The steel industry, one of the most carbon-intensive sectors, must reduce its emissions. In a recent analysis, steel experts from consulting firm Arthur D. Little provide an overview of the current state of green steel production and the challenges in terms of costs, energy supply, and supply chain readiness on the path to a CO2-free future for the steel industry. The steel industry needs to reduce global emissions by 25% within the next six years to meet the 1.5°C target of the Paris Agreement, requiring a yearly decrease of more than 4%. However, the International Energy Agency (IEA) concluded at the end of 2023 that the sector is not on track to achieve net zero emissions by mid-century, with overall emissions continuing to rise annually. This underscores the urgent need for a rapid transformation in one of the most carbon-intensive and hard-to-abate industries.
Currently, the steel sector contributes 7% of global CO2 emissions, largely due to reliance on fossil fuels in the reduction process. As a result, strong market drivers are pushing the transition to green steel, produced with minimal greenhouse gas (GHG) emissions:
- Regulatory pressures. Particularly within the EU, agreements like the Paris Accord and the European Green Deal, together with trade policies such as the EU’s Carbon Border Adjustment Mechanism (CBAM), are forcing reductions in emissions across entire supply chains (Scopes 1, 2, and 3). High regulatory pressures, compared to emerging markets like India and Africa, are accelerating the adoption of green steel within the EU. Meanwhile, international agreements, growing environmental awareness, and the need to access export markets are driving the adoption of green steel in emerging economies. - Commercial demands. Large corporations are decarbonizing their operations and sourcing carbon-neutral steel to meet emissions goals. Companies such as Volvo, Mercedes-Benz, BMW, and General Motors are actively committing to green steel sourcing.
- Social expectations. Growing public demand for sustainable and transparent production practices is influencing investor decisions and policies. ###One of the most promising solutions is direct reduction of iron ore using hydrogen instead of coke, producing water as a byproduct instead of CO2. This Viewpoint outlines key market fundamentals and the status of green steel, focusing on technologies and pathways leading toward a decarbonized industry.
Pathways to green steel There are two main pathways to reduce steel industry emissions, either separately or in combination: - Direct reduction with green hydrogen. This involves replacing coke with hydrogen as the reduction agent, theoretically eliminating CO2 emissions. This process is often referred to as “direct reduced iron-electric arc furnace” (DRI-EAF) technology when paired with an electric arc furnace. - Carbon capture and storage (CCS). This involves capturing and storing CO2 emissions from the conventional steel-making process.
Which are the main differences between the conventional blast furnace-basic oxygen furnace (BF-BOF) process and the DRI-EAF process? BF-BOF, which relies on coke as the reduction agent, generates significant CO2 emissions and accounts for more than 70% of global crude steel production. In contrast, DRI-EAF using green hydrogen produces no CO2 during the reduction process. However, current hydrogen supplies for DRI-EAF are predominantly fossil fuel–based (70% from natural gas, 30% from coal), resulting in CO2 emissions. Scaling up green hydrogen production through renewable
Green steel transition hurdles Green steel has potential, but five key barriers combat acceleration of adoption.
- Cost. Green steel costs more to produce than traditional steel because it requires increased electricity demand for hydrogen production (i.e., electrolyzers), electric arc furnaces, direct reduction grade (DR-grade) pellets, green hydrogen, and significant infrastructure upgrades. However, carbon pricing can make conventional steel more expensive by accounting for its high emissions. For green steel to become competitive, carbon prices may need to reach €90-€100 per ton of CO2, compared to the current EU average of around €80 per ton. Mechanisms like CBAM and the US’s Inflation Reduction Act can shift market dynamics by reflecting the true cost of CO2 emissions, making green steel more attractive.
- Limited high-grade iron ore. As stated, DRI-EAF technology requires DR-grade iron ore pellets. Currently, DR-grade ore makes up less than 5% of the global iron ore supply. This scarcity poses a significant challenge to the scale-up of green steel production. With demand for DR-grade pellets expected to rise dramatically by 2030, the global supply of high-grade ore is projected to hit capacity limits unless new mining projects are developed or a method to enable the use of lower-grade iron ore is developed.
- Lack of clean energy. On average, green steel production consumes three to four times more electricity than the traditional BF-BOF process. This is largely due to the energy-intensive electrolysis required for green hydrogen production and the high electricity demand of electric arc furnaces used to melt iron. Converting Europe’s steel industry to hydrogen-based production is estimated to increase electricity demand by 15% to 20% of the EU’s current total electricity consumption, which would require the installation of 50,000 new wind turbines.
- Green hydrogen availability. Green hydrogen, less than 0.1% of global hydrogen production, is critical for green steel but faces significant supply challenges. As of 2024, only 4% of announced low-emission hydrogen projects have reached a final investment decision or begun construction, while nearly 70% of the committed electrolyzer capacity is in China. However, costs remain 1.5 to six times higher than fossil-based hydrogen.
- Scarcity of scrap. The direct reduction process requires steel scrap, and demand for scrap is projected to outpace supply. Protectionist policies implemented by various countries to secure scrap supply and impose high export tariffs can further exacerbate this issue. To mitigate this risk, steel companies are strategically acquiring scrap yards, with 25% to 30% of global scrap now owned by steel companies. This shortage is likely to lead to higher scrap prices and could limit overall green steel production capacity.
Sweden’s green steel boom vs. Australia’s iron ore dilemma The limited availability of DR-grade iron ore (which constitutes less than 5% of the global supply) hinders the industry’s ability to meet the growing demand for low-carbon steel. Australia, which produces 38% of the world’s iron ore, faces significant challenges in the green steel transition. Around 96% of its iron ore exports are hematite, a type of ore with a high level of impurities, making it unsuitable for the DR process required for green steel production without extensive processing. This limits Australia’s ability to meet the growing demand for low-carbon steel. In contrast, Sweden, which produces only about 2% of the world’s iron ore, has a significant advantage. More than 85% of Sweden’s iron ore, primarily from the Kiruna mine, is magnetite, which has fewer impurities and is highly suitable for DR-grade pellets. Combined with abundant, inexpensive clean energy and strong government support, Sweden is in a strong position as the industry shifts toward green steel production.
Power player driving the green steel movement The transition to green steel requires collaboration across the value chain, from sourcing DR-grade pellets to steel production and equipment manufacturing. This section highlights the power players, their roles, and their contributions to advancing green steel technologies.
Sources of DR-grade pellets DR-grade pellets are primarily supplied by leading companies such as Vale (Brazil), LKAB (Sweden), and IOC (Canada), known for their high-quality iron ore deposits and advanced pellet production. Additional contributions come from Metalloinvest (Russia) and producers in the Middle East and India, which are increasingly investing in production to meet rising global demand.
Green steel producers Leading steel producers are pursuing green steel initiatives, investing in hydrogen-based reduction technologies and EAFs to replace traditional blast furnaces. Figure 6 shows key players and their projected capacities. However, recent announcements from ArcelorMittal and Thyssenkrupp indicate delays in their green steel investments due to economic conditions, technological challenges, and policy uncertainties, underscoring the challenges facing the green steel transition.
Equipment manufacturers Green steel production relies heavily on equipment manufacturers advancing technologies for hydrogen-based direct reduction.
Midrex is the leader in developing shaft furnaces for DR using hydrogen. In addition to shaft furnaces, alternative methods like batch production are entering the market. For example, GreenIron plans to introduce a bell furnace designed for hydrogen-based batch processing.
Conclusion – accelerating the transition to green steel To unlock the full potential of a decarbonized steel industry, business leaders and policymakers must take coordinated action across three areas:
Transform market dynamics. Introducing differentiated low-carbon steel products and prioritizing them in procurement to create supply-demand synergies allows suppliers to charge a premium and establish stable demand.
Establish policy frameworks for decarbonization.Carbon taxes and tariffs on high-carbon imports can close the cost gap between high-carbon and low-carbon production methods, ensuring fair competition. Policies promoting recycled content and scrap recovery enhance sustainability.
Mobilize financial support. Governments and financial institutions must support the transition through late-stage R&D funding, price-stabilization mechanisms, and securitization tools to manage the decline in value of high-carbon assets.
Source: Arthur D. Little
