Green steel projects threatened by EU carbon market reform plans – German state premier

Weakening the European Union's Emissions Trading System (EU ETS) could put green steel projects in the western German state of Saarland at risk, state premier Anke Rehlinger said in an open letter to chancellor Friedrich Merz, Spiegel reported. The state’s industry had invested in projects to make steelmaking climate friendly with political commitments in mind, and unreliable framework conditions risked jeopardising the transformation, Rehlinger wrote.

“The Saarland steel industry has embarked on an irreversible path, relying on the commitments made by the federal government and the European Commission,” the letter read according to Spiegel. Rehlinger pointed to policy reliability as a key factor for industry investments. 

At the centre of the dispute is the EU ETS, which puts a price on emitting carbon dioxide (CO2). Industry must hold a permit to emit one tonne of CO2, and while most of these "allowances" are auctioned, a share has been allocated free of charge to industry in international competition. The EU is currently considering extending these free CO2 allowances beyond the agreed phase-out period, following pressure from member states and industry to water down the policy.

"The political objective must remain to maintain CO₂ pricing and the European Emissions Trading Scheme (ETS 1) in such a way that the transformation of the steel industry is not jeopardised," the letter said. 

Management at steelmakers Saarstahl and Dillinger, based in Saarland, fear that the federal government will no longer fully support the move to green steel, and argue that continuing with free CO2 allowances would worsen the economic outlook of climate friendly steel production, public broadcaster ARD reported.

Stahl-Holding-Saar, which owns both companies, said supply contracts for the majority of around five billion euros of investment have been signed, with around half of the funds coming from the government, the broadcaster added. “We are sticking to this path, just as we have discussed and decided. And that is why, quite simply, the expectation is that others will also stick to this path,” the company’s director, Stefan Rauber, told ARD. 

To make production climate friendly, companies must replace coal-based blast furnaces with hydrogen-based processes – a costly transition exacerbated by other factors like cheap competition from China, comparatively high energy costs, and US tariffs. Other German companies have also decided to invest heavily in the transition. One of Germany’s largest steelmakers, Salzgitter AG, today (9 June) signed its first major green hydrogen supply contract, having last year delayed green steel projects due to economic and regulatory challenges. 

The European Council agreed to make it more expensive for countries outside the EU to import large quantities of steel on 8 June, in a bid to protect the European market from global overproduction and cheap competition, Spiegel reported. The German government has also introduced an industrial electricity price set to reduce costs for energy-intensive industries.