Steel is the backbone of modern society. Cities are built upon its structures. Steel is present in the planes, trains, ships, and automobiles that ensure people and goods can be transported around the globe. And it is a key component of the wind turbines, transmission towers, pipelines, and other energy infrastructure necessary to keep homes heated and skylines illuminated.
The production of steel—while necessary to modern society—is extremely energy intensive and a significant source of greenhouse gas emissions contributing to climate change. Steel production in fact emits more carbon dioxide into the atmosphere than any other heavy industry. In 2018, for example, steel production accounted for 1.8 billion tons of carbon dioxide emissions or 8 percent of all global carbon dioxide emissions (although the US steel industry is comparatively less carbon intensive).
The production of steel is carbon intensive because of the need to convert iron ore into steel. The typical process utilizes coke as a reductant to convert the iron oxide in ore to iron. Coke is produced by heating coal in the absence of oxygen to drive off impurities and convert the coal to essentially pure carbon. The coke-making process generates large amounts of carbon dioxide emissions. The coke is combined with iron ore in a blast furnace at high temperature to reduce the iron oxide in the ore to iron and to remove various impurities. The iron is then reacted in a basic oxygen furnace (BOF) to remove excess carbon and to add various elements (manganese, nickel, chromium, etc.) to produce steel. Each step in the steel-making process generates large amounts of carbon dioxide emissions. Steel can also be produced by the recycling of scrap steel into new steel by melting the scrap in an electric arc furnace (EAF). The EAF eliminates the need for coke as a step in the production process. However, melting the steel requires very large amounts of electricity, much of which is currently generated by fossil fuel sources.
But the steel industry has begun taking steps to address its carbon emissions through a variety of approaches. Perhaps the most prominent of the steel industry’s efforts to decarbonize involves substituting clean hydrogen for coal or natural gas in order to reduce iron ore and then relying on an EAF (as most US steel is currently produced) powered by clean electricity, as opposed to a blast or basic oxygen furnace. A more straightforward approach—although not necessarily any more feasible—entails deploying carbon capture technology on existing fossil fuel fired blast furnace facilities or basic oxygen furnace facilities and permanently sequestering the majority of those facilities’ carbon emissions. Finally, there is a new steel production process that yields “green steel” through molten oxygen electrolysis powered by clean electricity.
While these approaches have all shown varying degrees of promise, scaling them to meet global steel demand—which is likely to increase in response to the infrastructure build out required by the energy transition and the increasingly limited supply of steel scrap—along with making these approaches cost effective will not be easy. The recently passed Inflation Reduction Act of 2022 (IRA), however, provides incentives for undertaking a number of these green steel production approaches that could accelerate the US steel industry’s efforts to minimize its carbon emissions while continuing to meet the infrastructure demands of the modern world.
Clean Hydrogen used in Steel Production
The process of reducing iron ore to crude steel with clean hydrogen requires tons (literally) of clean hydrogen. One estimate suggests that 144 tons of clean hydrogen will produce just 2 tons of green steel. The amount of clean hydrogen required to transition steel production to a clean hydrogen and EAF process—setting aside the costs of new facilities and equipment—simply does not exist on the market today and what little clean hydrogen is on the market is far from being cost competitive with carbon intensive gray hydrogen produced from natural gas through steam-methane reformation.
The IRA is poised to transform the hydrogen market with the introduction of a new clean hydrogen tax credit under Internal Revenue Code Section 45V, also known as the Hydrogen Inflation Reduction Act (HIRA). Under the new Section 45V hydrogen producers will be entitled to receive a credit of up to $3 for each kilogram (kg) of clean hydrogen produced (defined as having emissions intensity no greater than 4 kg of carbon dioxide equivalent emissions per kg of hydrogen produced). The amount of the credit is throttled up or down based upon the emissions intensity of the hydrogen and whether prevailing wage and apprenticeship requirements are met at the facility. The clean hydrogen producer may also elect to take direct payment of the credit during its first five years and then sell the credit during its final ten-year window. Additionally, and as further discussed below, the IRA allows a steel producer to take the clean electricity credits related to a wind or solar project it develops, use the electricity the wind or solar project generates for the production of clean hydrogen, and also receive the Section 45V credit for each kg of clean hydrogen the facility produces.
Whether a steel producer elects to produce its own clean hydrogen or rely on a third-party supplier, 45V is certain to increase the supply of clean hydrogen and drive its cost down over the next decade. US steel producers looking to decarbonize their production processes are likely to find an attractive clean hydrogen market in the US in the coming years thanks to 45V.
Steel Production with Carbon Capture
The traditional steel production process that uses a blast furnace or basic oxygen furnace emits a fairly concentrated stream of carbon dioxide that could largely be captured with existing carbon capture technologies. Carbon capture equipment could also be deployed on a steel production facility’s cogeneration plant to capture a high degree of that facility’s emissions. Although the Section 45Q credit for carbon capture has been around for over a decade, the technology has—with a handful of exceptions—not yet been successfully deployed at commercial scale.
The IRA proposes to boost the nascent carbon capture industry through a number of enhancements to the 45Q credit. Under the IRA-revised 45Q the credit amount per ton of carbon permanently sequestered is increased from $50 to $85 and from $35 to $60 for carbon captured and used. The IRA also provides much needed flexibility regarding the size of industrial facilities that would qualify for the 45Q credit by reducing the capture threshold from a minimum of 100,000 tons of carbon captured annually to just 12,500 tons. The owners of the carbon capture equipment are also eligible to receive direct payment of the credit for the first five years of the credit’s twelve-year duration.
While it is unclear whether the IRA’s modifications to 45Q will be enough to make retrofitting steel production facilities with carbon capture equipment economical in all cases, the IRA has nevertheless provided US steel producers with another potentially attractive approach for decarbonizing steel.
Clean Electricity Incentives to Support Production via Electric Arc Furnaces or Molten Oxygen Electrolysis
Both EAFs and the molten oxygen electrolysis process require massive amounts of electricity to produce steel. And for these processes to truly produce green steel, the electricity they rely on must also be clean.
The IRA, through a number of clean energy credits (see, e.g., Sections 45, 48, 45Y, 48E), will further drive down the costs of clean electricity and make it more widely available. By driving down the cost of a key green steel input, the IRA will make producing green steel at scale with electricity (in whole or in part) an achievable goal for the industry. (In addition to the IRA’s credits aimed at driving down the cost of clean hydrogen, carbon capture, and electricity, the IRA provides a little over $5 billion in funding for federal spending and programs related to low-carbon building and transportation materials, which may include steel).
The demand for steel appears certain to only increase in the coming years and this demand may be particularly pronounced for US steel given the infrastructure build out required by the IRA and its bonus credit for “steel, iron, or manufactured product … produced in the United States.” If the US intends to meet its climate change goals it will need to ensure that an increasing share of this steel is green steel. The IRA provides big incentives to help the US steel industry continue its decarbonization efforts.