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Bright Blue, the independent think tank for liberal conservatism, has today published a new report entitled A carbonless crucible? Forging a UK steel industry, which examines how the UK’s steel industry can be revived and a thriving market for ‘clean steel’ developed.

With the UK Government extending current steel import tariffs and a new Conservative Prime Minister soon to be appointed, Bright Blue’s latest report explores and explains the pathways, policies, challenges and objectives for the development of ‘clean steel’ in the UK. We conclude by offering original and credible policy recommendations for deepening the decarbonisation of UK steel in the years ahead.

The challenge of decarbonising steel is particularly urgent: in 2019, the steel sector accounted for just over one fifth of carbon dioxide (CO2) emissions from all UK industries. The Climate Change Committee (CCC) has recommended emissions from the production of iron and steel in the UK fall to near zero by the mid 2030s. However, there is so far no specific commitment from the government to delivering ‘clean steel’ within a clearly defined timeframe.

Bright Blue’s report identifies five objectives to cultivate an internationally leading ‘clean steel’ industry:

  1. Ensure steelmakers have access to suitable quantities of affordable low-carbon electricity
  2. Make hydrogen available and affordable to steelmakers in sufficient quantities to enable clean steel production in the 2030s
  3. Establish a policy framework to overcome investment barriers to producing clean steel
  4. Enable access to suitable raw materials, such as scrap steel
  5. Develop a market for ‘clean steel’ products, backed by appropriate regulations

A carbonless crucible is published alongside a new report from the think tank Green Alliance, both in partnership with LIBERTY Steel Group. This report is the outcome of a policy partnership between the two organisations which began at COP26 in Glasgow and aims to develop policies required to create a sustainable future for UK steelmaking.

Wilf Lytton, Associate Fellow at Bright Blue, commented:

“We are used to hearing stories of the demise of steelmaking in the UK. But the reality is that steelmakers, and the industries that rely on them, have rarely been more critical to securing the UK’s place in the world than is the case today. 

“With ongoing global trade tensions, supply disruptions related to the war in Ukraine, and the need to cut greenhouse gas emissions, both the Government and the steel industry now face many common challenges ahead, from net zero to national security.

“Recent efforts to safeguard the UK’s steel industry from high energy costs and trade pressures have shown a willingness on the part of the UK Government to address the immediate issues facing the sector. 

“However, a longer-term plan of action is now needed to bridge the gap to clean steel. We urgently need policies for developing new markets for clean steel, enabling steelmakers to get on with the task of developing innovative clean steel technologies and scaling them up to meet the UK’s emissions targets.”

Ryan Shorthouse, Chief Executive of Bright Blue, commented:

“With Boris gone, the Conservatives need something new to sustain the support of Red Wall voters. Bold policies to revive the steel industry to make it clean and competitive would be a good start.

“Steelmakers are a critical part of the UK economy, but they have faced significant challenges in recent years, especially higher energy prices and global trade distortions. With the right policies and investment, however, the UK can have a world-leading clean steel industry.

“Technological readiness is no longer a significant barrier to the deep decarbonisation of primary and secondary steelmaking in the UK. Instead, steelmakers need the support and confidence to invest in new technological approaches and develop clean steel business models.

“Despite the UK Government’s recent efforts to support the decarbonisation of the steel industry, existing and insufficient public policy is still one of the key challenges that is holding back private investment in UK clean steel.”

Jamie Wallis MP, Member of the Welsh Affairs Committee, commented: 

“I welcome Bright Blue’s latest research into Britain’s steel industry and support the report’s principles to ensure the industry can decarbonise successfully, and thrive in the long-term.

“I am also pleased to see that the role technologies can play in supporting steelmakers, such as the importance of hydrogen, is a key focus throughout the report in both the analysis and the recommendations. 

“The steel industry has a rich history in the UK, providing stable and well-paid jobs in Wales and for my constituents of Bridgend. A strong and clean steel industry can be a vital part of the Government’s Levelling Up agenda and I am glad Bright Blue today has released this timely and important report that can help achieve this.

“Whoever is the next PM, we must ensure a thriving and well-supported steel industry in order to retain the Red Wall.”

The report proposes 7 original and credible policies to support the development of a ‘clean steel’ market in the UK.

Recommendation one: Extend the EII Compensation Scheme until 2030, with the level of compensation reviewed annually

The UK Government recently renewed the EII Compensation scheme which provides relief to steelmakers from indirect carbon costs in the electricity they use which are set to last until 2025. However, it is likely that the scheme will be required on a longer-term basis, not least because French and German steelmakers are expected to benefit from equivalent exemptions indefinitely. 

We propose the Government extend the scheme until at least 2030 to provide a longer-term signal to steelmakers that reduces uncertainty around the level of compensation available after 2025. The change is expected to be revenue-neutral for government since the current scheme would likely be extended anyway.

The level of compensation provided by the scheme should, however, be reviewed annually by government in line with the latest available evidence. Recommendations to the Secretary of State at the Department of Business, Energy and Industrial Strategy on whether to retain or adjust the level of compensation should also be made public.

Recommendation two: Introduce mandatory carbon footprint requirements for Contracts for Difference (CfD) from 2024 and Capacity Market (CM) contracts from 2025, raised in each round until 2035 when embedded carbon content should be net zero

In the power sector, the UK’s Contracts for Difference (CfD) and Capacity Market (CM) mechanisms represent a major source of government-administered funding to support investments in low-carbon power generation and marginal capacity, respectively.

Government is responsible for setting the rules that participants bidding for both CfD and CM contracts must adhere to, which already includes emissions performance standards for fossil power generation. A similar approach should be taken to setting standards for the embodied carbon of generation assets contracted through these schemes.

We propose minimum requirements for the carbon content of materials used in contracted projects or by setting upper limits for embodied carbon emissions on a per kWh contracted basis. These requirements could be used for materials in the construction of electricity generation assets (including renewables, nuclear, dispatchable power, storage and flexibility), starting with the 2025 T-4 auction for CM applications, and with the sixth allocation round (AR6) for CfDs in March 2024. These new requirements should be set in line with the Government’s net zero target for the power sector, and raised at each round such that newly contracted capacity is required to achieve net-zero embodied carbon emissions from 2035 onwards. 

Recommendation three: Introduce new mandatory carbon footprint standards for large construction projects from 2026 that require a certain proportion of construction materials used to be low-carbon, and expand both the scope products covered by the standard and the required proportion of low-carbon materials over time

The construction sector is the largest consumer of steel products in the UK. Publicly funded construction projects account for a significant portion of this demand. 

The UK Government has established guidance on public procurement for construction projects via the Procurement Policy Notice and the Treasury’s Green Book. However, both are advisory and require extensive training and resourcing at central and local government levels to be applied effectively owing to their complexity.

Government should introduce a requirement for large construction projects to incorporate a minimum percentage of certifiable low- and zero-carbon materials. The requirement should apply to the use of specific products in constructions, rather than to the project as a whole. 

The requirement should come into effect from 2026 to allow time for the development of product carbon footprint labelling standards.

The requirement could initially be applied to a selection of widely used and standardised construction products which, for steel, might include reinforcement bar, beams, columns, heavy sections, flat sections, angled sections, and hollow sections. The scope of materials covered by the requirement should be expanded over time to include steel products used outside the construction sector. 

The required percentage of low- and zero carbon products used in projects should also be increased over time in line with the UK Government’s 2050 net zero target.

To promote compliance, a requirement to submit a sustainable procurement plan should be introduced in planning and tender processes for large projects. As part of these procurement plans, project developers would be obliged to demonstrate compliance with the requirement to source a certain percentage of low- or zero-carbon materials.

Recommendation four: Introduce a carbon border adjustment mechanism (CBAM) by or before 2026 whilst phasing out free allocation from the UK Emission Trading Scheme (ETS) for sectors covered by the CBAM

The UK ETS could play an important role in supporting commercial clean steel production, but existing provisions for free allocation undermine the carbon price signal for Energy Intensive Industries (EIIs).

We therefore urge the current Government to establish a UK Carbon Border Adjustment Mechanism (CBAM). To reduce trade barriers, the UK CBAM should broadly align with similar schemes being considered by its trading partners.

The CBAM should initially cover products regulated by the UK ETS that are at risk of carbon leakage and take effect by or before 2026, when the EU plans to introduce its own CBAM. 

To maintain compliance with World Trade Organisation rules, the UK CBAM should form an extension of the UK ETS, with importers required to adopt the same compliance standards as UK manufacturers, and to pay a levy on embodied carbon in their products at a rate pegged to the UK carbon price. 

The introduction of a CBAM should be followed by the rapid phase-out of free allocation in the UK ETS for industries covered by the scheme. As part of ongoing reform of the UK ETS, the Government should, as a minimum, introduce a mechanism through which free allocation can be reduced more rapidly for products covered by a CBAM. This will enable government to generate additional revenues from carbon pricing which can be used to fund policy interventions that support the net zero transition for EIIs.

Recommendation five: Publish a list of priority users for low-carbon hydrogen supplied through the UK’s planned hydrogen networks and ringfence a proportion of low-carbon hydrogen purchase contracts for those sectors

The Government has committed to developing 10GW of low-carbon hydrogen production capacity by 2030. We consider that this will be achieved most effectively through establishing two-way CfDs that allow hydrogen producers and purchasers to competitively bid for long-term government contracts to supply and purchase low-carbon hydrogen, with contracts awarded through a competitive bidding process.

Access to low-carbon hydrogen purchase contracts should be prioritised for certain sectors, taking account for: 

  1. How effectively the sector’s use of hydrogen contributes to meeting the Government’s net zero target, measured in terms of emissions savings generated; 
  2. The ambition of sectoral emissions targets set by government; and
  3. The availability and cost of alternatives to hydrogen for decarbonising the sector

We urge the government to publish a list of sectors that are eligible for priority access to low-carbon hydrogen and to ring fence a proportion of low-carbon hydrogen purchase contracts for those sectors, commensurate with their needs.

Recommendation six: Introduce a cap – reducing over time – on the total weight of scrap metal exports, with the intention of at least halving scrap exports by 2030

High levels of scrap exports are unsustainable in the context of decarbonising the UK’s steel industry.

A cap on total UK scrap exports by weight should be introduced, rather than an export ban – as some have proposed – which might lead to unintended consequences such as scrap metal losing its value. 

The cap should be set at historic average levels initially and reduce over time with the intention of at least halving scrap exports by 2030.

Recommendation seven: Provide total VAT relief on the purchase of low-residual scrap to offset the increased costs of scrap processing

Large quantities of poor condition scrap are produced in the UK in excess of what UK steelmakers require for their own production. Scrap that is in poor condition can, however, be upgraded to low-residual scrap, which has greater value to UK steelmakers, if processed to remove contaminants.

To offset some of the higher costs associated with processing and upgrading scrap metal in the UK, the Government should zero rate VAT on the purchase of low-residual scrap.

ENDS

Notes to editors:

To arrange an interview with a Bright Blue spokesperson or for further media enquiries, please contact Max Anderson at max@brightblue.org.uk or on 07850 684474.

  • This report is kindly sponsored by LIBERTY Steel Group. Bright Blue has had complete editorial control over the report. The report does not necessarily reflect the views of our sponsor.
  • This report is the outcome of a policy partnership between Bright Blue and Green Alliance which began at COP26 in Glasgow in 2021 and aims to develop policies required to create a sustainable future for UK steelmaking. Green Alliance have published a separate report. Green Alliance does not necessarily endorse the findings of this report.