China continues coal-reliant investments in steel sector, threatening to derail the country’s climate commitments, create a slew of exorbitant stranded assets, produce more steel than the market demands, and ultimately make the sector financially vulnerable.
The Centre for Research on Energy and Clean Air’s (CREA) latest report has revealed that steel plants approved after 2020 are at risk of becoming stranded assets worth USD 118 billion if China meets its climate targets, which require earlier retirement of these carbon-intensive facilities than their operational lifetime. These coal-based plants that contribute to China’s steel sector make it among the highest carbon intensive producers in the world.
On average, China generates over two tonnes of carbon dioxide for every tonne of steel it produces. The US has a carbon emission intensity of less than one tCO2/t, while the global average is 1.91 tCO2/t, mainly attributed to the high carbon intensity and volume of steel made in China.
Several models also show that China’s steel demand will decline significantly as industrialisation and urbanisation peak. One model expects the country’s crude steel production to decline 58% by 2050 compared with 2020.
The sector is already accelerating towards exorbitant stranded assets. In 2023, the sector’s annual fixed asset investments (FIA) were 14 times its total profit.
Policy recommendations
Despite being the second largest source of carbon dioxide, investments in new production capacity are not aligned with China’s ambitious ‘dual carbon goals’ to reach CO2 emissions peak before 2030 and achieve carbon neutrality before 2060.
To ensure a quick transition towards cleaner steel production, CREA proposes the following policy recommendations:
- The steel sector should be included in China’s emissions trading system (ETS) within the 14th five-year period. The ETS should shift from an intensity-based allocation to an absolute cap.
- To peak CO2 emissions from the iron and steel sector before 2025, new investments in blast furnace capacity should be limited and the adoption of electric arc furnaces and hydrogen-based steelmaking technology sped up.