The rapid rise in the cost of EU CO2 allowances – Implications for EAF steelmaking

Jan 10, 2022

The inflation and the price of electricity have risen sharply during 2021. In addition to these, the price of CO2 allowances in the EU has been also in a steep upswing. There has been already a 154% increase (from 33€ to 84€) during 2021 and analysts estimate that the prices might hit 100€ in the near future (Reuters, 2021). This naturally has a considerable effect on steel producers in the EU as emission-intensive processes and rising costs of emissions will certainly affect the margins of steelmaking.

Investing in emission-reducing technologies is now more important than ever. To slow down the climate change but also maintain the ability to compete in the markets.

Figure 1. Daily Carbon prices. (Ember climate, 2021)

EU emission trading system

These permits or allowances give the holder the right to release one ton of CO2 per permit. The steel manufacturers in the EU are obligated to surrender the number of allowances that equates the emissions during the preceding calendar year.

During the calendar year the steel producers receive a certain number of allowances for free. If these are not sufficient to cover all the emissions the producer must buy the rest of the allowances from the EU-wide market. However, these free allowances are planned to be phased out gradually and reduced to zero by 2035 (Shearman & Sterling, 2021). Surplus allowances can also be sold at the same market.

The purpose of the system is to create a financial incentive for enterprises to implement emission reduction measures.

Cold weather and limited amount of wind power have driven more fossil fuel generation which increases the demand for the CO2 allowances. In addition, the price has been boosted by the surging natural gas price which makes the burning of coal more economic. However, coal-burning emits twice the emissions which have further increased the price of the EU Carbon permits. (Reuters, 2021)

The price peak for the allowances will most probably be over in spring/summer 2022 once the increased use of coal during this winter is ending. Though, it is likely that we are not going back to the range of 20-30 EUR per ton as in 2020. Reuter’s analysts estimate that the prices will average ~70€ a ton during 2022.

Since the steel industry is very emission intense, this trend of rising emission costs will hurt the steelmakers’ profitability. Especially in BF/BOF route but also the EAF route since the emission costs are included in the electricity price. And the electricity spike doesn’t seem to be as short-lived as the first estimations. Bloomberg approximates with newer data that Europe’s energy crisis will last until 2023.

Therefore, it is vital for steel producers to develop the practices and methods to reach more energy and emission efficiency processes. Even small changes will affect a lot.

It’s noteworthy to mention that steel product prices have also risen in 2021, but they are expected to lower back to pre-COVID levels later in 2022 (IHS Markit, 2021). It remains to be seen how much the cost of CO2 can be priced in steel products in the long term.

Read how to improve the EAF energy efficiency with the ArcSpec system or contact our experts if you want to discuss more about EAF control to reduce emissions and energy consumption.

Sources:

https://www.bloomberg.com/news/articles/2021-12-29/don-t-mistake-the-gas-meltdown-for-end-to-europe-s-energy-crisis
https://ember-climate.org/data/carbon-price-viewer/
https://www.iea.org/reports/global-energy-co2-status-report-2019/emissions
https://ihsmarkit.com/topic/steel-market-outlook-and-steel-price-forecast.html
https://www.reuters.com/markets/commodities/eu-carbon-price-could-hit-100-euros-by-year-end-after-record-run-analysts-2021-12-08/
https://www.reuters.com/business/energy/analysts-raise-eu-carbon-price-forecasts-gas-rally-drives-up-coal-power-2021-10-14/
https://www.shearman.com/Perspectives/2021/08/CBAM-and-revised-EU-ETS-Implications-for-the-Steel-Industry