UK Steel - Submission to the UK ETS Future Markets Policy Consultation

March 2024

UK Steel welcomes the consultation and the opportunity to provide evidence on the design of the UK Emission Trading Scheme. The UK steel sector is committed to Net Zero and delivering on the Government’s target, reducing emissions substantially over an accelerated timeline to mitigate contributions to climate change. UK Steel published our Net Zero Steel report in 2022, outlining potential decarbonisation journeys. A year later, both integrated steel producers have announced investment in electric arc furnaces (EAFs) or plans to switch to EAFs. This would reduce the industry’s emissions by 80% by 2035. The steel industry is therefore committed to working with the Government to create a suitable business and policy environment, which will support the sector in decarbonising rapidly.

However, even with a UK CBAM, the UK ETS does not provide an effective incentive to decarbonise integrated steelmaking. When Tata Steel and British Steel switch from integrated production to electric arc furnaces, substantially reducing their emissions, they will not continue to receive similar levels of free allowances, which they can sell as part of the investment financing. Instead, the free allocation would be substantially cut as their new free allocations will be based on the EAF benchmarks. The steel industry cannot pass on the cost of carbon to their customers, nor the cost of decarbonisation due to the high trade intensity of the sector, and the UK ETS does not reward them for a switch to electric arc furnaces. It is, therefore, important to keep in mind that the UK ETS fundamentally does not provide an incentive to decarbonise or reduce emissions for the steel sector but instead increases the risks of carbon leakage and competitiveness.