What previous failures tell us about Europe’s green steel ambitions

Europe needs a lead market to scale up green steel. And while the bloc has neither the cash bazooka of the United States Inflation Reduction Act, nor the state capitalism of China, the automotive industry can be the lead market to boost Europe’s green steel plans, writes Julia Poliscanova.

Julia Poliscanova is a senior director for vehicles and e-mobility supply chains at Transport & Environment, a clean mobility campaign group.

A123 Systems, a US startup aiming to produce lithium-ion batteries for electric cars, famously received hundreds of millions of dollars in support from the US government in 2009.

In the very same year, the US solar panel startup Solyndra similarly collected over half a billion in subsidies to help the company scale up.

Both went bust.

While circumstances differ, what both companies have in common is the failure to secure a market for their product.

In the US, sales of electric cars were nowhere in 2009, as sufficiently strict clean car rules were not yet in place. The lack of demand for locally manufactured solar (long before the US Inflation Reduction Act) meant that Solyndra faced cheaper competitors from elsewhere.

A somewhat similar tale is now happening in Europe’s steel sector.

Steel is responsible for 7% of global carbon emissions, putting it at the top of the industrial decarbonisation agenda.

The most common production method requires reducing iron ore with coal-fired blast furnaces at temperatures over 1500°C. Using recycled steel, or scrap, in electric arc furnaces instead can reduce the total emissions from the steel sector by close to half by 2050.

But to decarbonise steel completely, new manufacturing methods for primary steel production are needed.

One option is to use green hydrogen as the reducing agent in a DRI (direct reduction of iron ore) process. Direct electrification (via electrolysis) is also being developed.

Other options include producing hydrogen from fossil fuels such as natural gas and capturing CO2 with the help of carbon capture technologies.

Developing clean steelmaking processes takes time, effort and a lot of capital, prompting governments to subsidise local companies.

German giant ThyssenKrupp was recently given €2 billion in state aid for its green steel plant in Duisburg. ArcelorMittal has so far collected close to USD 2.3 billion in subsidies from the French and Canadian governments for its own green steel plans. The list goes on.

It’s not clear whether all these subsidies are for green steel only. But what is even less clear is who will buy all this green steel and at what price.

Bar voluntary commitments from a few premium carmakers such as BMW, Mercedes and Volvo Cars, which can easily be delayed or scrapped, a reliable lead market in Europe is currently missing.

Reliable market offtake is key for cost-effectiveness and scale. It can give the necessary volume certainty and unlock the investment.

While Solyndra and A123 Systems failed in 2009, a different story is happening in Europe in 2023.

Even without hefty subsidies, European wind turbine manufacturers dominate the global top 10, while dozens of battery factories are being built in Europe on the certainty of the electric car market. The CEO of one of these battery companies recently stated that the 2035 car engine ban is what made him choose Europe.

While Europe has neither the cash bazooka of the US IRA, nor the state capitalism of China, the automotive industry can be the lead market to boost Europe’s green steel plans.

Automotive supply chains are at the heart of Europe’s industrial fabric; they buy 30% of Europe’s high-quality steel (and even close to half of the production of the likes of ThyssenKrupp). Carmakers’ growing profit margins also mean they can absorb the short-term green premium of cleaner steel.

The EU should put in place green steel quotas for new cars from 2030. This can be done either via the currently discussed end-of-life cars law (ELV) or via separate CO2 standards for automotive steel (extending to trucks, trains and buses in the future).

Carmakers can be given an average target to be met across their entire offer of new cars, with premium models meeting that first before commercialising this across the vehicle range.

This should be flanked by a revamped trade policy that supports a local green steel industrial base, for instance by extending CBAM to steel-using products such as cars. State aid could then support innovation and fill the gaps (e.g. as contracts for difference), but it cannot be the only tool to support a manufacturing build-out.

On their own, subsidies will not transform Europe’s steel industry but will cost the taxpayer dearly. A secure automotive lead market and a smart trade policy are what Europe needs to build its green steel industry.