17 April 2023 – CBAM or the EU Carbon Border Tax is an important component of the European Green Deal. Although the measure is supposed to contribute to a reduction of CO2 emissions, it is becoming more and more apparent that the EU’s own CO2-intensive industry, above all the EU steel manufacturers, are to be protected and given preferential treatment with obvious loopholes and hollow justifications that border on stupidity. But the green steel bubble could soon belong on the scrap heap. Because there is a huge dirty hole in CBAM.
- CBAM: The big dirty hole in the EU CO2 tax
- Scrap: The dirty hole in CBAM
- The production of scrap does not produce any CO2?
- Green Deal, Waste Shipment Regulation, CBAM, ETS Certificates
- Without scrap there are no ETS certificates and no subsidies.
- 90% scrap content and full alloy surcharge?
- Stainless steel scrap in short supply
- Steel production emits CO2, but steel scrap does not?
- Conclusion: Stainless steel scrap is the game changer
CBAM: The big dirty hole in the EU CO2 tax
CBAM, an important part of the EU Green Deal and for some the coming green saviour at the external borders of the European Union. The EU Carbon Border Tax is supposed to deter dirty imports that produce a lot of CO2eq emissions, or if they do have to come in, bureaucratic red tape is supposed to be imposed on them from 2023 onwards, and from 2026 onwards also levies in the form of CO2 CBAM certificates that can be purchased.
Noble EU green goals with miracle weapons
The noble green goals stop, however, where they threaten the existence of CO2-intensive industries such as cement, fertilisers or steel and stainless steel. In the original CBAM draft, the focus was still on green hydrogen and the miracle cure Direct Reduced Iron/Hot Briquetted Iron (DRI/HBI). Both of these (green H2 and equally green DRI) have been half-broken, not only because of the war between Russia and Ukraine. Which is why the EU steel manufacturers and EUROFER, for example, no longer talk about green hydrogen. Or the European Steal Technology Platform had already put it in a nutshell years ago that 500 million tonnes per year of DRI was simply completely unrealistic and that everyone (manufacturers and EU) was also clear about this.
Hydrogen dreams shattered?
The sham of trying to get CO2-intensive (i.e. not green) hydrogen into the final CBAM version failed because of a few stubborn EU parliamentarians (and rumour has it that a few indomitable stainless steel traders from the south of Germany might have had something to do with it). Since then it has become quieter and quieter about the “green” hydrogen. Green H2 has already disappeared from the wording of the steel associations.
Green hydrogen not available for years
The attempts to get the production of clean hydrogen outside the EU off the ground were more of a false flag from the start. And it could simply fail because it is not enough to simply have an abundance of electricity from renewable energies. It also requires vast amounts of water, which is not available in the right quality and quantity in many coastal regions of Africa and the Middle East. Salt water must therefore be desalinated for the production of “green” hydrogen, and you can certainly imagine that this is a huge environmental disaster that also consumes an incredible amount of energy. Apart from the fact that the people in the potential producer countries themselves hardly have enough clean drinking water.
CO2 footprint distorts the view
And in the European Union it is hardly to be expected that in the Dutch and German Wadden Sea of the North Sea or on the coasts of the Baltic Sea (which is already much too warm), desalination plants will now be set up for which there is neither enough energy nor, and presumably even more decisive, the political approval in a population increasingly trimmed to a green future. The individual CO2 footprint, an invention of the oil companies among others, becomes a clichéd boomerang. After all, it was supposed to divert the CO2 blame onto the citizen.
Growing water shortage in the EU
If we now look at the largest EU member states France (no water), Italy (no water) and Germany (also no water), it quickly becomes clear that the green hydrogen project does not or will not have much chance of success.
No more cheap natural gas
The unspeakable Russian war against Ukraine has added another energy problem. Originally, the plan of the steel manufacturers, who of course knew that there would not be enough green hydrogen in the short to medium term, was to rely on cheap natural gas from Russia, since all the new technical and, above all, green miracle plants can, as it happens, also process natural gas – and, moreover, hydrogen cannot really be produced green from natural gas. 16 tCO2eq for one tonne of grey hydrogen is simply not feasible.
Without green hydrogen, DRI remains dirty
The funny other colours you can stick on hydrogen are not really an alternative to green, as they produce much more CO2 in production than is produced by burning most fossil fuels. And the reader can probably already guess – if there is no green hydrogen, there is no green DRI. Once again, there is not even enough conventional DRI or even Hot Briquetted Iron (HBI). The US steel producers with their focus on EAF production and an at least halfway existing DRI/HBI production of a few million tonnes per year, however, have to deal with shortages again and again and have to resort to the alternative raw material scrap.
Scrap: The dirty hole in CBAM
And that brings us to the dirty hole in the EU Carbon Border Adjustment Mechanism. Since the negotiations between EU parliamentarians and member states, steel and stainless steel scrap have once again been clearly declared as products not affected by CBAM. One of the reasons given for this is that steel and stainless steel scrap do not produce any significant CO2 emissions during production.
Conversely, this Regulation should not initially apply to certain products whose production does not entail meaningful emissions like ferrous scrap, some ferroalloys and certain fertilisers.Source: Proposal for a regulation of the European Parliament and of the Council establishing a carbon border adjustement mechanism, p. 13, paragraph 36
With such formulations, one may doubt the education of some people in Brussels. Or one may legitimately ask oneself whether this wording, which was already in the original CBAM draft and was only marginally changed in the course of negotiations, was simply stupid, corrupt or stupid AND corrupt. The answer is, of course, up to each person.
The production of scrap does not produce any CO2?
Ferrous (steel and stainless steel) scrap produces no significant CO2 emissions during the production of steel? But ferrous and non-European steel, the production of which can easily result in 30% scrap (according to the Environmental Product Declaration, the EU stainless steel producer Outokumpu has a scrap rate of 29.8% for cold-rolled stainless steel in production from 2019 to 2024) produces tonnes of CO2 that must be taxed at the EU’s external border?
At first glance, this makes little sense. At second glance, it already calls for strategic incompetence and premeditation directly from Brussels. Or what do you think about this obvious contradiction?
Green Deal, Waste Shipment Regulation, CBAM, ETS Certificates
All in all, it does make sense, just not from the point of view of environmental protection (which is only of secondary importance in the EU Green Deal anyway). At the latest since the new EU Waste Shipment Regulation, in which the EU steel producers and their lobby organisations and PR agencies had tried with enormous effort to get a ban on scrap exports – of course with regard to the alleged environmental protection. Shortly before the home stretch, the steel mills dropped the masquerade and openly postulated that resources must be protected and kept in the EU.
Without scrap there are no ETS certificates and no subsidies.
This is also understandable, because free ETS certificates are only available if the conventional steel producers put 90% scrap into their electric arc furnaces, or 70% on the part of the stainless steel producers. In addition, according to the “European Union sustainable finance taxonomy“, EAF steel and stainless steel producers must either meet the technical requirements for the EU CO2 benchmark values (which they most likely do not) or put at least 90% scrap into their electric arc furnaces (EAF) if they want subsidies and funding from EU pots for their environmental projects (which they would otherwise not want to pay for).
90% scrap content and full alloy surcharge?
Or why do you think that suddenly all EU stainless steel producers claim that they use more than 90% scrap to produce their stainless steel. And at the same time have exposed the alloy surcharge as the farce it has been for years. What EU customer is willing to pay a 100% alloy surcharge for a tonne of stainless steel when it contains almost no alloys such as nickel or chrome? While the share of stainless steel scrap in the EAFs of the manufacturers was just under 30% in 2009 and that of ferrous scrap less than 20%, it is now said to be 90%+. However, at least 70% of it has to be so-called high-alloy scrap or stainless steel scrap in order for the free ETS certificates to be allocated.
Stainless steel scrap in short supply
And because of the long shelf life of stainless steel (about 50 years), the raw material scrap is in short supply. Which is why the hole in the Carbon Border Tax CBAM is easy to explain. Or why steel and stainless steel were classified as complex goods in the sense of CBAM, so that the ferroalloys they contain can be separately subject to carbon duties. Thus, the CO2 emissions of raw materials, which otherwise would not have had to be calculated, have to be included in the Scope 3 emissions.
In order to ensure the environmental integrity of the CBAM, the measure shall take into account all relevant input materials that contribute significantly to GHG emissions. For instance, in the case of steel, if a coil is produced in country X using a slab produced in country Y, also emissions of the slab shall be included in the CBAM. In the case of stainless steel production, ferro alloys represent the key source of GHG emissions. While EU stainless steel producers are using a preponderant proportion of ferrous scrap, thus limiting the ferroalloys proportion and the resulting GHG emissions to an absolute minimum, stainless steel imports from third countries rely mainly on primary materials such as nickel pig iron or other carbon-intensive ferro-alloys. This results in major differences in the full carbon footprint, with a large share of imported stainless steel having a carbon footprint 2 to 5 times higher than equivalent stainless steel produced in the EU. Therefore, and in order to ensure that the CBAM will efficiently address carbon leakages impacting the EU stainless industry and provide an incentive to third countries to reduce their own GHG emissions, it is essential that the list of upstream materials pursuant to article 7(6) includes also ferro alloys in the case of stainless steel.Source: Draft report, Establishing a carbon border adjustment, Amendment 1274
Steel production emits CO2, but steel scrap does not?
But stainless steel “scrap”, which is melted in India with electricity from EAFs fuelled by Russian coal and nickel pig iron from Indonesia and which is inevitably produced during the production of stainless steel (we remember approx. 30% scrap), naturally has no higher CO2 emissions than the stainless steel products produced there at the same time. Yes, and the fuel rods from the nuclear power plants also no longer radiate when they come out of the reactor into the final repository. But otherwise things are still going well, aren’t they?
Conclusion: Stainless steel scrap is the game changer
Should a stainless steel producer outside Europe now come up with the idea of explicitly using only stainless steel scrap for its exports destined for the EU market and forego the more CO2-intensive nickel pig iron, then this huge hole in the CBAM regulation could become an unwanted game changer.
When will the next export ban come?
Not for EU manufacturers, though. For them, the whole thing will turn into a pipe burst at the latest when the most important remaining suppliers of stainless steel scrap, Turkey and Mexico (along with Switzerland and Norway), can no longer or no longer want to deliver (Turkey in particular should have sufficient reasons for this). Russia is already out of the market for years to come due to the EU sanctions against ferrous scrap.
Has the EU made a miscalculation?
And even now the calculation of the available scrap for the EU mills would have to be very tight and, if at all, would hardly be enough to fulfil the minimum quantities for the allocation of the free ETS certificates. This also shows why, for example, the Finnish Outokumpu group has sold or wants to sell its long steel production units in the UK to Marcegaglia and the Swedish plants in Degerfors and Storfors to Cogne Acciai Speciali.
The raw material scrap or stainless steel scrap is probably now so scarce that production in these plants is no longer worthwhile. And what else the Finns might be up to this year, after these three positions have disappeared from the portfolio, is possibly in another Stainless Cappuccino.
Market protection measures against cheap scrap imports?
Taken together, the glittering fairy tale of green steel could burst sooner than previously assumed and it could turn out that it was all just green steel washing after all.
If the recycling industry, battered by EU Waste Shipment Regulation, now comes up with the idea of demanding market protection measures against cheap scrap imports and applies for anti-dumping proceedings against, for example, stainless steel scrap containing NPI from whatever far-flung corner of the world… that would be more than understandable after all export opportunities have been cut off except for a few OECD countries. And steel manufacturers would like to get rid of Turkey as well.
- EU stainless steel anti-dumping measure against China and Taiwan extended
- Asian stainless steel market gains further momentum
- Chinese stainless steel prices rise significantly
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