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| China ETS |
China's government agencies and steel industry organizations are working to implement an emissions trading system (ETS) in the steel sector to achieve carbon neutrality. However, this initiative is facing delays due to the industry's economic difficulties, the central government's lack of resolve, and complex stakeholder interests.
The Chinese government and the China Iron and Steel Association (CISA) have been pushing for the introduction of a national compliance emissions trading system for the steel sector in 2024. However, most producers are unfamiliar with carbon asset management and cannot afford the high carbon prices, leading to delays.
China launched its ETS in July 2021 and currently only covers the power sector. Many policymakers, industry experts, and organizations have called for an accelerated expansion of the ETS to include other carbon-intensive sectors such as cement, aluminum, iron, and steel, especially those that are liable under the EU's Carbon Border Adjustment Mechanism.
In early 2024, the Ministry of Ecology and Environment (MEE) issued public consultation guidelines on emissions accounting and reporting for the cement and aluminum sectors, paving the way for their inclusion in the ETS. However, guidelines for the steel industry have not been released due to the extensive product list and complicated emissions calculation procedures.
On June 6, a CISA spokesperson told the state-run China Environment News that the steel sector is expected to be included in the national ETS this year after a series of initial preparations at the request of the government.
Some industry experts see this as a willingness to participate in the ETS despite various challenges.
China Environment News, which serves as a spokesperson for the MEE, which oversees the development of the carbon market, aims to encourage concrete action from other government agencies and industry stakeholders.
Despite the MEE's clear push, the central government remains wary of policies that could harm the economy. The steel sector accounts for about 15% of national CO2 emissions, but produces over 50% of the world's steel, making this a particularly difficult challenge.
A CISA official noted, "Compared to the power sector, the industrial process from raw materials to finished products in the steel sector is much more complex. Therefore, it will be much more difficult to conduct emissions calculations and verifications and to establish an ETS allowance allocation plan."
Since 2013, China has established several regional pilot carbon markets. According to CISA, these pilots have allowed about 80 steel companies to gain experience in carbon asset management and emissions trading.
"However," said a CISA official, "these companies only produce about 13% of crude steel output. Most steel companies still lack ETS experience. Even among companies that are already participating in regional ETS markets, active engagement in emissions trading has been limited".
A Chinese steel market analyst commented, "When asked about decarbonization strategies, most steel producers still seem confused.
He added: "Regardless of the difficulty, they have to comply with the government's request to participate in the ETS. Meanwhile, the EU's CBAM is approaching, and more CBAMs may come from other countries".
Including the sector in the ETS would drive more robust decarbonization investments. However, some steelmakers are concerned about the costs, questioning whether decarbonization investments are "necessary and mandatory at this time" given their slim profit margins.
CISA noted that while China's steel exports rose 32.6% from January to February, the average export price fell 32.1%, leading to trade tensions with India.
As of June 7, China's carbon price was 96.07 yuan per ton of CO2 ($13.26/mtCO2e). Steel producers are currently reporting profits of only 100-300 yuan ($13.80-$41.39) per ton of steel.
One Chinese rebar producer noted, "The production of one ton of steel products emits about 1.78 tons of CO2. Carbon emissions vary widely from one steel product to another, and many producers are still unable to make such emissions calculations."
However, some market participants argue that, as in the power sector, the government should start with low ETS costs by providing free allowances based on annual production levels. Producers would only have to buy allowances if they emit more than the free allowances.
Meanwhile, CISA has unveiled a decarbonization roadmap for the steel sector. This roadmap aims to peak the sector's carbon emissions by 2030, reduce emissions by 40% from 2020 levels by 2040 and by 95% by 2060, and ultimately achieve carbon neutrality through carbon capture, utilization and storage (CCUS).
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