Recyclers concerned over EU plans to give free carbon credits to steel plants

European recyclers have raised concerns over plans to hand out free CO2 allowances to steelmakers, saying the methodology considered by Brussels puts recycled steel scrap at a disadvantage compared to primary steel made from iron ore, which is more polluting.

The European Commission on Wednesday (6 December) tabled a draft update of the Free Allocation Regulation, launching a four-week public consultation on the new rules that will decide how many CO2 allowances will be distributed for free to industries in 2026-2030.

Steelmaking is considered at high risk of relocating abroad because of the EU’s carbon pricing policies pushing manufacturing costs above competitors in China or India.

For that reason, the sector was added to the EU’s so-called “carbon leakage list,” which makes it eligible to receive up to 100% free allowances under the EU Emissions Trading Scheme (EU ETS) – effectively giving steelmakers a free pass to pollute.

The system will expire in 2034 as the EU gradually starts applying its new carbon border adjustment mechanism (CBAM) in parallel.

However, the draft Free Allocation Regulation is causing concern among environmental groups, and the European recycling industry, who say the methodology for giving away free pollution permits favours the most carbon-intensive steel production methods.

“Free allowances were designed to prevent carbon leakage until the CBAM is fully implemented. They should not be incentives to promote a specific manufacturing process over another – let alone a more polluting one,” said Aymeric Amand, policy officer at Sandbag, a non-profit climate change think tank.

Using recycled scrap in steelmaking reduces carbon emissions by at least 58%, according to the European Recycling Industry Confederation (EuRIC). Yet, the EU’s draft allocation plan gives the lion’s share of free ETS allowances to primary steel produced from iron ore, which is more energy-intensive.

According to EuRIC, the current free allocation system has given perverse incentives to the European steel industry. While recycled steel represents 70% of production in the USA or Turkey, the percentage is only 55% in Europe, the association says.

“So far, free allocation has directly incentivised the most carbon-intensive steel process, namely the production of steel in blast oxygen furnaces reliant on iron ore,” says Emmanuel Katrakis, secretary general of EuRIC.

“Free allocation that hampers circular and low-carbon steelmaking not only runs against the very objectives of transitioning towards a more circular economy but also against EU’s climate targets,” he told Euractiv.

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Steelmakers say free allocations necessary for flat steel

The European Steel Association, Eurofer, says it supports the objective of increasing scrap recycling in Europe but argues that the Free Allocation Regulation pursues a different objective – restoring fair competition between steelmakers in Europe and abroad.

“It’s true that in absolute terms, the primary route receives more free allocations than the secondary route. But in reality, since the primary route emits much more, they still have a much higher cost than the secondary route, after the deduction of free allocations,” says Adolfo Aiello, Eurofer deputy director general.

According to Eurofer, primary steel emits an average of 1.8 tonnes of CO2 for each tonne of steel produced, whereas emissions are only 0.25 tonnes when using recycled scrap – which translates into much higher carbon costs for the former.

Moreover, primary and secondary steel do not compete in the same market segment, which requires different qualities of steel, the association argues.

“So looking only at the free allocations assumes there is direct competition between primary and secondary steel in each market segment,” Aiello told Euractiv, when, in reality, the two compete on two different markets.

“The secondary steel relies on scrap, which unfortunately has a lot of impurities, such as copper and other elements. And those impurities do not allow you to achieve the same quality requirements for the market segments. Sorting will have to improve in the future, but we are not there yet,” he explained.

Double standards

For Sandbag, though, the idea that scrap isn’t good enough for steelmaking is false. “High-grade flat products can be produced with more than 50% scrap but cost more due to the current free allocation rules,” it argues.

In addition, the draft free allocation rules ignore a provision inserted in recital 10 of the revised ETS directive, which says free allowances must be distributed in a way that is “independent of the feedstock or the type of production process”.

“Promoting certain manufacturing processes instead of focusing on the total embedded emissions in final products prevents other, non-subsidised solutions to decarbonise our heavy industry. Free allocation rules should establish a level playing field and allow best practices to emerge,” Sandbag’s Amand says.

According to Sandbag, restoring a level playing field would require one minor policy change – allocating free permits for every tonne of “flat steel” produced instead of hot metal or transformed primary ore.

The draft regulation was published on Wednesday (6 December), opening a four-week public consultation period during which interested parties can voice their opinion on the proposal. The Commission’s aim is to adopt the regulation before April 2024.

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[Edited by Alice Taylor]

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