Among the discussions at COP29, carbon pricing was once again highlighted as one of the most effective methods to mitigate climate change.
It’s not a new topic, but it’s certainly a challenge to coordinate amid a difficult geopolitical landscape. However, the impact of a global alignment on carbon is essential in creating predictable and meaningful investment into the green transition. That’s why the Climate Leadership Coalition brought together countries including Finland, Canada, and Germany, as well as the WRO, OECD, World Bank and IMF, at the climate conference to advocate for global coordination.
In 2023, the steel industry reached a market value of $928 billion, producing ~2 billion tons of steel. China’s meteoric rise as the world’s largest producer – from 17,5% of global steel production in 2000 to 54% in 2023 – is perhaps the best example of the exponential growth that has massively changed the steel landscape. The big question is: from the industry today responsible of 10% of global greenhouse gas emissions towards 90% reduction by 2050, how to achieve the end-goal without setting a global price for steel fast?
Source: Outokumpu’s Future of Steel white paper (original sources: World Steel Association, Sandbag)
According to the recent white paper Outokumpu published on the future of steel, the economists at the London School of Economics argue that carbon pricing is the most efficient way of decarbonizing the economy. Not only does it lead to more efficient behavior
in consumers and industry, but it also provides a way to fund the green transition.
As we know, many governments have implemented schemes to put a price on carbon emissions, such as emissions trading systems (ETS). The European Union currently has the most advanced system, where the price of emitting a ton of carbon has increased almost tenfold in 5 years. The Carbon Border Adjustment Mechanism (CBAM) aims to equalize the carbon price paid by EU and non-EU carbon intensive products by imposing a carbon price on imports. China, California, Canada, all have carbon pricing systems as well, albeit significantly less encompassing. However, CBAM requires the entire product carbon footprint accounted and accurate reporting to happen – to make it a success case in stopping carbon leakage. And we are not quite there yet.
The problem is the noticeable shift in global dynamics, suggesting a trend toward regionalization and the potential division of the global value chain into blocks centered around China, the EU, the U.S, India, and other regions. And of course, this leads to the rising geopolitical tensions in the world affecting the geopolitical aspects of steel – questioning the potential vulnerability of global supply chains for strategic resources. Steel, indeed, being one of them.
It’s about politics and long-term rule-setting
During the Climate Week and the United Nations General Assembly in New York last week, where I took part as well, the global climate leaders from different industries had pivotal discussions on the topic. It was very clear that despite increasing global tensions, it has never been more important to find alignment on how to globally mitigate climate change. Unlocking investments is the key to advancing a green and just transition, with carbon pricing mentioned to play a critical role in embedding these investments into corporate strategies.
It was important to see that carbon pricing was highlighted in COP29 through Climate Leadership Coalitions advocacy. Despite the shortfalls of this year's climate conference, countries coming together to agree on climate action in the current geopolitical situation creates stability. What we also witness is how companies are willing to take the bold steps needed to drive this change to a more sustainable business.
Incentivizing decarbonization globally in the hard-to-abate sectors is not only important – but heavily depending on – achieving a global alignment on carbon pricing. This is essential for encouraging industries to invest in green technologies, which require effort across the value chain.
The C-level experts across the steel industry value chain that were recently interviewed on the future of steel, highlighted the short-sightedness in rule-setting as one of the major threats. The need for stable rules that do not fluctuate too much over the course of a political election cycle was deemed central for long-term bets to pay off.
In my opinion, it’s not only about geopolitics but strongly about politics, as well. The geopolitical situation creates favorable winds in terms of public support of large infrastructure and reconstruction projects, albeit at a cost of inflation, interest rate hikes and prices. The political situation in comparison, creates cynicism, indifference and worse: inaction.