China's push to start emissions trading for steel industry this year faces critical challenges

The Chinese government and the country's iron and steel industry association have been pushing for the sector's adoption of the national compliance emissions trading system in 2024, but critical challenges remain as most producers are unfamiliar with carbon asset management and cannot afford a high carbon price given thin profit margins.

China launched its ETS in July 2021, which currently only covers the power sector. There have been many politicians and industrial stakeholders calling for an accelerated ETS expansion to include other emissions-intensive sectors, especially those liable under the EU's Carbon Border Adjustment Mechanism, like cement, aluminum, iron and steel.

Earlier in 2024, the Ministry of Ecology and Environment or MEE released for public consultation emissions accounting and reporting guidelines targeted toward the cement and aluminum sectors, paving way for their inclusion in the ETS. However, the guideline is yet to be released for the iron and steel industry due to its long list of products and sophisticated emissions accounting procedures.

A spokesperson for the China Iron and Steel Association or CISA told state media China Environment News June 6 that "the iron and steel sector is expected to be included in the national ETS this year after a series of early-stage preparations, following the government's call."

Some industrial experts regarded this as a quasi-official voice that committed to onboard the iron and steel sector despite challenges.

China Environment News is the mouthpiece of MEE, which oversees carbon market development. Articles on this newspaper usually aim at lobbying other government bodies and industrial stakeholders to take certain actions.

Despite MEE's clear push, the central government is wary of any policy that could compromise the economy. This becomes even tricker for the iron and steel sector as it contributes about 15% of the country's CO2 emissions but also over 50% of global steel production.

Lack of carbon management capacities

"Compared with power sector, iron and steel sector has much more complicated industrial processes, raw materials and products. As such, it will be much more difficult to conduct emission accounting and verifications, as well as crafting the allocation plan of ETS allowances," CISA said in an interview with China Environment News.

Since 2013, China has established several provincial, pilot carbon markets. These pilots have covered about 80 iron and steel companies, enabling them to accumulate experience in carbon asset management and emissions trading, CISA said.

"However, these companies only contributed about 13% of crude steel outputs. Majorities of iron and steel companies still lack the ETS-related experiences," the spokesperson said. Even for some companies that have already participated in provincial markets, they mainly focus on fulfilling liabilities and did not actively participate in emissions trading, CISA noted.

"When I ask steel producers about their decarbonization strategies, most of them still give me a confused look," a China-based steel market analyst said.

The analyst used a Chinese idiom to describe the iron and steel sector's situation -- "the arrow is already on the bowstring, so you have to shoot."

"They must follow the government's call to participate in the ETS no matter how challenging it can be. Meanwhile, the EU's CBAM is coming and there may be more CBAMs from more countries coming."

Compromised profitability

Including the sector in the ETS will exert a stronger push for more decarbonization investments. However, some steel producers worry that the costs could be unbearable, questioning whether investing in decarbonization is "luxurious" as they are facing razor thin profit margins.

In January-February, China's steel export volume increased by 32.6%, but the average export price dropped by 32.1%, CISA told the state media, highlighting that, since 2023, low prices have triggered investigations by the US, the EU and Thailand and caused trade frictions with India.

Notably, China's emissions allowance price was at Yuan 96.07/mtCO2e ($13.26/mtCO2e) on June 7. Steel producers said their current profits were Yuan 100-300 ($13.80-$41.39) for each ton of steel.

Around 1.78 mt of CO2 emissions will be incurred for producing a ton of product, a China-based long steel producer said, adding that carbon footprints vary significantly by steel products and many producers are still unable to conduct such emissions accounting.

The producer expected ETS costs to start low, because, like the power sector, the government will give each producer a free emissions quota based on its annual output. Producers only need to buy emissions allowances if they emit more than their free quotas.

CISA has published a decarbonization roadmap for the iron and steel sector that targets to peak the sector's emissions in 2030, reduce the sector's emissions by 40% in 2040 from 2020 levels and by 95% in 2060, as well as achieving carbon neutrality with carbon capture, utilization and storage technologies and carbon offsets.