Britain’s steel industry has warned that it faces more than £150mn in annual costs under government plans to phase out allowances that allow manufacturers to emit greenhouse gases for free.
Ministers plan to wind down carbon allowances over 10 years from 2027, in what the sector called an “earthquake moment”.
UK Steel, the industry trade lobby group, has warned ministers that the sector could face annual carbon costs as high as £167mn by 2037 — the expected end of the phaseout period — depending on the price of carbon.
This forecast factors in the country’s two biggest producers moving to less polluting electric arc furnaces and the industry as a whole producing about 7mn tonnes of steel a year.
“Our biggest concern is about the fact that the government is removing free allocations and how many free allocations you would receive, that would have a tremendous impact on the costs that we face,” said Frank Aaskov, director of energy and climate change policy at UK Steel.
“It would be an absolute earthquake moment for this industry if free allocations are removed,” he added.
The government has been consulting on plans to remove free carbon allowances for industry under the Emissions Trading Scheme (ETS) as part of plans to introduce a carbon border tax from 2027. The consultation ends on March 10.
Britain’s most energy-intensive producers currently receive a certain amount of allocations for free under the government’s ETS to ensure they can compete with rivals based in countries with weaker climate mitigation policies.
Britain’s steel industry has been under pressure to reduce its carbon footprint to help the UK meet its net zero emissions pledge by 2050. Tata Steel UK, which owns the vast Port Talbot site in south Wales, last year closed its two remaining blast furnaces as part of a government-backed deal to build one electric arc furnace. Under the agreement, ministers committed £500mn of state aid for the Indian-owned group.
British Steel, which currently operates Britain’s only two remaining blast furnaces, has been locked in talks with ministers about securing an even greater level of support.
The Chinese-owned group is considering building two smaller electric arc furnaces at its flagship Scunthorpe site in Lincolnshire. Trade unions want the company to keep operating the blast furnaces during the transition and are lobbying ministers for relief from any associated carbon costs.
Aaskov said that the sector’s overall emissions would still be “significant” under the new scheme, even though they would fall dramatically with the closure of the final two blast furnaces.
Some parts of the manufacturing process “such as rolling, reheating and downstream processes” would still emit significant carbon, he added.
The industry was not against phasing out of the free allocations but was “cautious” about it happening too abruptly, he said, arguing that it needs to be managed carefully.
“There is no plan B,” said Aaskov, adding that there were “a lot of concerns if [the carbon border tax] will provide protection against leakage”.
The government is bringing in the “carbon border adjustment mechanism” to protect industries from unfair competition from regions with lower carbon costs.
The government said it would “not allow the end of steel making in the UK”, adding that its recently published steel strategy consultation would examine the long-term issues facing the industry. The government had also committed up to £2.5bn to rebuild the sector.
It added that the new carbon border tax mechanism “will ensure that importers pay a fair and comparable carbon price to those faced by domestic producers, giving industry the confidence to invest in the UK knowing that their efforts to decarbonise aren’t undermined”.
