INSIDER: Designing Low-carbon Product Standards for Cement and Steel in the United States
Achieving the goals of the Paris Agreement will require decarbonizing the global economy. This includes heavy industry sectors like cement and steel, which together account for around 3% of U.S. greenhouse gas (GHG) emissions and approximately 15% of global emissions (about 7% for cement and 8% for steel). A variety of options are available to reduce emissions in each sector, with more in development. Accelerating the development and deployment of these decarbonization approaches will require a suite of policies addressing the entire supply chain.
Two new papers consider the role and design of low-carbon product standards for cement and steel, which would set an emissions intensity benchmark for the production of each and allow for trading of emissions credits within each industry.
Why are cement and steel so carbon intensive?
Producing cement and steel requires high heat, often from fossil fuels, and involves chemical reactions that also release carbon dioxide. As a result, energy and process emissions make both products emissions intensive.
Cement production involves heating limestone and small amounts of other minerals to produce clinker, which is then ground into a fine powder with small amounts of additives like gypsum to form cement. Steel production from iron ore is traditionally done using a blast furnace using coke (made from coal), resulting in the release of carbon dioxide. The combination of these combustion and process emissions releases close to a ton of carbon dioxide for each ton of cement produced and over two tons of carbon dioxide for each ton of steel produced using a blast furnace. A low-carbon product standard can encourage deployment of options to decarbonize these sectors.
How does a low-carbon product standard work?
A low-carbon product standard incentivizes manufacturers to reduce a product’s carbon intensity by setting an emissions intensity benchmark that decreases over time and allowing companies to trade emissions credits. Companies selling or importing the covered product must comply with the standard, and they either receive or surrender credits based on the emissions intensity of their products relative to the benchmark. Companies with credits can sell them, which provides them with a financial incentive to continue reducing their products’ emissions intensities.
A low-carbon product standard promotes adopting available decarbonization technologies and can drive innovation. By lowering the benchmark over time, the government signals to companies that investment in innovative emission reduction technologies and processes will pay off. Furthermore, the standard is technology-neutral, allowing companies to use any approach they see fit to reduce emissions.
The standard will work best alongside other policies, such as investment in research and development, additional financial incentives, technical assistance and procurement policies.
What are the design considerations for a low carbon product standard?
Designing a low carbon product standard, including for cement and steel, requires considering the following six design choices:
1. Choosing the Product
The design process for a low-carbon standard starts with determining which product(s) to regulate. For the cement sector, the primary decision is whether to regulate cement or concrete. Because there are fewer than a hundred cement plants in the United States — compared to thousands of concrete plants — and cement plants already have systems in place to report their emissions, it is far easier administratively to regulate cement. Cement is also a more uniform product than concrete, which simplifies the benchmarking process. On the other hand, additional emissions reduction options can be incorporated at the concrete-making stage. On balance, we recommend that federal standards regulate cement.
For steel, the key choice is where to focus along the production chain. Given the diversity of production routes and the innovative production technologies of tomorrow, as well as the diversity of final products that contain steel, this research recommends focusing on intermediate, fabricated steel products such as sheets, plates, bars, beams, pipes and tubes. These are the intermediate products that are sold to construction companies or manufacturers who fashion them into automobile parts, appliances and other products.
2. Crediting and Point of Regulation
The product standard would apply at the point when producers and importers make their first sale of cement or steel in the United States. A producer or importer receives credits when the average emissions intensity of the product sold each year is below the benchmark set by the standard. Companies must surrender credits when the emissions intensity is higher than the benchmark. In this way, only the share of emissions that exceeds the benchmark is subject to an emissions price. Credits are tradable, meaning that producers or importers with credits can sell them to those needing to surrender them.
3. Defining an Emissions Intensity Metric
Because the standard is based on an emissions intensity metric — the amount of emissions per unit of product — policymakers must choose which emissions to include. For both cement and steel, these metrics should include direct emissions from production and indirect emissions associated with purchased electricity. Direct emissions are already reported and comprise the vast majority of emissions from most facilities. Including emissions from electricity purchases incentivizes investment in efficient electrical processes and the use of zero-carbon electricity where it is available. The steel metric should also include emissions associated with upstream production of coke, lime and direct-reduced iron since they are significant contributors to total emissions.
4. Benchmarking and Stringency
After defining the emissions intensity metric, policymakers should gather data from the industry to determine the distribution of emissions intensity across the regulated entities. Stringency will typically be defined with reference to these values — for example, as a percentage of the mean emissions intensity. The benchmark should initially be set marginally below the current average emissions intensity to incentivize investment in available, cost-effective abatement options in the near term. The benchmark should be set to decline over time, and policymakers should review that trajectory periodically based on abatement options and emissions reduction goals, such as achieving net-zero CO2 emissions by 2050.
5. Establishing Cost-containment Measures
Regulators will need to analyze current emissions intensity and abatement options to establish the declining emissions intensity benchmark, and this analysis will provide a basis for estimating the future supply of — and demand for — credits. However, a mismatch in supply and demand could result in very high or very low prices for credits. Establishing cost-containment measures can generate economic benefits by limiting such spikes and lulls. We therefore recommend establishing a price ceiling and floor for credits. The levels of these should be set according to the desired stringency of the program and should take into consideration the current and expected future costs of key abatement technologies and backstop carbon removal technologies.
6. Addressing Leakage and Competitiveness
Leakage occurs when an emissions mitigation policy in one jurisdiction results in increased emissions outside of that jurisdiction, such as through lost market share to foreign competitors located in unregulated jurisdictions. Cement and steel are both emissions-intensive and trade-exposed. To address the potential for leakage, the performance standard should apply to importers of foreign cement and steel in addition to domestic producers.
How could a low carbon product standard be implemented?
A federal low-carbon product standard could be implemented through passing new legislation or through existing legal authority contained in the Clean Air Act. New legislation is preferred because it would provide an opportunity to comprehensively design a low-carbon product standard that incorporates all of the design considerations outlined above. While the Clean Air Act allows for air pollution regulation from new and existing facilities, it could not cover imported products, emissions related to purchased electricity or, for steel, other upstream emissions. New legislation would likely cover more manufacturing segments of the industrial sector other than just cement and steel, so it would need to address cross-sectoral issues, as well.
What options could lower the emissions intensity of steel and cement?
Multiple abatement options — both existing and in various stages of development — can reduce emissions from cement and steel production:
- Fuel switching can reduce emissions by substituting fuels like waste material and waste biomass for carbon-intensive fossil fuels to provide industrial heating.
- Carbon capture, use and storage (CCUS) could capture the majority of both process and fuel combustion emissions from steel and cement plants. CCUS systems are not yet demonstrated on commercial scale cement plants, but a handful of such projects are in progress.
- Energy efficiency is another opportunity for both cement and steel plants. According to a U.S. Department of Energy study, U.S. steel facilities have the ability to decrease energy consumption by up to 39% with upgrades and retrofits made to existing best practices, and an additional 24% if innovative technologies deploy at scale.
- Reducing the clinker-to-cement ratio through increased use of blended cements can be scaled up today. Oxy-combustion, or combustion of fuels in a high oxygen environment to capture exhaust CO2 more easily, is in development. Additionally, novel cements that use different chemistries than conventional cement can help reduce process emissions, fuel combustion emissions or both.
- Innovative steel production processes like electrolytic processes, hydrogen or biomass can reduce iron ore, greatly lowering process emissions.
Driving Innovation in the Cement and Steel Sectors
While industry has sometimes been considered a “hard to abate” sector, greater policy and investment focus can help reduce its emissions as demand for these products grows worldwide. In this context, the United States has the opportunity to set ambitious policies and be a leader in developing the necessary technologies to address these sizable emissions. A low-carbon product standard, combined with a range of other policies that target different steps in the cement and steel supply chains in different ways, would be a strong step in that direction.