Climate change risks and opportunities for Indian Steel sector

Posted on December 22, 2011 by


The Indian steel industry have entered into a new development stage from 2005-06. Driven by rapid development of Indian economy; India’s steel consumption will continue to grow at nearly 16% rate annually, till 2012.  Steel production in the financial year 2009-10 was 60-61 million tonnes. Demand of Steel is rapidly growing due to increasing construction projects and automobile industry. The National Steel Policy has envisaged steel production to reach 110 million tonnes by 2019-20 (It is around 293 million tonne as per the estimates based on status of MOUs signed by the private producers with the various State Governments). The Indian steel industry plays an important role in the country’s economic growth. Consumption of Steel is taken to be an indicator of economic development. The demand of steel is growing in the country although the per capita steel consumption is only 40 kg in India as compared to 150 kg across the world and 250 kg in China.

Steel industry is a significant contributor to manmade greenhouse gas emissions. Steel making consumes large amount of energy which mainly  derived from the coal a dirtiest fossil fuel on the earth. Green House Gas coming from the fossil fuel combustion in the major process contributes in climate change. Climate Change is one of the most important issues facing the world today. Growing concern on the climate change, the impact of human activities on the earth’s climate has been receiving increasing attention from the world.

GHG emission by Indian Steel Sector

India is now the world’s third largest emitter of greenhouse gases, ranking behind China. India’s Ministry of Environments and Forests released its greenhouse gas inventory of 2007 emissions in May 2010. As per the inventory report, India’s emissions have grown at an average annual rate of 3.3 percent, increasing from 1.25 billion tons in 1994 to 1.9 billion tons in 2007. The report analyzes emissions from Electricity use, Agriculture, Iron and Steel industry, Transportation, land use change and other industries.

Iron and Steel sector solely contributed 117.32 million tons of carbon dioxide equivalents in 2007 which is 26.79 million tons higher than the year 1994. It is due to the growth of steel sector and its high energy intensive operations. Following graph shows the sector wise comparison of GHG emissions between 1994 and 2007;

GHG emission from Indian Steel sector

Finance Minister Pranab Mukherjee proposed to invest 1.73 trillion rupees on infrastructure in India’s budget for 2010-11 which will further trigger steel requirement in great extent. Although steel contributes in the development of the country, its production process will emit huge amount of Green House Gases in the atmosphere. It’s a big concern to India to grow as a low carbon economy.  In addition, India has announced plans to reduce emissions intensity by 20 – 25 % between 2005 and 2020. India wants to achieve this target without affecting the growth and it will not be possible without indigenous action plans to curb the GHG emissions. It requires balancing between economic growth and environment sustainability while planning roadmap for 8-9 % growth rate.

National Action Plan on Climate Change

Regulatory framework to mitigate risks induced by the climate change is necessary. India is not behind in bringing climate change regulation and it is found that there have been significant developments in legislation and regulation regarding climate change in the country. Mainly it includes National Action Plan of Climate Change (NAPCC) of India introduced in 2008. NAPCC envisage to use of 15% renewable energy by 2020 and making energy efficiency mandatory. NAPCC proposed eight national missions and some other mission for the mitigation and adaptation of climate change.  It includes Renewable Energy Certificates (REC), Perform Achieve and Trade (PAT) under the National Mission on Enhanced energy Efficiency with other national mission that integrates climate change policies in the main development goals.  International legislation such as Kyoto protocol, Regional Greenhouse Gas Initiative (RGGI) in Northeast and Mid-Atlantic states, the California Global Warming Solutions Act of 2006, the Western Climate Initiative, and the Midwestern Greenhouse Gas Reduction Accord, Australia’s Carbon tax etc are already in place to address the issue of climate change.

In India at present, there is no regulation with regard to GHG emission. However, Government of India being signatory to Kyoto Protocol is emphasizing on state-of-the-art technologies for energy efficiency and carbon mitigation. Climate change is a massive challenge for the steel industry. Considering the risks and opportunities due to the climate change to the heavy energy intensive industries, Electricity Act 2003 introduced Renewable Purchase Obligations for the fossil fuel based energy consumers. As the steel industry uses captive power plants for the power generation (mostly uses Coal as a fuel), it comes under Renewable Purchase Obligations. It means Steel Industries that have fossil fuel based power generation have to comply with RPO under the EA act 2003. If the obligated steel industries doesn’t comply with their obligations under the RPO, they will be penalized under the EA act. Either they can generate renewable power or can buy Renewable Energy Certificates from the renewable energy project developers.

Global Climate Regulations

Seventeenth climate change conference (COP 17) successfully organized at Durban.  Outcome of the conference is remained uncertain in many things but the developed countries are agreed to participate in a second commitment period of the Kyoto Protocol. The second commitment period would start from 1st January 2013 and would extend up to either 2017 or 2020 (to be decided COP 18 Qatar next year).  Developed countries clearly mentioned in the conference that they will sign the treaty on legally binding GHG emission reduction targets only after the developing countries like India and China take emission cuts.  European Union also wanted developing nations to do more than just “business as usual.”As per the Durban agreement, the participating countries have agreed to decide on the modalities and procedures of the second commitment period by 2015 and implement it from 2020. Thus, it is anticipated that the big emitters like China, India and USA will have legal emission commitments post 2020.

The major risks associated with climate change for steel industry in India would be during post Kyoto scenario with possible new emissions regulatory regime.  There may be the emissions caps for developing countries like China and India. Steel industry is GHG emission intensive due to its huge energy uses. If the future climate change regulations in India put GHG emission caps on steel industry, it will definitely affect the steel business and growth of the industry. In addition, NAPCCC envisages voluntary emission cuts and hence all GHG emission intensive industries including steel sector will require to embrace low emission technologies and subsequently be prepared for the stronger climate change regulations.

Another threat induced by the climate change to the Steel sector is restricted availability of Natural resources. Steel industry need natural resources mainly iron ore, coal, natural gas and dolomite.  India is coming up with Mines and Minerals (Development and Regulation) Act 2010, which has stringent environment clearance laws.  Indian government is more concerned about deforestation. Mining resulted in deforestation and it significantly contributes to climate change. There is possibility to restrict new mining grants for these minerals in near future due to the regulations. As the major resources of the steel industry come from mining activities, it can affect the steady supply of these minerals.   In addition, natural disasters like floods and storms as result of climate change can affect productivity of the mines. Recent example is flooding in the coal mines areas in Australia restricted the supply of coal.  It increases the coal price which has led to considerable reduction in steel production. (Also see Impact of Climate Change on Global Coal Production – Emphasis on Indonesia)

Opportunities

Kyoto regime brought lot of monitory benefits to the GHG emission reduction project developers. Kyoto protocol which is the international treaty on the climate change introduced Clean Development Mechanism (CDM).  CDM is an arrangement under the Kyoto Protocol allowing industrialized countries (called Annex 1 countries) with a GHG emission reduction targets to invest in projects that reduce emissions in developing countries as an alternative to more expensive emission reductions in their own countries.  Such projects can earn Carbon Credits in the form of GHG emission reductions (One carbon credit is equivalent to one ton of carbon dioxide).

As discussed earlier, Renewable Energy Certificates (REC) and Perform Achieve and Trade (PAT) are the India’s domestic mechanism partially similar like GHG emission trading scheme. REC mechanism allows trading of REC (one REC produce when one mega watt hour of electricity generates) and Energy Saving Certificates (ESCrts) under the PAT mechanism to the obligated entities on Indian power exchanges. Project developers with renewable energy and energy efficiency projects can earn additional revenue through these mechanisms.

In addition, The Bombay Stock Exchange (BSE) has launched the first ever ‘Carbon Indexing Project’ in collaboration with the UK government recently. This project will use data from the recently released ‘Carbon Disclosure Project (CDP) Report 2011 – India 200’ to rate BSE-listed companies on the basis of their carbon emissions and compare it to their performance on the stock exchange. It can help organizations with low carbon footprint to build their brand image among the industry.

References – MoEF, Ministry of Steel, MNRE

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