Enabling financing for carbon emission phase-out in the steel sector in India

Financing clean energy technology has been a challenge for the industry to invest in capital intensive production for addressing environmental concerns. Investing in conventional methods of production results in technology lock-in. To study the problem in the Indian steel sector, a techno-economic assessment was conducted for coke-based blast-furnace route and hydrogen-based direct-reduced-iron route. This analysis based on current state of technologies found that a very high carbon price around $105-130/tCO₂, is required to make investment viable in Low Carbon Technology (LCT). The first cost for near-zero emission steelmaking production is substantially high - about 25% to 40% higher than for conventional steelmaking without CO₂ costs, while on the demand side near-zero emission steel would add premium of only 1 to 2% to the final cost of end products.

Different carbon price instruments were explored to capture the external costs of carbon emissions to make investment viable in LCT. It is found that they are capable of providing a signal to the industry to consider LCT while making investment decision, however the unpredictability of future carbon prices makes it difficult for investor to invest in LCT. To enable the investment in LCT, it is required to stimulate demand for carbon-free steel and de-risk the investment by introducing financing instruments that can affect the risk of higher prices, such as capital subsidy and contract- for-differences in the cost of green hydrogen that can mitigate financial risks and thereby increase the willingness to invest in LCT.