Britain’s steel industry is sounding the alarm about potential costs exceeding £150 million each year as the government moves to eliminate free carbon allowances for manufacturers. This shift is part of a broader strategy to phase out allowances over a decade starting in 2027, which the industry has described as an “earthquake moment.”
UK Steel, the trade group representing the industry, has alerted officials that annual carbon costs could reach as high as £167 million by 2037, coinciding with the anticipated end of the phaseout. This projection is based on the two largest steel producers in the UK transitioning to electric arc furnaces and the industry overall producing approximately 7 million tonnes of steel each year.
Frank Aaskov, the director of energy and climate change policy at UK Steel, expressed deep concerns about the government’s withdrawal of free allocations, stressing that it could drastically affect operational costs. He noted, “If free allocations are removed, it would be an absolute earthquake moment for this industry.”
The government has been gathering feedback on its plans to eliminate free carbon allowances under the Emissions Trading Scheme (ETS) as it introduces a carbon border tax starting in 2027. The consultation period is set to conclude on March 10.
Currently, the most energy-intensive producers in the UK receive some carbon allocations at no cost, which helps them remain competitive against foreign manufacturers located in countries with less stringent climate regulations. Consequently, the UK steel sector is under pressure to lower its carbon emissions to support the country’s commitment to reach net-zero emissions by 2050.
In an effort to modernize, Tata Steel UK, which operates the major Port Talbot facility in Wales, closed its last two blast furnaces last year in favor of an electric arc furnace, following a government-supported agreement that included £500 million in state aid. Meanwhile, British Steel, which still runs the country’s last two active blast furnaces, is in discussions with government officials for more support as it contemplates constructing two smaller electric arc furnaces in Scunthorpe.
Trade unions have voiced their concerns, urging British Steel to maintain operations of the blast furnaces during this transition and seek relief from associated carbon costs. Aaskov remarked that, while emissions would significantly decrease with the closure of traditional furnaces, other processes, like rolling and reheating, would still contribute to carbon emissions.
He emphasized that while the industry does not oppose the gradual removal of free allocations, it must be managed carefully to prevent sudden disruptions. Aaskov reiterated, “There is no plan B,” highlighting significant worries about whether the planned carbon border tax will genuinely protect local industries from competition.
The government is implementing a “carbon border adjustment mechanism” designed to level the playing field and ensure that importers account for a comparable carbon price to what domestic producers pay. In response to these concerns, officials reassured that they would not permit the decline of steel production in the UK and mentioned a recently launched strategy consultation focused on the industry’s long-term challenges, including a commitment of up to £2.5 billion to revitalize the steel sector.