The new SBTi iron & steel sector guidance
– pros outweigh cons
Corporate strategies have a huge impact on how the future will be shaped. The updated SBTi corporate level target setting tool helps the iron and steel sector players to create and adjust their strategies to effectively address the climate crisis, writes Bernt Nordman, head of climate program at WWF Finland.
Strategy is serious business. One strategic decision means streamlining numerous subordinate decisions to reach the defined goal. With the acute climate crisis at hand, business leaders have shown to appreciate expert guidance on decarbonization strategies.
In July 2023, the Science Based Targets initiative (SBTi) published its new guidance for steel sector target setting. The new guidance – superseding the previous, well-below 2 degrees (WB2C) pathway – is based on the science-based carbon budget of the 1.5°C threshold, in alignment with the ambitions of the Paris Agreement.
While the guidance will be presented in detail by SBTi at a webinar on September 19th, key points can already be introduced and evaluated.
Electrifying the industry – Goodbye to coal
The SBTi is generous in the allocation of emissions. The iron & steel sector may emit as much as 53 Gt of CO2e during 2022–2050 – roughly one tenth of the carbon budget of all humankind! Notably, emissions from the power production needed to fulfill the needs of steel mills, the so-called Scope 2 emissions, are included in the systems boundary. The reason is obvious: electrification of the processes is key to phasing out the use of fossil fuels in the metallurgic processes.
On the other hand, the emissions from coal mining are not included in the core boundary. There is growing evidence that methane emissions from mining are significantly contributing to global warming. Mining coal for the steel sector could result in emissions in the magnitude of about 1 Gt CO2e per year, but the data available is not yet robust enough. However, the SBTi is committed to update the sector guidance as soon as the data quality issues have been solved. Let’s hope it will take only a couple of years, as indicated in the guidance. Meanwhile, the SBTi requires iron & steel sector companies to include all Scope 3 emissions from energy and fuel in a separate target. Methane emissions from coal mines are included in this mandatory mechanism, but at present the minimum emissions reduction level (WB2C) is only -25 % 2020–2030. Furthermore, communicating multiple targets may cause some confusion.
In addition to integrated steel companies, the SBTi tool can be used by upstream companies, downstream actors and financial institutions.
In addition to integrated steel companies, the SBTi tool can be used by upstream companies, downstream actors and financial institutions.
Applicable for different stakeholders
Downstream the core boundary ends with hot rolling since most steel products are hot rolled. The main target group of this SBTi tool is the integrated steel companies covering the whole value chain, but it may also be used for upstream companies like iron ore producers or downstream actors, for whom steel is a major feedstock, for example in the automotive industry. Furthermore, this iron & steel sector guidance can be used by financial institutions to formulate strategies for asset management as well as financial mechanisms. The key parameter of the target setting tool is emissions intensity, i.e. emissions of CO2e per ton of hot rolled steel. As this would leave room for the improvements in emissions intensity to be neutralized by growth of production, the emissions reduction goals will grow more ambitious if a company’s anticipated production growth is bigger than that of the total market.
The emissions reduction target will also depend on the share of scrap used. There are basic similarities between the SBTi scrap dependent pathway and the sliding scale methodology of the Responsible steel standard for steel mills: Since only directing the present scrap steel streams to SBTi aligned steel mills and/or companies will not result in any climate benefits, the SBTi tool incentivizes the decarbonization of primary steel, i.e. ore based production. However, the scrap share is a key parameter of the target setting tool, and the disclosure of these numbers is crucial. Frankly, the guidance is not perfect in terms of credibility and transparency of scrap streams: Since companies are obliged to disclose only the realized scrap shares, independent stakeholders will not be able to scrutinize the credibility of the targets.
Quite rightly, the iron & steel sector guidance puts a lot of emphasis on short-term emission reductions.
Quite rightly, the iron & steel sector guidance puts a lot of emphasis on short-term emission reductions.
Transition needs to start now
As much as the long-term impact of robust strategies can be hailed, the risk of too distant target years needs to be flagged. The transition must start without delay.
The SBTi 1.5°C framework is based on the net zero target by 2050. Quite rightly, the iron & steel sector guidance puts a lot of emphasis on short-term emission reductions. In the SBTi Net Zero framework, short term targets are compulsory, and the present target year is fixed to 2030.
The short-term emission reduction targets suggested by the SBTi target setting tool are significantly lower than the global median reduction of 43 % (2019–2030) suggested by the IPCC AR6. The SBTi suggests that, for the steel sector specifically, emissions intensity reduction of some 30 % by 2030 is 1.5°C aligned (given that the specific company would not change its’ scrap share). This, however, is open for debate and criticism. The rationale behind the outcome is that the SBTi SDA is based on publicly available steel decarbonization pathways, notably the IEA Net Zero. The IEA is transparent about the underlying assumptions that breakthrough technologies including hydrogen direct reduced iron (H-DRI) and carbon capture and storage (CCS) will be available and implemented at a very large scale after 2030. We’re in deep trouble if this doesn’t play out this way.
One effort by the SBTi to fix this potential loophole is this additional qualitative requirement in the guidance: “Furthermore, in order to ensure that the emissions reductions required post-2030 materialize, all investments, even in the short term, must be in line with the emissions reductions pathway of the 2030s.” The implementation of this principle is one of the key issues to scrutinize when the first validated corporate targets are published.
The best guidance available
The green steel ecosystem is in a very dynamic phase. There are many initiatives aiming at speeding up the decarbonization of the steel industry, including mill and products level standards and public procurement criteria. The updated SBTi target setting tool for the iron & steel industry is by far the best available guidance for corporate level target setting. I urge all stakeholders to include it in their toolkits and thus help realize the decisive potential.
Bernt Nordman, Head of Climate program of WWF Finland
member of the Expert Advisory Group assisting SBTi in the development of the 1.5°C iron & steel sector SDA
