This is the fourth Insight in our series on heavy industry.
Canada’s iron and steel industry is poised to make big emissions cuts thanks to government support, industry investment, and industrial carbon pricing.
If there is an avatar for industrial decarbonization, it is steel. This versatile and infinitely recyclable material will help build the net zero economy, literally, as a component of vehicles, wind turbines, transmission towers, and much else. And low-carbon steel is expected to see rising demand compared to its more carbon-intensive equivalents.
Though Canada’s steel industry is currently lower-carbon than most of its foreign counterparts, it is still a highly emissions-intensive business. As with other heavy industries, decarbonizing steel means cutting emissions at capital-intensive facilities that face low-cost global competitors.
Policymakers have a part in helping the Canadian iron and steel industry navigate this transition. As this Insight will discuss, the role for policymakers is less about identifying the winning pathway to decarbonization and more about implementing the most cost-effective measures.
Steel emissions are poised for big cuts this decade
Canada’s iron and steel industry is on the cusp of significant changes. Between 2005 and 2022, its emissions fell by 3 megatonnes, but not because of decarbonization. Though facilities installed some efficiency upgrades, the industry’s emissions fell largely because one large plant stopped producing iron and steel. You can see this trend in Figure 1 by clicking the historical button.
The future drivers of emissions—shown by clicking on the projected button in Figure 1—will look very different. Under the measures in Canada’s 2030 Emissions Reduction Plan, 440 Megatonnes projects that the iron and steel industry will grow while slashing its energy and emissions intensity. Overall, the industry is on track to cut emissions by 5 megatonnes, or 40 per cent, between 2022 and 2030.
This drop in emissions is thanks to decarbonization projects that target the emissions associated with ironmaking, the most carbon-intensive stage of steel production. Ironmaking generates so many emissions because it requires separating iron from oxygen, traditionally by combining iron and high-carbon coal in a blast furnace. The combustion of the fuel and the chemical reaction between carbon and oxygen both produce large quantities of carbon dioxide.
Today, Canada has three steel mills that make their iron using coal-based blast furnaces. These facilities—the largest in the industry, known as integrated plants—are responsible for about 90 per cent of the sector’s emissions.
There are a few ways to reduce those emissions. One of Canada’s integrated steel facilities is opting to avoid ironmaking altogether. Instead of producing steel from scratch, it will make steel exclusively using scrap, in a process that can be largely decarbonized by using an electric arc furnace.
However, scrap-based or secondary steelmaking cannot entirely replace ironmaking-based or primary steelmaking. Primary steelmaking will still be needed to make some high-performance grades of steel, and scrap-based steelmaking will always depend on reliable supplies of good quality scrap. That means finding ways to decarbonize ironmaking itself, a much more challenging task.
One of the main alternatives to blast furnace ironmaking is a process known as direct reduced iron, in which steelmakers find lower-emitting ingredients that can remove oxygen atoms from iron ore. Currently, the most common input for direct reduced iron is natural gas, which still releases carbon dioxide during the reaction. It is also possible to use hydrogen, which does not release carbon dioxide when combusted—though the production of the hydrogen itself can generate emissions, depending on the process.
Another of Canada’s integrated steel plants has chosen the route of direct reduced iron. In the coming years, it will install an electric arc furnace and replace its blast furnace with direct reduced iron fueled by natural gas.
The decarbonization projects at these two plants will significantly cut Canada’s iron and steel emissions, but they won’t take the facilities all the way to net-zero emissions.
Carbon pricing and federal funds have helped put steel on track to net zero
The emissions reductions that we project in the near future would put the iron and steel industry on a pathway aligned with net zero (Figure 2). As steel producers have noted, those reductions are thanks to a combination of commercial interest and government policy. Customers increasingly demand low-carbon products (though there is not yet a widespread willingness to pay a premium for them), while industrial carbon pricing and significant public support for the industry’s recent decarbonization projects have provided powerful incentives to cut emissions.
To stay on its net zero pathway after 2030, the industry will have to make deeper emissions reductions. The most important action will be to eliminate the remaining emissions associated with ironmaking, whether those come from fuel combustion or chemical processes.
There are many possible solutions, though none are yet commercialized. In theory, Canada’s last remaining blast furnace could be replaced with other technologies, or its emissions could be captured. Facilities that use natural gas could reduce those emissions through carbon capture or by replacing gas with low-carbon hydrogen. Alternatively, ironmaking could be completely electrified through electrolysis.
Every solution has its challenges. Carbon capture projects are hard to install at steel plants, with their many point sources of emissions, and the world’s only commercial-scale solution has low capture rates. In turn, low-carbon hydrogen is expensive to produce, and it would be difficult to procure in Ontario, the home of Canada’s integrated plants. Meanwhile, the technology to electrify ironmaking is still under development, and it would require enormous volumes of electricity, at a time when demand for electricity is already expected to rise.
Steelmakers around the world are experimenting with all these technologies. For policymakers, the challenge is identifying the most cost-effective measures that create the enabling conditions for net zero solutions.
Policies to decarbonize steel should be cost-effective
Public policy has been a crucial factor in the decarbonization of iron and steel. But what has worked in the past should not necessarily be the template for the future.
The iron and steel industry’s latest projects are supported in large part through public funds. There can be good reasons to use public funds for decarbonization: subsidies can motivate first-movers in hard-to-abate sectors, and they are easier to justify where industries are major employers and when there is growing demand for low-carbon products, but limited willingness to pay a premium for them.
Yet governments should be cautious about continuing this approach. As Canada travels further along its pathway to net zero—and as global competitors face continuing pressure to decarbonize too—it will be more cost-effective to rely on other policies that offer powerful incentives to cut emissions without relying on expensive subsidies.
One such policy is industrial carbon pricing, or what we call large-emitter trading systems. These systems are designed to reduce the risk of offshoring Canada’s industrial emissions, while sending a consistent price signal that encourages firms to reduce their emissions. Usually, systems also recycle some proceeds back to emitters for decarbonization projects.
Governments can also help create a market for low-carbon steel through their procurement rules. By requiring projects that use public money to buy low-carbon goods, including steel, governments can reduce emissions and support the competitiveness of low-carbon producers. The federal government doesn’t yet include steel in its green procurement rules, but it plans to do so.
The prospects for low-carbon Canadian steel are encouraging. The industry is taking constructive steps to reduce its emissions and Canada has a range of effective policies already in place. Together, they can generate the momentum to decarbonize steel even further while setting the stage for its long-term competitiveness.
Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute.