare associatedfinancing plan detailed
cost estimates andexpected source offunding• Other actions detailed in
the strategy

a. External reporting andindependent verificationon the KPIs and strategy todeliver(per Hallmarks 1 and 2)• Company-specific KPIs thatalign as early as possible
with that pathway• Science based, address
scope 1, 2 & 3 emissions
and address short, medium
and long term

• Put in place necessary
goverance frameworks toenact change

A Green Future for Steel - Climate Bonds Initiative• Re-evaluated andrecalibrate KPIs as
neededb. Annual reporting of
independently verified
progress in terms of action
taken and performanceagainst targets.
(per Hallmarks 3 and 4)

20

Conclusions
Steel manufacturing is vital to the European andglobal economy. It is a crucial input for multiple
sectors such as construction, renewable energy
production and transport and its inclusion in thetransition to net zero is vital.
Steel currently accounts for 22% of EU industrial CO2
emissions, highly using energy-intensive production
processes relying on coal (coke). The next decade is
crucial to the EU steel sector transition and meeting
net-zero commitments. Finance needs to flow to
1.5°C-aligned pathways and activities.
The success of the steel transition relies
on strong policy support. Policymakers set
out the conditions required for a net-zero steel
sector and play a major role in determining
which pathways are taken. The Climate
Bonds Standards for steel (currently underdevelopment) and this policy paper provide
science-based guidance on what constitutes atruly 1.5°C-aligned steel sector transition. The
most important role of policy in this process is toprovide investment clarity, certainty, and direction.
Policies must be coherent and aligned toencourage demand for green steel, facilitate
investment in the transformation of steel
companies and assets, and enable the scalingof innovative clean technologies. Therefore,
the policy toolbox for this transition is wideranging, including economy-wide standards
and regulation, sector-specific support suchas contracts for difference and green public
procurement, and strategic legislation such as
circular economy and WSR.
To bring the EU steel sector in line with atransition to climate-neutrality in 2050, itsemissions must fall by at least 48% by 2030 andby 97% by 2050, from 2020 levels.178 Large capital
flows are required for this transition, and the
CAPEX needed to renew and refurbish steel plant
assets is significant. The below table summarises
recent estimates of these costs .

A Green Future for Steel - Climate Bonds Initiative

Table 3: Estimated costs of decarbonising the EU steel industry
SourcePurposeAmountRoland Berger181

CAPEX DRI-EAF production withhydrogen by 2030

EUR21bn

Roland Berger

CAPEX of BF-BOF with CCS
technologies by 2030

EUR31bn

European Parliament’s
ITRE committee182

Low-carbon technologies to transition
the steel sector

Mckinsey183

Decarbonisation of steel production
by European companies by 2050

EUR50-60bn + EUR80120bn annual capitaland operating costs
EUR100bn

74% of existing European blast furnace
capacity will reach the end of its lifecycleand need reinvestment by 2030.179 The scaleof this investment requirement, given the long
lifetimes of steel plants, poses a risk but also an
opportunity. If these opportunities are missed,
the European economy risks locking in trillionsof Euros in stranded assets and failing to meet its
climate targets. 70 Mt of EU blast furnace capacity
needs reinvestment by 2030. As of April 2022,
total industry plans for low-carbon steelmaking
technologies investment amount to around 36
Mt of primary steel production.180
At the same time, this large investment
requirement presents a unique opportunity for
the European economy to develop innovativetechnologies, achieve rapid transition of a key
hard-to-abate sector and become a front-runnerin the emerging net zero-aligned economy.

21

Appendices
Appendix I: EU stakeholders
The European Steel Association (EUROFER)
is an international not-for-profit organisation
based in Brussels and represents the entiretyof steel production in the European Union.
EUROFER broadly supports the need to transition
the sector to help the bloc achieve its climate
targets but highlights that EU policy support
is needed. It states that the steel sector willneed access to affordable and low-carbon
energy sources, particularly electricity andhydrogen, and investment support. Anothercritical issue revolves around non-EU countries’
competition: EUROFER calls on policymakers
to ensure protection from the risk of carbon
leakage.184 It recognises the with the EU-ETS
benchmark-based free allocation and indirect
cost compensations to heavy industries.185
Euroalliages is the Association of European
ferro-alloy and silicon producers (ferroalloys
include various iron alloys with a high proportionof one or more other elements such as
manganese, aluminium, or silicon). It represents
more than 95% of the sector in the EEA. Europe
could account for 13-15% of global silicon
production or about 3 Mt.186
Another relevant player is ESTEP.187 It was oneof the first European Technology Platforms tobe created. These are industry-led stakeholders
recognised by the EC as key actors in driving
innovation, knowledge transfer and European
competitiveness in their sector. Its membership
includes all the major European steel producers
and the European Steel Association, academics
and research centres, industrial stakeholders,
and trade union representatives. The EC and theMember States are also represented in ESTEP
management committees.
ArcelorMittal is the second largest steelproducing company in the world second only
to the China Baowu Group.188 The company is
the largest producer of steel in the European
Union, as well as in North and South America andAfrica. In Europe alone, ArcelorMittal employs
more than 80,000 people, and around 50% of
the company’s total steel volume is producedin Europe.189 ArcelorMittal laid out a group-widecommitment to being carbon neutral by 2050.
In its recently published Climate Action Report
2, the company commits to reduce scopes 1
and 2 CO2 emissions intensity by 25% by 2030,
with an anticipated cost of USD10bn. The CO2
emissions intensity reduction target is increased
to 35% (up from 30%) – scopes 1 and 2. Boththese targets are set over a 2018 baseline.190
The Transition Pathways Initiative has assessed
ArcelorMittal, whose carbon intensity is above
the steel sector average, as aligned with the
below 2°C benchmark for 2044 (IEA’s SDS
scenario, which holds the temperature rise to below
A Green Future for Steel - Climate Bonds Initiative

1.8 °C with a 66% probability.191,192 To achieve its
climate objectives, ArcelorMittal outlines several
prerequisites: a market where carbon-neutral
steel is more competitive than more polluting
options, availability of financial mechanisms
allowing long-term investments, and accessto clean and affordable energy sources, as wellas public support to accelerate breakthroughtechnologies.193 As part of its innovative andlow-carbon projects, ArcelorMittal has recently
announced the signature of a letter of intent
with the Governments of Belgium and Flanders,which supports a EUR1.1bn project to build a
2.5 million-tonne direct reduced iron (DRI) plantat its site in Ghent, as well as two new electric
furnaces. In particular, ArcelorMittal Belgium will
be able to reduce its CO2 emissions by 3.9 Mt per
year by 2030, thanks to such a 2.5 million-tonne
DRI plant and the two electric furnaces. The EC
needs to examine the agreement’s compliance withthe bloc’s regulations and decide on its approval.194
The Swedish steelmaker SSAB announced it aims
to reach net-zero emissions for its operations by
2030-2035 (instead of the previous 2045 target),anticipating a cost of some USD5bn in the next
decade.195 The German steelmaker ThyssenKrupp
aims to reach climate neutrality by 2045. The
company has also set a 30% emission reduction
target for its production and processes, and purchaseof energy, by 2030 (over the 2018 baseline).196
Germany is the largest European source of steel
production, with more than 35 Mt of crude steel
produced in 2020, corresponding to 25.6% of the
bloc’s total amount.197 In July 2020, the Federal
Government published its steel strategy, For astrong steel industry in Germany and Europe.
The Steel Action Concept, aimed at helping theGerman steel sector transition to net zero whileremaining competitive. The Steel Action Concept
lays out some key objectives to be achieved, suchas creating a level playing field on the global steelmarket, avoiding carbon leakage, and working
with other EU countries to progress the sector’stransformation. The Federal Government intends
to support the transition of the steel sector
through different programmes and projects:• A new budget item, The Use of Hydrogen inIndustrial Production worth €15 million for2020 and commitment appropriations worth
EUR430m up to 2024, to be financed within
the next budget.
• The National Decarbonisation Programme of
approximately EUR1bn up to 2023.
• The programme Carbon Avoidance in the
Basic Materials Industry with funding of
EUR370m up to 2023.

• Sandboxes for the Energy Transition, a
regulatory programme, with funding of
EUR415m from 2020 to 2023.
• The Research Initiative for the Avoidance of
Climate-Related Process Emissions in Industry
with funding of EUR80m up to 2025.198
In May 2021, the Federal Government decided
to make available additional funding for EUR
5 billion to decarbonise the steel sector in
the 2022-2024 period.199 Given the foreseen
decarbonisation of the European steel sector
and investment needs, as well as the need todeal with fierce international competition, theGerman government recognises the importanceof tackling the risk of carbon leakage as thisindustry is affected by high energy and CO2
prices, as long as there are not equal CO2 prices
in non-EU countries the risk of carbon leakage
needs to be addressed.
The German Steel Federation (WV Stahl)
is the country’s steel industry association,
representing the sector’s interests at the national
level. WV Stahl has underlined the importanceof implementing a coherent political framework
supporting the steel industry’s transition. In
particular, the association has asked for adequate
protection against carbon leakage throughsufficient free allocation of certificates within
the EU-ETS, and the envisaged carbon borderadjustment tax. It also advocates for policies
supporting hydrogen production because of
its importance for decarbonising steelmaking
processes. Nevertheless, WV Stahl estimates thatgreen hydrogen will not be sufficiently available,
thus recognising that the use of other types ofhydrogen will play an important role as well.
Therefore, in the association’s view, the roleof gas as an enabler allowing for an emissions
reduction towards a climate-neutral economy
should be recognised and gas should not beburned through CO2 pricing policies.200 However,as highlighted in the net-zero pathway developedby the IEA, the Net Zero by 2050 Roadmap, no
new oil and gas fields should be approved, as
well as no new coal mines or mine extensions,other than those planned in 2021.201 Finally, the
new German government’s decision on a CfD
scheme aimed at the steel, cement, lime, andammonia industries202 will be positive to bringthe case for the replication of such schemes at
the national level in the EU after the successcase of the UK. Peter Altmaier, the then Federal
Minister for Economic Affairs and Energy, had
estimated that the total investment required forthe transition of the steel production in Germany
at EUR35bn, of which EUR10-12bn could bemade available from public funds by 2050.203• The Carbon2Chem research project, aimed at
testing the option of CCU in the steel industry (andother sectors), with funding of around EUR140m.
22

The EC holds energy policies as a corecompetency, with several Directorate-Generals
and Commissioners involved. The new executive
structure defined by President Ursula von derLeyen is based on a hierarchy of nationally elected
Commissioners grouped in areas under the control
of one of the five Executive Vice-Presidents.
The European Parliament is responsible for passing
a law initiated by the EC. The work of the Parliamentis prepared by parliamentary committees.
The European Council defines the EU’s overall
political direction and priorities, headed by the
27 Heads of EU Member States. The Council of
Ministers is negotiating EU legislation with the EU
Parliament. The Permanent Representations ofeach Member State accompany Ministers at thenegotiation meetings.
The EC has long acknowledged the importanceof the steel industry in the EU. The new structureof the von der Leyen EC entailed the creation ofa super Directorate General as the result of themerging of two previous DGs: the new DG InternalMarket, Industry, Entrepreneurship and SMEs (DG
GROW). Thierry Breton, nominated by the Frenchgovernment, is the Commissioner in charge of thisnew and broad department204 and reports to theCommissioner-Executive Vice-President Margarethe
Vestager in charge of Digital.205 DG GROW leads
the EC strategy on steel.206 It is noteworthy that its
2013 Action Plan for Steel207 referred that “steel
demand remains 27% below pre-crisis levels andup to 40,000 jobs have been lost in recent years”
and that “to face the downturn of steel demand
after the economic crisis and ensure a promising
future for the sector, the EC is working on boosting
the industry”. The EC should revise its messaging,and certainly to boost steel demand is not the rightpolicy objective. In addition to the discussions at
the global level on oversupply, the Commission
should consider steel demand reduction as a driver
for the decarbonisation of the sector, favouringother more climate-friendly materials namely inthe construction sector. DG GROW also holds theCommission’s pen for the critical issue of the accessof raw materials, which is addressed in the EC’s
initiative on raw materials in 2008.208 More recently,
in 2020 the EC presented a dedicated Action Planon the access to raw materials; an updated list ofcritical raw materials including fluorspar, lithium,magnesium, graphite, coking coal, niobium which
are all relevant to steel production, and a ForesightStudy on Critical Raw Materials for Strategic
Technologies and Sectors in the EU, also looking at
the strategic materials that the EU needs to ensure
for its steel production.209,210
DG Environment (DG ENV) is involved with therules on transporting waste within and beyond EU
borders, a widespread practice in the European
steel industry. In November 2021 the EC proposed
its new Regulation to reduce pollution and ensurethat materials are reused and recycled.211 In
the case of steel, there is an additional strategic

A Green Future for Steel - Climate Bonds Initiative

element to promote the availability of scrap to the
EU industry for its recycling and as an alternative
to new steel production. The EC has dedicatedExpert Groups to gather advice from external
stakeholders such as industry representatives,trade unions, academics, and NGOs. Several
such Expert groups are relevant to the steel sector
such as the EC Expert Group on Steel; High-Level
Expert Group on energy-intensive industries, theSteel Advisory Group, or the Technical Group on
Steel. 212,213,214,215 Finally, the EC’s trade policies
limit steel imports from outside the EU to boost
internal competitiveness.216 The EC is a leading
actor at global level on steel: namely, Executive
Vice President of the EC Valdis Dombrovskis
presided over the last ministerial meeting of the
Global Forum on Steel Excess Capacity (GFSEC)
on 26 October 2020 which called for firmly
maintaining the problem of excess capacity on
the G20 agenda.217 The conclusions of the meeting
also pointed to market-distorting subsidies tosteel industries as the reason behind excess
capacity by sustaining uneconomic plants andencouraging investment in additional steelmaking
capacity that would not otherwise be built. Also, it
concluded that subsidies could hamper research,development, and innovation, negatively affecting
the steel industry’s financial health.

Appendix II: European
Just Transition
The EC’s Fit for 55 package, unveiled on 14
July 2021, included a proposal for a Social
Climate Fund and an accompanying Council
Recommendation to the Member States on
addressing the climate transition. The Council
Recommendation aims to guide EU Member
States on how best to address the social andemployment aspects of the climate transitions.218
The Social Climate Fund is designed to funnel
ETS revenues to the Member States to aid
citizens’ investments in energy efficiency, newheating and cooling systems, and cleaner
mobility. To benefit from the fund, Member
States would need to develop Climate Action
Social Plans as part of their National Energy
and Climate Plans. The fund is expected to raisearound EUR72.2bn over a seven-year period(2027-2032), equivalent to 25% of the revenues
to be generated by the new proposed ETS forbuilding and road transport fuels. In addition,
Member States would have to co-finance their
Climate Action Social Plans by dedicating
another 25% of the revenues they generate
through the new ETS, bringing total spending toaround EUR144bn.

As part of the European Green Deal, the EC
established the Just Transition Mechanism for
the EU, with the EC’s President von der Leyen
stating that the transition would leave no one
behind. Just transition issues must be held frontand centre of the EU policies so those least
responsible for climate change do not bear thebrunt of the transition impacts.
The Just Transition Mechanism is a framework to
support national just transition efforts. It provides
financial resources and technical assistanceto the EU Member States, which must develop
national just transition plans. It currently includes
a EUR19.2bn Just Transition Fund, budgetaryguarantees under the InvestEU programme, andother grants and loans. The EU has designed a
Just Transition Mechanism to support the countries
and regions that face the greatest challenges inphasing out high-emissions activities.
The Just Transition Mechanism consistsof three pillars:
1. Just Transition Fund (JTF). The JTF
supports the economic diversification andconversion of affected regions. The EC’s
initial January 2020 proposal had a budgetof EUR40bn. Nevertheless, a final budget of
EUR19.2bn has been agreed on and is expected
to mobilise around EUR25.4bn in investments.
2. InvestEU Just Transition Scheme. It will
provide a budgetary guarantee under theInvestEU programme and is expected to mobilise
EUR10-15bn in mostly private sector investments,
covering a wider range of projects than the
JTF, including investments in energy andtransport infrastructure, digitalisation and digitalconnectivity, and the circular economy. These
investments will be made by private and public
sector entities, with financial products proposed by
the InvestEU implementing partners, such as theEuropean Investment Bank Group or national banks.
3. A new Public Sector Loan Facility. It will
combine EUR1.5bn of grants financed fromthe EU budget with EUR10bn of loans fromthe European Investment Bank to mobilise
EUR18.5bn of public investment.
Given the smaller size of the fund approved
compared to the initial proposal, some studies
advise the Fund to only focus on social support
for workers and retraining.219 Establishing the EU
Just Transition Mechanism is a commitment that thetransition will not leave anyone behind. Nevertheless,some points could be improved. In particular, thevolume of the funds is unlikely to be sufficient toensure a just transition at the EU level.220

However, the EC has estimated that until 2030
around EUR350bn will be needed in additionalenergy system investment annually to meet theFit for 55 targets. Greater involvement of public funds
will be needed to address this, given the limited
inflows of private capital to such projects.

23Appendix III: Central Bank policy
to channel investment flows
The European Central Bank (ECB) has analysed
the integration of climate risk in the European
banking sector, covering 112 directly supervisedbanks with combined assets of EUR24tn, andconcluded that none were close to meeting its
expectations on climate and environmental
risks and called on them to address theirshortcomings. 221 In some cases, banks will
receive a qualitative requirement as part of theSupervisory Review and Evaluation Process(SREP). The ECB will gradually integrate
climate and environmental risk into its SREP
methodology. This will eventually influence Pillar
2 capital requirements. The ECB is set to publish
its findings in an updated report on climate andenvironmental disclosures in the first quarter of2022, together with individual feedback to thebanks. The ECB must prioritise this work andcontinue pushing for the integration of climate
risk in European banks’ balance sheets.

Monetary policy
Green quantitative easing is currently being
considered by central bankers across the globe.
The ECB presented an Action Plan to include
climate change elements in its monetary policy
strategy as part of a general review of theirmonetary policy strategy and is committed todeveloping new experimental indicators coveringgreen financial products and the carbon footprintof financial institutions.222 The ECB will follow
up in 2022 with step-by-step enhancements ofsuch indicators.223 Negative screening is oneof the most common sustainable portfolio
management tools used by central banks mainly
applied to their equity holdings.224 For example,
in 2019 Sweden’s Riksbank applied climate risk
weightings to a portion of its SEK500bn forex
reserves.225 This resulted in the exclusion ofbonds issued from the highly fossil fuel-exposed
provinces of Alberta, Canada, Queensland,
and Western Australia.226 Riksbank also applied
exclusion criteria to its corporate bond purchaseprogramme, requiring bond issuers comply
with sustainability standards to be eligible forthe quantitative easing (QE) programme.227 The
Bank of England published how it will green its
Corporate Bond Purchase Scheme (CBPS) to
account for the climate impact of the issuers of
the bonds held, targeting a 25% reduction in theweighted average carbon intensity of the CBPS
portfolio by 2025, and full net-zero alignment by
2050.228 Exclusion of assets with high climate risks
from asset purchases can also help to reduce therisk to the central bank’s balance sheet.229
Negative effects on credit flow to corporationsin hard-to-abate sectors suggest that Central
Banks should consider incorporating transitionlabelled bonds in their respective updates on
their corporate bond purchase programmes

A Green Future for Steel - Climate Bonds Initiative

which could happen in the coming years. Even
more, the actual context of huge central bankintervention in our economies should be used topush more directly for the financing of transition
specifically and not just green activities.

Prudential Regulation
Central Banks must address the risk of stranded
assets posed by investments in fossil gas
infrastructure from financial institutions, which
could potentially jeopardise the stability of thefinancial system. Finance Watch has proposeda one-for-one capital requirement rule for thefinancing of new fossil fuels: for each euro/dollar
that finances new fossil fuels projects, banks andinsurers should have a euro/dollar of their funds
held liable for potential losses.
In this sense, prudential adjustments can bemade to preference green lending or discourage
lending to assets liable to climate risk. Risk
weighting of assets can be made moresensitive to climate risk, for example, People’s
Bank of China (PBOC) gives banks a higher
macroprudential assessment score if they holda high number of green assets.230 Whilst there
are concerns over the impact of adjusting risk
weighting on bank stability, green supporting
factors can overcome the higher risk weights often
given to green assets given their longer payback
periods but require greater risk sensitivity provided
by taxonomy and disclosure requirements.231
Basel III’s Countercyclical Capital Buffer (CcyB) isa powerful macroprudential tool which aims toprotect the banking sector from periods of excess
aggregate credit growth that have often been
associated with the build-up of system-wide risk.232
A countercyclical carbon capital buffer could
be implemented, acting similarly to the CcyB togive climate-sensitive resilience to banks or setting
exposure restrictions for certain assets or sectors.233
Central Banks can vary capital requirements
according to an FI’s climate risk exposure. Capital
buffers would be set higher for those with greater
exposure to unsustainable activities because
these Fis would be at greater risk of default.
Conversely, capital requirements could be
discounted according to an FI’s green lending.
In 2019 the Hungarian central bank, Magyar
Nemzeti Bank (MNB), announced a preferential
capital requirement against balance sheet
exposure to energy-efficient housing loans.234
The discount reflected the reduced risk of default
on green mortgages.235 Similarly, Lebanon’s
CB, Banque du Liban, differentiates reserve
requirement ratios according to the amount ofbank lending flowing to renewable energy andenergy efficiency projects.236
The ECB has carried out a 30-year economy-wide
stress test, which showed a concentration ofclimate-related risks in certain regions, sectors,
and companies.237 This informs both Central

Bank policy and wider EU policy. Communicationof the stress test results can also aid the real
economy, for example, in all sectors, a lack oftransition increases the risk of default. Central
Banks=s could carry out stress testing to identify
national vulnerabilities. These could be focusedon the energy transition in Central Banks withlower capacity for stress testing. Energy transition
stress tests could follow the example of De
Nederschlande Bank (DNB). DNB’s 2018 stresstest showed that a disruptive energy transition
would have a greater impact on financial
institutions, with losses mitigated by earlytransition policies.238

Appendix IV: Role of financial
markets supervisors andregulators
The financial regulatory bodies in the EU were set
in place following the 2008 financial crisis and are
European-wide institutions with full supervisory
and regulatory bodies: ESMA (the European
Securities and Markets Authority), EIOPA (theEuropean Insurance and Occupational Pensions
Authority) and EBA (the European Banking
Authority). In revising its founding Regulationsin 2019 (ESAs Review), it obtained a specificmandate to integrate sustainability into its remit.
The European Supervisory Authorities (ESAs)
have an important role in the EU sustainable
framework. As referred before, they are in theprocess of drafting regulatory technical standards(RTS) for taxonomy-related sustainability
disclosure according to Articles 8(3), 9(5) and11(4) of the SFDR.239
Much of the work of the ESAs is relevant totransition finance of large corporations. For
example, in May 2021, the EBA published resultsof its first EU-wide pilot exercise in climate risk,
aimed at mapping banks’ exposure to climate
risk and, most importantly, evaluate banks’ green
estimation efforts carried out so far240. The EBA
highlighted the urgency to remediate data gaps
to guarantee a smooth transition to the net-zeroframework by financial institutions. Similarly,
ESMA has a wide set of attributions related tosustainable finance and will likely have a major
supervisory role in the future European Green
Bond Standard. 241 EIOPA has a key influence
on insurance companies and pension funds;
institutional investors are the largest asset
owners (on behalf of their beneficiary citizens)which have a major role in transition financesince they are well positioned to support specifictransition projects.
The European Systemic Risk Board (ESRB), whichis responsible for macroprudential oversightacross the EU, has stressed that climate change
is a systemic risk large enough to cause financial
instability and large negative macroeconomic
shocks to the financial system.242

24While banks, insurance companies, and pension
funds have explored climate-related financial
risk assessments, investment funds have thelargest exposure to climate-sensitive economic
sectors such as utilities, transport, and fossil fuelextraction. Also, funds are exposed to losses due
to shocks to their portfolio due to their exposure
to the transition to net zero.243 While there areclimate risk indicators for equities, corporate
bonds, sovereign debt and other such assets,
investment funds can also invest in other fundswith exposures to climate-sensitive sectors.
It is necessary to assess the indirect exposureof investment funds to climate risks via theirholdings of other funds’ shares. The European
Securities and Markets Authority, in charge of theoverall supervision of the European fund industry(shared with the National Competent Authorities),
must include investment funds’ climate risk
assessment in its future Work Programmes.244

A Green Future for Steel - Climate Bonds Initiative

Endnotes
1. https://www.agora-energiewende.de/en/service/global-steeltransformation-tracker/
2. https://www.bing.com/ck/a?!&&p=4f9cded152d9f4e5b9805dc6a543fd5154c5da835e39ef7dc2f1e21ff87a7e47JmltdHM9MTY1MzkzMTAwMCZpZ3VpZD00YzQ1MjFlZC00YzY1LTQ5ZjItYjgyZS1iNzI3YzQwY2MxMWYmaW5zaWQ9NTE2OQ&ptn=3&fclid=44da1c84-e03c-11eca51f-32b83f314564&u=a1aHR0cHM6Ly93d3cucm9sYW5kYmVyZ2VyLmNvbS9wdWJsaWNhdGlvbnMvcHVibGljYXRpb25fcGRmL3Jyb2xhbmRfYmVyZ2VyX2Z1dHVyZV9vZl9zdGVlbG1ha2luZy5wZGY&ntb=1
3. https://www.iigcc.org/download/global-sector-strategy-steel/?wpdmdl=4810&refresh=627d17afe207d1652365231
4. https://content.rolandberger.com/hubfs/Green_deal_for_steel-3.
pdf?utm_campaign=21-0180_Green-deal-for-steel&utm_medium=email&_hsmi=175944227&_hsenc=p2ANqtz-_EjPwbY5yFgwhc624ctQ4W8N1y-Iw0ts8ifYWcZs8ajrTFYLR-UWiWn5LYzFcuFo5pX5kIT59SJsfwyv2V9Uj-b86w5KkSZYE1aqDcdaaZ8vrgu5Q&utm_content=175944227&utm_source=hs_automation
5. Almeida, M., Filkova, M., Harrison, C., and Sette, P. Green Bond European Investor Survey, Climate Bonds Initiative, November 2019 https://www.climatebonds.net/files/reports/gb_investor_survey-final.pdf
6. https://www.ipcc.ch/report/ar6/wg3/
7. The Climate Bonds Standard provides clear, sector-specificeligibility criteria for assets and projects that can be used for Climate
Bonds and Green Bonds. The Steel Criteria lay out the requirementsthat Steel production asset, projects must meet to be eligible forinclusion in a Certified Climate Bond and for companies on a credible
transition path to issue transition labelled debt. The Criteria apply to
manufacture and production of steel and do not address other stagesof the value chain.
https://www.climatebonds.net/standard/Steel
8. Climate Bonds’ Financing Credible Transitions paper established fiveprinciples for an ambitious transition (for an overview, see figure 10).
These are designed to ensure the transition is science-led, ambitious
and will reduce overall emissions by excluding the use of offsets.https://www.climatebonds.net/files/reports/cbi_fincredtransitions_final.pdf
9. Roland Berger (2020 The Future of Steel Making
10. https://www.steel.org/steel-technology/steel-production/
11. ibid
12. ibid
13. World Steel Association 2021
14. https://www.iigcc.org/download/global-sector-strategy-steel/?wpdmdl=4810&refresh=627d17afe207d1652365231
15. Mission Possible Partnershiphttps://www.eurofer.eu/about-steel/learn-about-steel/what-is-steeland-how-is-steel-made/16. Agora Energiewende (https://static.agora-energiewende.
de/fileadmin/Projekte/2021/2021-06_IND_INT_GlobalSteel/AEW_236_Global-Steel-at-a-Crossroads_WEB.pdf)E3G (https://9tj4025ol53byww26jdkao0x-wpengine.netdna-ssl.com/wp-content/uploads/1.5C-Steel-Report_E3G-PNNL-1.pdf)ResponsibleSteel (https://www.responsiblesteel.org/standard/)
Mission Possible Partnership (https://missionpossiblepartnership.
org/wp-content/uploads/2021/10/MPP-Steel_Transition-Strategy-Oct19-2021.pdf)EUROFER (https://www.eurofer.eu/assets/
Uploads/EUROFER-Low-Carbon-Roadmap-Pathways-to-a-CO2neutral-European-Steel-Industry.pdf)IIGCC (https://www.iigcc.
org/download/global-sector-strategy-steel/?wpdmdl=4810&refresh=61c5ed2ea29de1640361262)Roland Berger (https://content.rolandberger.com/hubfs/Green_deal_for_steel-3.
pdf?utm_campaign=21-0180_Green-deal-for-steel&utm_medium=email&_hsmi=175944227&_hsenc=p2ANqtz-9GU_2iafHkxkQlvY4ljvjZVnlCC75CF9TGmEkjp0kEXovpdmrrFMtF5xfm4XaON_btj0ng3Y7yxDvrEdGG_tIErh1SRYdMRJiOa68K7lRR6ktuPek&utm_content=175944227&utm_source=hs_automation / and https://www.
rolandberger.com/en/Insights/Publications/Europe’s-steel-industryat-a-crossroads.html)IEA (https://iea.blob.core.windows.net/assets/
7f8aed40-89af-4348-be19-c8a67df0b9ea/Energy_Technology_Perspectives_2020_PDF.pdf) CEPS (https://www.ceps.eu/ceps-projects/
greensteel) Publication for the committee on Industry, Research andEnergy (ITRE) (https://www.europarl.europa.eu/RegData/etudes/
STUD/2021/695484/IPOL_STU(2021)695484_EN.pdf)
17. Arcelormittal, Baowu Group and Tata Steel all aim for net zero in 2050
18. https://www.agora-energiewende.de/en/service/global-steel-transformation-tracker/
https://www.industrytransition.org/green-steel-tracker/
19. https://missionpossiblepartnership.org/wp-content/uploads/2021/10/MPP-Steel-Transition-Strategy-Oct-2021.pdf
20. https://www.agora-energiewende.de/en/service/global-steel-transformation-tracker/
21. https://www.agora-energiewende.de/en/service/global-steel-transformation-tracker/
22. https://content.rolandberger.com/hubfs/Green_deal_for_steel-3.
pdf?utm_campaign=21-0180_Green-deal-for-steel&utm_medium=email&_hsmi=175944227&_hsenc=p2ANqtz-_EjPwbY5yFgwhc624ctQ4W8N1y-Iw0ts8ifYWcZs8ajrTFYLR-UWiWn5LYzFcuFo5pX5kIT59SJsfwyv2V9Uj-b86w5KkSZYE1aqDcdaaZ8vrgu5Q&utm_content=175944227&utm_source=hs_automation
23. https://www.europarl.europa.eu/RegData/etudes/
STUD/2021/695484/IPOL_STU(2021)695484_EN.pdf
24. https://www.mckinsey.com/~/media/mckinsey/industries/
metals%20and%20mining/our%20insights/the%20future%20of%20
the%20european%20steel%20industry/the-future-of-the-european-steel-industry_vf.pdf?shouldIndex=false
25. https://www.mckinsey.com/~/media/mckinsey/industries/
metals%20and%20mining/our%20insights/the%20future%20of%20
the%20european%20steel%20industry/the-future-of-the-european-steel-industry_vf.pdf?shouldIndex=false
26. https://9tj4025ol53byww26jdkao0x-wpengine.netdna-ssl.com/
wp-content/uploads/1.5C-Steel-Report_E3G-PNNL-1.pdf
27. https://www.eurofer.eu/assets/publications/reports-or-studies/annual-report-2021/EUROFER-Annual-Report-2021.pdf

28. https://www.oecd.org/industry/ind/steel-market-developments-Q4-2021.pdf
29. https://www.eurofer.eu/press-releases/moderate-recovery-set-tocontinue-in-2022-as-energy-prices-and-substantial-uncertainty-putgrowth-at-risk/
30. https://www.mckinsey.com/~/media/mckinsey/industries/
metals%20and%20mining/our%20insights/the%20future%20of%20
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Prepared by Climate Bonds Initiative.
Author: Fabio Passaro
Acknowledgements: Lily Burge, Fabiana Contreras, Paul Fennell,
Rachel Hemingway, Sean Kidney, Shivakumar Kuppuswamy,
Vangelis Papakonstantinou, Juan Manuel Viver Gargallo, Wido K. Witecka
Design: Godfrey Design, Joel Milsted
Editorial support: Caroline Harrison
Suggested Citation: Passaro, F., A Green Future for Steel,Climate Bonds Initiative 2022

© Published by Climate Bonds Initiative, August 2022
www.climatebonds.net

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