Budget 2025: Red Flags In India’s Green Steel Mission

The Union Steel Ministry is preparing a National Green Steel Mission (NGSM), a comprehensive plan to reduce the carbon emissions from India's steel industry, the world’s second largest. 

NGSM includes production linked incentives (PLI), a scheme to encourage the production of cleaner, lower-emission steel or 'green' steel, besides renewable energy incentives to promote use of renewable energy in the steel industry.

It also includes a mandate to purchase green steel for government agencies, green hydrogen projects which will integrate the steel sector into the larger goal of producing and using green hydrogen, and steel scrap recycling, mainly aimed at reducing coal consumption in steel making. 

Defining Green Steel

In December 2024, India became the first country in the world to define green steel. India’s Green Steel Taxonomy, announced by the Steel Ministry, is a framework for categorising steel products based on their carbon emissions. 

This is significant, since globally, there is no commonly accepted definition of green steel. The taxonomy marks a major step in the NGSM for a transition to sustainable steel production, and is part of India's broader strategy to combat climate change and promote sustainable industrial practices. 

The objective is to help India remain competitive in the global steel market. What has added a dose of urgency to these measures is the European Union's proposal to impose a 25 per cent 'carbon tax' on steel and aluminium imports.

To encourage compliance with green steel standards, India plans to establish a regulatory body that will monitor compliance and regularly assess the impact of policies and incentives. 

The question is: How will the new norms reformat an energy-intensive sector like steel? With the steel sector dominated by many MSME units, the success of these measures will depend on the pace of implementation, and would require serious hand-holding by the government in the initial years. 

Rating Green Steel 

Under NGSM, 'Green Steel' will be defined in terms of percentage greenness of the steel produced at the steel plant with carbon dioxide equivalent (CO2e) of emission intensity less than 2.2 tonne per tonne of finished steel (tfs). 

While steel with emission intensity lower than 1.6 t-CO2e/tfs will get five-star rating, those with emission intensity between 1.6 and 2.0 t-CO2e/tfs and 2.0, and 2.2 t-CO2e/tfs, will be rated four-star and three-star, respectively. Steel with emission intensity higher than 2.2 t-CO2e/tfs shall not be eligible for green rating.

Achieving this is no mean task. To put things in perspective, steel producers in India, the world's fastest-growing major economy, generate around 2.55 metric tonnes of carbon dioxide per tonne of crude steel produced, 38 per cent higher than the global average of 1.85 tonnes, according to Global Energy Monitor. 

Grey Skies 

Given the situation on ground, India’s ambitious green steel plans seem fraught with significant challenges. Domestic steel demand, rising at 8 per cent, is being driven by a wave of infrastructure projects and spiraling demand for new houses. 

This requires construction grade steel, where a lot of new production is coming from small-scale plants that are relatively easy to build, but can be highly polluting. Several of them are sponge iron units located in iron ore-rich states across the country. 

These units are mostly coal-based, and produce an output that is further processed to produce stronger steels such as reinforcement bars for concrete buildings. 

What holds promise is the use of green hydrogen in steelmaking. Though still in its experimental phase, green hydrogen-based direct reduced iron (DRI) and electric arc furnace (EAF) steelmaking could revolutionise the industry within the next decade. 

By 2030, the cost of green hydrogen is predicted to fall to US$ 1/kg, making it a viable option for large-scale steel production. In addition to green hydrogen, renewable energy and natural gas are poised to play crucial roles in decarbonising steel production. 

“The success of green steel production hinges on the availability of renewable energy. Thus, investments in solar and wind energy, along with robust energy storage systems, are critical," Kapil Bansal, EY India’s Energy Transition & Decarbonisation Partner, said in his report ‘How India can lead the global green steel revolution’. 

Renewable energy could comprise 43 per cent of the sector’s energy mix by 2030-31, necessitating an investment of over Rs 70,000 crore. Till green hydrogen becomes viable, natural gas can serve as a critical transition fuel. 

It has its own challenges, such as inadequate pipeline infrastructure and price vagaries, which must be addressed to ensure natural gas effectively supports the decarbonisation pathway. Currently, only 21 per cent of the existing blast furnace capacity and 5 per cent of the coal-based DRI capacity, have access to gas pipelines.

For steel units, an essential move from the government would be assured offtake of their produce. The industry had earlier said that since infrastructure accounts for 40 per cent of steel demand, assured offtake in volumes can justify the investment required to produce green steel. 

In step, Green Public Procurement (GPP), a key policy direction in the report, ‘Greening the Steel Sector in India: Roadmap and Action Plan’, aims to create demand for green steel by making the government its first major customer, which Climate Catalyst, a global non-profit, called the most promising policy direction. 

The report projects that green steel consumption through GPP could rise from 2.2 million tonnes in 2026-2027 to 10.6 million tonnes by 2031, with the share of green steel in total procurement increasing from 5 per cent in FY27 to 15 per cent by FY31. This could narrow the price gap between green and traditional steel, paving the way for entry of green steel in the mainstream market. 

Budget Boost  

The Steel Ministry is reportedly seeking a support of around Rs 15,000 crore from the Budget to offer incentives to steel mills to produce low-carbon steel, reduce emissions, boost research and development, increase raw material efficiency, as well as encourage banks to offer lower interest rates on renewable energy loans. 

MSMEs in the steel sector would be looking at the forthcoming Union Budget for support in the form of capital subsidy for the equipment and technology that needs to be installed and adopted, as they transition towards producing cleaner steels. 

The other could be incentives to accelerate the move towards alternative energy sources in the form of tax credits, subsidies and grants, to support renewable energy investments. 

The government could also look at lowering power tariffs to reduce production costs. State government sops like carbon credit trading schemes will also go a long way in providing support to steel sector MSMEs. 

(The writer is a veteran journalist. Views are personal)