Financing hydrogen iron

A wonkish plan for problem industries in the energy transition.

We know how to make the electricity supply renewable. We know how to make land transport electric. Both are on track. But there are four problem industries where things are not so clear.

These estimates are not all for the same year and not strictly comparable, but they are good enough to make the point that to reach net zero emissions, the four sectors (together 20% of global fossil emissions) cannot be ignored.

The challenges are distinct but they have common features.

  1. Very plausible technological pathways exist to decarbonise. But these are not mature, and for the moment they are far more expensive than BAU.
  2. There is no guarantee or strong expectation that technical progress will ever eliminate the cost barrier, in contrast to electricity and land vehicles.
  3. The industries are typical of modern capitalism: they are international and oligopolistic, with a lot of trade, a handful of large companies, and a myriad of small ones.
  4. Their products and services rarely have plausible substitutes. (We shall see later on why this matters).

Points 1 and 2 mean that the issue for public policy is not R&D (pace all the Democratic presidential hopefuls) but early deployment.

Recall how we got to cheap wind, solar and batteries. It wasn’t a carbon tax, since that does not exist anywhere in the pure form. Partial cap-and-trade exists in the EU, but it has only just started to bite, after giveaway initial allocations. It was done by subsidies for early deployment to create economies of learning and scale:

  • In the USA, tax breaks for wind, solar, and electric cars; renewable obligations at state level.
  • In Europe and China, tax breaks, subsidies, and regulatory privileges for electric cars.
  • FITs and ringfenced auctions for wind and solar generation in Germany, other European countries, China and India.

The costs of FITs have been large in the past, though the cumulative liability (in Germany for instance) has now almost stopped growing as the few surviving FITs are near market rates. Well worth it of course, especially if you aren’t a German consumer.

The same principle holds for our four problem industries. Carbon taxes are politically toxic, and a coordination nightmare in globalised industries. So what’s the workable second-best kludge?

I’d like to float a possible solution. I’ll take steel as the example. The principle extends to the others ceteris paribus.

Steelmaking has two stages. Step 1 is reducing the iron oxides found in nature to pig iron, typically by heating with coke in a blast furnace, a Han-dynasty Chinese invention. Take hematite. In multiple chemical steps,

2.Fe2O3+ 3.C → 2.Fe + 3.CO2

POSCO blast furnaces at Pohang, Korea

Step 2 converts the brittle pig iron to more versatile steel by adding a small percentage of carbon in an electric arc furnace. This can also be done with scrap iron and steel, 25% of all steel production today. Since Step 2 can be done with renewable electricity, the carbon emissions problem is all about Step 1, pig iron.

Electric arc furnaces are distributed all across the globe in industrial cities with a good supply of scrap metal. Blast furnaces are found in monstrous coastal integrated plants, run by the largest companies. The 15 largest steel producers:

Source: World Steel Association

These 15 are responsible for a third (32%) of global steel production, but more – I suppose over 40% – of the new pig iron we are interested in.

The technology for decarbonization of ironmaking is direct reduction (DRI). Iron ore is heated up with natural gas (CH4), reformed to a mixture of carbon monoxide and hydrogen :

3.Fe2O3 + 6.CO → 6.Fe + 6.CO2

and 8.Fe2O3 + 24.H2 → 8.Fe + 24.H2O

This is done at reasonable scale today (100 mt/yr), mainly in India.

However, the process works fine just with the hydrogen:

Fe2O3 + 3.H2 → 2.Fe + 3.H2O [equation corrected]

Two pilot plants for hydrogen DRI are being built in Sweden and Austria by SSAB and Voest respectively with EU research funding. ArcelorMittal are also building a pilot hydrogen DRI plant in Hamburg. These are major and long-established steelmakers; the process almost certainly works.

Technically, but not yet financially. The price of catalysed hydrogen will have to drop a lot for that to happen. The steelmakers are saying “we can do it, but it’ll cost you”. None will move at a large scale – decommissioning a blast furnace is an expensive decision – without an incentive. Collective action problem! So we need early deployment subsidies once again.

Here’s my Cunning Plan (Baldrick™). There are many proposals floating around for fiscally neutral general carbon taxes: the revenue is typically rebated to low income taxpayers. The main objections to this are (a) it’s still a carbon tax (b) it’s too clever by half. But also (c) nobody knows how effective it would be. Relative prices shift (good) but you are also throwing in an uncertain income effect on those who don’t get the rebate, and you are hoping for a cultural nudge too.

HOWEVER these difficulties mostly go away with a sectoral levy-and-rebate scheme.

The early German FITs for renewable energies tried to remove the incentive to waiting for prices to come down aka the penalty for early adopters. The aim was to maintain a roughly equal ROI over time, steadily lowering the FIT rate in line with installation prices. It wasn’t perfect but basically worked. In particular, it was seen as fair, and SFIK there is no significant resentment of the early adopters who got the high FITs.

My scheme would try to identify the current excess cost over 10 years of a hydrogen DRI plant, estimate the likely total volume of subsidised investment, and set subsidy and matching levy rates on carbon-emitting iron. As hydrogen gets cheaper, the rates would fall. You would need a working fund or equivalent budget guarantees to cope with the inevitable errors.

It’s fiscally neutral for the industry. But there are no free lunches. Hydrogen steel is more expensive to make than the carbon-emitting variety. Consumers will pay a slightly higher price for all steel to fund the transition. Most of them will hardly notice. The lack of substitutes for steel means that the industry as a whole will not lose significant business to say aluminium.

The scheme depends on negotiation with the leading producers, that is my top 15, but it should be open to anybody. For holdouts and smaller players, governments would have to be prepared to impose the levies as taxes. It also presupposes a lot of coordination between governments. This does not have to be universal. You need a “coalition of the willing” covering a significant proportion of the industry (as a minimum China, India and the EU, if possible Japan, Korea and the USA), and prepared to impose border taxes on holdouts.

Still too clever by half? Maybe. What’s your alternative?

Exercise for the next session of the Public Policy seminar: work up a proposal on the same lines for aviation, shipping or cement, with the pros and cons. Tip on shipping: flag-of-convenience states are tiny and in no position to stand up to serious diplomatic pressure from big players who mean business. You can stop well short of sending an aircraft carrier to intimidate the Marshall Islands.

BTW, if my scheme works in more than one sector, you are growing a global carbon tax from the bottom up.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

7 thoughts on “Financing hydrogen iron”

  1. When we subsidize one technology like this, we disincentivize those who might otherwise be working on better alternatives to carbon reduction. We also assume we can see far into the future of a complex global network and see what the demand will be for something like steel. If, for instance, shared autonomous electric vehicles were to become mainstream, demand for steel in automobiles could drop precipitously. Similarly for a thousand other applications of steel. No centralized authority will ever have enough information to create a winning record of picking appropriate winners and losers in the carbon sweepstakes. A carbon tax or cap and trade may not be politically feasible, but there are no alternatives that are not a potentially counterproductive roll of the dice economically. The record of subsidies is not good enough to count on the law of averages either.

    1. RonWarrick makes valid points, but reaches a questionable conclusion. He says “No centralized authority will ever have enough information to create a winning record of picking appropriate winners and losers in the carbon sweepstakes.”

      Well, suppose that’s true. The alternative, which seems to be to allow the marketplace to sort out the winners and losers over time, may be a better plan for picking the best winners and losers, but that’s not the objective of the game. “Over time” is the problem. The number one objective is not a perfect solution to a long-range problem. Rather, it’s to do SOMETHING that will work effectively to stave off the impending calamity. The clock is running, the time is nigh, and we hardly have time to say “let’s watch and see what cunning things the marketplace can devise.”

      Striving for perfection is frequently the enemy of reaching an achievable result with significant positive value.

      1. Three thoughts:

        (1) if steel demand were going to drop in future, this tax on “making pig iron with coke” would just hurry along the process. If instead, some better method of making steel than this hydrogen-based method comes along, that better method will perforce be cheaper, right? So all it takes is to incorporate it into the cross-subsidy scheme.

        (2) The marketplace is going to have great difficulty making this happen. It’s called a “collective action problem”, and exacerbated by the fact that until enough economies of scale are found, it’s more expensive than BAU.

        (3) There is no long run here to be had, that we can just wait for. We have a finite number of years to solve this problem, and we need to push forward with what will work (albeit at some -cost-).

        One of the things that capitalists don’t understand, is that ROI isn’t what matters here. What matters is lifetime EROEI, and also the balance of actual natural resources required. Money? Pfft. Money is only a proxy for these more essential measures of viability. And we all know that far, far too often, money misleads us when it comes to Mother Earth, b/c somebody somewhere is pushing off his downside externalities on Mother Earth (== “all the rest of us”).

        It’s a collective action problem, and markets are shitty at that.

        1. Chet:
          1. Demand for steel is falling slowly, and a bit faster for pig iron as more scrap becomes available. But it’s very hard to imagine a future without at least half a billion tonnes a year of pig iron, half the current level.
          2. The underlying chemistry makes hopes of a better alternative to hydrogen DRI wishful thinking. Iron comes in nature as oxides. To get the pure metal, you have to extract the oxygen. This is highly reactive, so SFIK oxidising something else is the best path. Water (oxidised hydrogen) is the least problematic product. Even that takes a lot of energy. As anybody who has left a hammer out in the rain knows, iron really loves oxygen.

  2. Woot!!!

    Btw California has/had regulatory privileges too. Don’t underestimate the appeal of getting to use the carpool lane. (I believe they … “they” … are trying to take this away now.)

    Almost half of those plants are in China. So coordination-wise, it might not be as difficult as it might otherwise be. Or, not. I am no China expert.

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