More than ever, policy is placing obstacles in the already difficult path to climate neutrality for industry.

Persistently high electricity and natural gas prices overwhelm companies and can only be compensated to a limited extent through further efficiency measures. Rising CO2 costs bring additional burdens.

Relief Measures Overtaken by Rising CO2 Costs

For climate-neutral production of cold-rolled steels, natural gas-fired heat treatment in particular will need to be electrified in the long term or converted to green hydrogen.

Like many other sectors, companies in the cold rolling industry will depend on affordable natural gas until hydrogen production and infrastructure are fully developed and connected.

The Ukraine war has led to a permanent increase in natural gas prices; a return to cheap Russian gas supply is not foreseeable. Nevertheless, in 2024 the German government reinstated the price path of 45 euros/t CO2 in the national emissions trading system that had been decided for cheap Russian natural gas. The partial relief introduced in national emissions trading through the Carbon Leakage Regulation (BECV) in the Fuel Emissions Trading Act (BEHG) will be eliminated with the transfer to the so-called EU-ETS 2, which currently provides neither free allocation of certificates nor other relief measures. Effective protection against carbon leakage has yet to be created.

In addition to the costs of transformation, companies in the steel-processing industry face the threat of a significant increase in the cost of raw materials, starting in 2025 when the European Commission is expected to reduce emissions certificates and CO2 prices in EU-ETS 1 successively rise. With the end of the subsidy era and free allocation of emission certificates, initial price increases are already evident today.

Compensation for rising CO2 costs through competitive electricity prices would also be necessary for steel processors. However, while the federal government’s electricity price package reduces electricity tax to the European minimum rate, currently only a few sectors can benefit from electricity price compensation. Additional costs arise from the subsidy from the federal budget that was suspended due to the budget crisis, which is already leading to a significant increase in grid charges this year.

Last but not least, Federal Transport Minister Wissing, despite Germany’s already unusually high tax burden by international comparison, has fully exploited the scope left to member states by the European Commission for calculating the CO2 price as a new tariff feature of truck tolls.

For a medium-sized steel processor’s transport volume, the minimal relief from electricity tax is exceeded approximately six to seven times by the truck toll, which was increased for the second time during the year in December 2023.

The Impact of CBAM

The European Carbon Border Adjustment Mechanism (CBAM) provides no effective protection against carbon leakage due to its limited scope of application and lack of compensation for exports.

Also at industry’s urging, the European Commission created a CO2 border adjustment mechanism for CO2 costs from European emissions trading with the CBAM regulation that came into force on May 17, 2023. However, the CBAM is conceptually dangerously deficient.

Despite the planned expansion of the European Emissions Trading System for 2027, the scope of application remains so limited that with a further increase in CO2 costs, circumvention through the import of finished parts or products and the relocation of entire value chains becomes a realistic and increasingly threatening scenario.

CO2 compensation for exports is also missing and is not compatible with WTO law under the current CBAM concept. Both sales in the internal market and direct and indirect exports of the steel-processing industry are therefore directly threatened by an increase in CO2 costs.

This assessment is also reached by a current study from the climate protection organization Sandbag, among others.

In fact, major customers from the automotive industry had publicly announced that they would not take possible location disadvantages into account. Large Tier 1 suppliers are already relocating sites to third countries on the EU periphery or looking for other ways to circumvent CBAM through finished imports.

EU Competitiveness

The understanding of politics and parts of industry about market-based steering of the green transformation urgently needs a course correction.

The idea of making CO2-burdened products more expensive apparently is not working. Price signals are a market-economy-effective instrument that also has effects beyond the borders of the European Union. Making products with high greenhouse gas emissions more expensive will not lead processors and consumers to not buy these products, but rather will boost imports of comparable goods with significantly lower price levels. We live in open economies where state-controlled price incentives always pose a great risk.

While possibly effective in individual cases, the depth and timing of industrial transformation are primarily determined technologically and infrastructurally, and are rather impeded or even counteracted by high prices. The increasing regulatory density regarding emissions, efficiency, and transformation makes market-based steering increasingly obsolete in the meantime.

Whether expensive EU products will actually be competitive globally and in the internal market in the future, whether a possible lead in climate-friendly technologies can be achieved at all, and whether higher prices can be compensated by the technology factor is more than questionable.

The transformation of industry needs incentives that do not overwhelm companies and keep Germany and Europe globally competitive.

Adaptation of Energy Policy

Rising costs for CO2 or H2 production costs must be compensated in the overall business calculation at all levels of the value chain through low electricity prices or other relief measures such as the above-average taxes and charges in Germany to maintain competitiveness.

However, even after a competition law tightening of market supervision for electricity and gas prices and the reform of the European electricity market design, electricity prices in Germany remain at a high level by international comparison with the retention of the so-called merit order or pricing according to the marginal pricing principle and a significant increase in grid usage charges.

With marginal pricing, the power plant with the highest marginal costs that must be connected to generate the total demand quantity or as a reserve determines a uniform electricity price.

In Germany, electricity prices are therefore set by the high marginal costs of fossil coal and gas power plants. The planned extensive grid expansion and the federal government’s power plant strategy with 50 new H2-capable backup gas power plants therefore offer no prospect of a lower electricity price level in the future either. Whether and to what extent the direct marketing and difference contracts (PPA and CfD) launched by the European Commission to stabilize the electricity market can contribute to an appropriate electricity price level remains to be seen.

Steel processors therefore demand a technology-open adaptation of energy policy that can ensure an adequate climate-neutral energy supply at competitive prices.

With current prospects, the steel-processing industry also has no choice but to demand so-called subsidization through an industrial or bridging electricity price and financing of grid expansion and power plant reserves from the federal budget. After all, the European electricity market reform allows for the possibility of skimming excess profits in the energy sector. The Federal Environment Agency was also able to report record revenues from emissions trading for 2023.

While countries like China and the USA are launching extensive subsidy programs, the sanctions regime introduced in Germany and Europe with the reformed emissions trading system and high energy prices are sustainably endangering the competitiveness and existence of industry.

A structural change demanded by economists in the discussion about introducing an industrial electricity price, which is particularly oriented toward an expected shortage of energy supply due to the federal government’s current energy policy strategy, carries the risk of shifting dependencies from semiconductors and new or green technologies to raw materials and intermediate products with a one-sided prioritization of so-called new tech industries.

Steel products will still be needed in an innovative climate-neutral economy and should not have to be imported from countries with less ambitious climate protection and social standards.

The Cold Rolling Mills Association, together with other sectors of the steel-processing industry, is committed to maintaining closed value chains in Germany and Europe through the campaign “We. Shape. Progress.”

Author

Anke Üffing (Source:
Fachvereinigung Kaltwalzwerke e. V. (FVK))

Anke Üffing
Cold Rolling Mills Association (Fachvereinigung Kaltwalzwerke e. V.)
+49 211 4564-123
ueffing@fv-kaltwalzwerke.de