Policy Brief on Decarbonizing Iron and Steel

The European steel sector is approaching a critical reinvestment and refurbishment window between now and 2035. Much of the European Union’s (EU) blast furnace fleet is aging, with an average age of around 50 years. Blast furnaces typically require major reinvestments roughly every 15–20 years, meaning that decisions taken in this period will determine whether assets lock in high-emissions production for decades or shift toward low-carbon pathways.

This brief recommends key policy decisions by the EU to decarbonize ironmaking, which is both the highest emitting and lowest value-added step in the steel value chain. Decarbonizing iron production while retaining high-value steelmaking, finishing, and recycling activities in the EU is therefore central to preserving strategic industrial know-how and value chains while reducing emissions.

The steel industry is responsible for approximately 5% of greenhouse gas emissions in the EU and 7% globally due to its heavy reliance on coal. Around 70–80% of process emissions are generated by the first step in the steelmaking process: the conversion from iron ore to iron. Traditional steelmaking via the blast furnace/basic oxygen furnace (BF-BOF) route dominates globally, including in the EU. Emission intensities vary considerably across plants due to differences in process design, energy and material efficiency, and system boundaries (e.g. treatment of upstream inputs such as coke or pellets). Globally, BF-BOF emissions average around 2.2 tonnes of carbon dioxide per tonne (tCO2/t) of crude steel, whereas EU production is estimated at approximately 1.8 tCO2/t of crude steel.

In 2024, the EU produced 129.6 million tonnes (Mt) of steel, accounting for around 7% of global supply and making it the world’s third-largest producer after China (~55%) and India (8%). Of this total, 57.8 Mt (~45%) was from recycled, or secondary, steel, above the global average of roughly 30%. The remaining 71.8 Mt was primary steel, produced by reducing around 98 Mt of iron ore.2 Since the EU’s domestic iron ore production, mainly based in Sweden, is insufficient to meet EU demand, the sector relies heavily on imports, primarily from countries such as Australia, Brazil, Canada, and Ukraine. This means that while the EU has large installed steelmaking capacity, it remains structurally dependent on imported upstream inputs, particularly iron ore and coking coal.

The global steel sector suffers from significant and increasing overcapacity, as well as depressing factory utilization rates and profit margins. Yet the need to decarbonize is becoming more urgent. One reason is that the industry is highly polluting, and its decarbonization will improve both climate and public health by reducing emissions of air pollutants which are linked to degraded local air quality in communities surrounding steel production sites. Additionally, failing to decarbonize will become more costly as free allowances under the EU Emissions Trading System are phased out between 2026 and 2034 following the introduction of the Carbon Border Adjustment Mechanism. Without abatement, EU steelmakers’ carbon cost exposure will increase significantly.

In a structurally low-margin global steel market, decarbonization pathways will only scale if they are paired with clean, affordable energy and demand-side measures such as standards, lead markets, and green public procurement.

Several decarbonization pathways exist, but they differ significantly in cost, scalability, infrastructure requirements, and suitability for deployment in Europe. Decarbonization of the steel sector should include increasing electrification of low- and high-temperature heat, as well as maximizing steel recycling. The main improvement, however, must come from moving the primary ironmaking process away from coal, and ultimately from all polluting production pathways on a global scale.

This transition must be supported by policy measures and financial incentives for innovators and industry. Hydrogen-based direct reduced iron (DRI) combined with an electric arc furnace (EAF) using electricity is currently the most mature alternative primary steelmaking pathway expected to scale in time to support the EU’s 2050 targets. These facilities could potentially produce 50% of the EU’s 2024 primary iron demand.

A key challenge is the availability of clean, affordable hydrogen, which requires abundant low-carbon electricity, the build-out of extensive and expensive hydrogen infrastructure, and industrial conversion of enduse equipment. The renewable hydrogen DRI-EAF production route consumes particularly large quantities of clean electricity. Switching 100% of the EU’s 2024 primary steel production (i.e. 71.8 Mt) to this route would take about 97% of all solar electricity produced in the EU in 2024.

In addition, transporting hydrogen by ship is inefficient and costly. Therefore, one option is to produce iron abroad with clean hydrogen and export it to Europe as hot briquetted iron (HBI). This is relatively simple and could even be cheaper in absolute terms than shipping iron ore ingots. This could also support diversified and resilient supply chains for low-carbon iron inputs, as HBI is well suited for long-distance bulk shipping and avoids the need to transport hydrogen to Europeansteelmaking regions.

With a few local exceptions, clean energy in the EU is limited and expensive, especially in the main steelmaking regions, leading to high projected levelized costs of hydrogen (LCOH), which in many cases remain higher than fossil-based alternatives such as coal. As a contingency, several of the new DRI projects intend to use unabated natural gas until affordable hydrogen becomes available. In contrast, geographic regions with favorable conditions, such as high solar irradiance, strong and consistent wind, or abundant hydropower, have a competitive advantage in projected LCOH. In regions where such conditions are less favorable, access to a clean and reliable electricity grid can nevertheless enable competitive low-carbon hydrogen production.

Another innovative low-carbon solution is direct electrification in the form of molten oxide electrolysis or electrowinning. These production routes do not consume hydrogen and instead use electricity to directly convert iron ore into metallic iron through electrochemical reactions. While total electricity demand is broadly comparable to hydrogen-based DRI pathways, these processes can achieve near-zero direct CO₂ emissions and avoid the need for hydrogen supply infrastructure, while also offering modular production pathways. Direct electrification technologies fundamentally redesign steelmaking chemistry rather than incrementally improving carbon-based processes. They can simplify plant design, reduce the number of processing steps, and potentially work with a wider range of ore qualities, which could improve resource efficiency and resilience in supply chains.

Direct electrification should be viewed as a promising post-2035 technology pathway. Deployment at scale will require successful pilot projects and anticipatory grid planning this decade. While it is not expected to deliver large-scale emissions reductions in the near term, due to current technological maturity, it has strong long-term potential, particularly in regions with abundant low-cost clean power. Sustained public and private research, development, and demonstration support will be critical to accelerate commercial readiness.