The Policy Greenhouse

China’s Issue with Steel

When it comes to the economic effects of environmental restriction on a nation’s most productive industry, the current state of affairs for China’s steel industry serves as the most current example. China is a very large producer of steel, and the production of steel makes up a third of the nation’s manufacturing carbon footprint. So much like coal in the USA, China’s most popular product is also the source of a large portion of their carbon emissions. Again, much like the US with the energy production industry, China has forced themselves to make their steel industry more sustainable over time in order to fit their goal of cutting to net-zero carbon emissions by 2060, especially because the carbon footprint from steel production is expected to hit an all time high by 2030. The Chinese government plans to enforce this by mandating a change to hydrogen-based steel production rather than making more of the  current carbon-based steel that has a heavier carbon footprint. However, this change will greatly increase production costs for Chinese manufacturers, as well as implementing CCUS technology to help trap and repurpose any carbon emissions. However, while this method will help to cut carbon emissions by 80%, they are expected to raise costs to over $425 per megaton higher than the cost for conventional steel making. These higher production costs are the main thing delaying the complete shift to greener steel production in China. Because the cost of decarbonization is so high, the decarbonized steel will not be produced on a large scale for a few years, and it is not expected to dominate the market until 2030. Understandably, the Chinese government is allowing steel making companies to slowly phase in the new decarbonized manufacturing process at a natural pace, as to prevent the steel industry from suffering and hurting the Chinese economy. This mirrors the change that the US energy industry might have to make in the future to help prevent further atmospheric degradation. It is with that in mind that it can be assumed that the progression of China’s decarbonization in the steel industry mirrors the future progression of the energy industry in America when it comes to decarbonization. 

The American Economy’s Possible Future

Much like how steel producers in China are slowly struggling to absorb the cost of CCUS technology integration, coal-based energy producers in the US are also facing issues when it comes to the production cost of decarbonization. Even after the passing of environmental legislation like the Inflation Reduction Act, American industry is still held back from complete decarbonization because of things like production cost for companies. Unfortunately it seems that it is not realistic for these companies to accelerate their decarbonization timeline with the aid of a subsidy from the Fed because of the current inflation the US is experiencing. Furthermore, just as China has a large market share for the steel industry, the US has a major role in the energy production industry both as a consumer and producer. And so it can be assumed that just as the Chinese economy suffers when the steel industry suffers, the same is true for the US and the energy production industry when it is affected by higher production costs due to manufacturing changes. With this in mind, it can be observed that a direct prerequisite to the decarbonization of the energy industry is some sort of aiding measure from the Fed to help the companies in the US make the switch. However, this fact leads to other questions, such as how should this measure help ease the production costs for the changes? Should it be in the form of a tax credit, or some version of a subsidy?

Sources:

​​https://www.spglobal.com/commodityinsights/en/market-insights/blogs/metals/051922-green-steel-china-decarbonization-dri, https://www.investopedia.com/articles/investing/021716/how-china-impacts-global-steel-industry.asp#:~:text=China%20is%20the%20world%27s%20largest,on%20the%20global%20steel%20industry., https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/steel-sector-is-key-to-reducing-china-s-carbon-emissions-61634240, https://www.eia.gov/energyexplained/us-energy-facts/