Steel, Carbon, and Capital: The Toughest Challenge in India’s Net-Zero Journey

Steel is everywhere—building our cities, powering industries, and shaping economies. But as I dug deeper, I realized it’s also one of India’s biggest climate challenges, responsible for 11% of industrial emissions. With demand set to surge, emissions could spiral out of control unless we act now. The problem? Decarbonizing steel isn’t just tough—it’s expensive, technologically complex, and critically underfunded. So, how do we bridge this gap before it’s too late? Let’s dive in.

The Decarbonization Challenge: Why Steel Matters

The industrial sector (excluding transport & Power) is responsible for over one-third of global greenhouse gas emissions and about 30% of India's carbon footprint. Within this, the iron and steel sector stands out as India's largest industrial emitter - 11%.

India is already the world's second-largest steel producer, producing about 120 million tonnes annually and contributing roughly 2% to the country's GDP. India's per capita steel consumption is just one-fifth of the average for developed countries. As the economy grows - India is projected to become the fastest growing economy by 2050, domestic demand is expected to surge rapidly.

If this growth follows conventional carbon-intensive production methods, sectoral emissions could triple by 2050. That's a climate disaster which we would not want at a global level.

So I digged deeper and tried to understand why decarbonisting Hard to abate sector like steel is hard? The production process is inherently carbon-intensive, with emissions coming from multiple sources:

  • Direct energy-related emissions (20-25%)
  • Process-related emissions (60%)
  • Indirect emissions from purchased electricity and materials (15-20%)

Decarbonizing steel requires a range of solutions, from energy efficiency and renewable energy to process modifications, alternative fuels (like green hydrogen), carbon capture, and increased material circularity through scrap utilization.

The problem is that most technologies required for deep decarbonization are still at early stages of development. They're either too expensive, unproven at scale, or both.

The Technology Landscape: From Proven Solutions to Moonshots

When I looked into the technological options for decarbonizing steel, I found a spectrum ranging from commercially available solutions to those still in the lab. Let me break this down:

Commercially Competitive Technologies (TRL 10-11)

Energy efficiency measures like Top Pressure Recovery Turbines and Waste Heat Recovery systems can reduce emissions by 2-15% with negative abatement costs (meaning they actually save money) Material circularity through scrap-based Electric Arc Furnaces (EAF) can cut emissions by 80%

Near-Commercial Technologies (TRL 5-9)

  • Hydrogen-based Direct Reduced Iron (H-DRI) can reduce emissions by 70-95%, but increases production costs by 20-45%
  • Carbon capture with various furnace technologies can cut emissions by 50-60%, with moderate cost increases
  • Process modifications like Top-Gas Recycling and Smelting Reduction offer 20-25% emissions reductions

Early-Stage Technologies (TRL 1-4)

  • Direct electrification methods like low-temperature electrolysis are still in early development

This creates a classic innovation dilemma: How do we bridge the gap between what's commercially viable today and what's needed for deep decarbonization tomorrow?

The Global Investment Picture: Following the Money

To understand how this challenge is being addressed globally, I looked at investment patterns in green steel production. The data reveals some interesting trends:

As of November 2023, about $41.7 billion had been committed to low-carbon steel projects globally (latest number I could find). These investments will fund up to 40 million tonnes of green steel production capacity, 20 GW of green hydrogen production, and 5 million tonnes of CO2 capture capacity annually.

While significant, this falls far short of the estimated $200 billion needed annually to achieve a net-zero steel sector by 2050.

Looking at the technology breakdown:

  • Hydrogen-DRI dominates with 87% of planned investments
  • Scrap-EAF follows with 10%
  • Carbon capture accounts for just 2%
  • Other technologies make up the remaining 1%

Geographically, the EU leads with 88% of announced investments, followed by Canada (5%), Australia and Norway (2% each), and Russia and South Korea (1% each).

What's particularly interesting is the role of public funding. About 16% of investments in green steel production come from public sources, primarily as innovation grants, capital subsidies, and equity for supporting infrastructure. This public capital plays a critical role in derisking early-stage technologies and catalyzing private investment.

Carbon markets are also emerging as an important revenue source, especially in the EU where carbon prices have ranged between €80-100 per tonne in recent years.

India's Steel Trajectory: A Looming Carbon Lock-In

Now, let's turn to India, where the picture looks quite different—and concerning.

India's steel production target is 300 million tonnes by 2030 and 700-800 million tonnes by 2047. Currently about 196 million tonnes of new steel production capacity in the pipeline, expected to come online over the next 15 years. To put this in perspective, that exceeds the current steel production capacity of the US, UK, Germany, and France combined.

Steel production targets are great but the issue is Nearly all of this planned capacity is fossil-based. The breakdown shows:

  • 28% using integrated Blast Furnace + Basic Oxygen Furnace (BF+BOF)
  • 38% using standalone BOF
  • 16% using integrated BF/coal-based Direct Reduced Iron (DRI) + BOF/EAF/Induction Furnace
  • 5% using integrated coal-based DRI + EAF
  • 4% using standalone EAF/IF
  • 9% using unspecified technologies

Only a tiny fraction (less than 5%) involves the cleaner scrap-EAF route.

About 90% of this capacity is expected to be operational by 2030. According to my analysis of the data, this could increase the sector's average emissions intensity from 2.18 to 2.27 tonnes of CO2 per tonne of crude steel, potentially doubling sectoral emissions from 260 to 560 million tonnes of CO2 annually by 2030.

This presents a massive decarbonization challenge and risks locking in carbon-intensive infrastructure for decades.

The increasing share of BF-BOF technology is particularly problematic because it's much harder to decarbonize than the DRI-EAF route. Achieving near-zero emissions with BF-BOF depends heavily on carbon capture technologies, which have high technological complexity and costs.

While there has been no investment in commercial-scale green steel production in India to date, there are some promising developments. Under the National Green Hydrogen Mission, the government has allocated about $55 million to support pilot projects substituting fossil fuels with green hydrogen in steelmaking until 2029-30. Two large private players, Jindal Stainless Ltd. and TATA Steel, are piloting hydrogen use in steel production.

But these efforts, while encouraging, are insufficient to transform the sector. More comprehensive policies and financing solutions are needed.

The Financing Framework: Bridging the Gap

So how do we address this financing challenge? A framework to solve this stands on five pillars:

1. Sectoral Policies

Well-designed sectoral policies are essential to level the playing field between low-carbon and conventional technologies. These could include:

  • Carbon pricing mechanisms
  • Technology mandates
  • Tax credits for low-carbon production
  • Green public procurement
  • Product carbon standards

India has historically prioritized rapid growth, energy security, and competitiveness in its industrial policies, with limited focus on decarbonization. However, recent initiatives like the National Solar Mission, Indian Carbon Market, and National Green Hydrogen Mission signal a shift toward green industrial policy.

2. Enabling Ecosystem

An enabling ecosystem involves different stakeholders implementing measures to address investment barriers. For the steel sector, this could include:

  • Formulation of sectoral transition pathways by governments and industry associations
  • Public investments in shared infrastructure for hydrogen and CO2
  • Voluntary commitments by steel buyers to pay a premium for green steel
  • Access to emerging technologies from international providers
  • Increased allocation of risk capital by development finance institutions
  • Building steel R&D partnerships among government, companies, and academic institutions

3. Bankable Business Models

Industry and financial sector players need to coordinate to establish new business models with bankable cash flows. This involves appropriate allocation and effective management of investment risks through:

  • Deconsolidated financial structuring (project financing)
  • Co-financing of projects by multiple sponsors
  • Long-term agreements for input supply and output offtake
  • Technology verification and risk insurance
  • Local currency financing and foreign exchange hedging

4. Financing and Derisking Mechanisms

Different financing solutions are needed for technologies at various stages of development:

  • Early-stage (TRL 1-4): Grants and equity from public and private sources for R&D
  • Demonstration stage (TRL 5-8): Mix of equity, subsidies, carbon credits, concessional debt, and guarantees
  • Market-entry and deployment (TRL 9-11): Equity, debt, and structured blended mechanisms, with increasing private sector participation

5. Financial Sector Policies and Regulations

Financial sector regulations play a crucial role in directing financial flows to underserved sectors. Tools include:

  • Taxonomies on sustainable, green, and transition finance
  • Mandates for financial institutions to measure and report financed emissions
  • Expanding priority sector lending schemes
  • Mandating corporate issuance of green/transition bonds
  • Incentivizing banks to lend to specific activities

Once investment demand has been stimulated, financial sector measures can unlock financing from various sources.

Innovative Financing Solutions: Getting Creative with Capital

Let's explore some specific financing mechanisms that could support steel decarbonization in India:

Technical Assistance Facility and Development Equity Fund

Early-stage projects deploying breakthrough technologies often lack commercial viability and face high development costs. A dedicated technical assistance facility could provide grants for project preparation activities like feasibility studies, market assessments, and legal advisory services.

Combined with a development equity fund providing early-stage risk capital, this could create a pipeline of bankable projects and improve investor confidence in emerging technologies.

Contract for Difference (CfD) / Carbon Contract for Difference (CCfD)

Breakthrough technologies typically have higher production costs than conventional alternatives. A Contract for Difference is a bilateral agreement between the government and a low-carbon project that covers the incremental cost of production.

The project receives payments equal to the difference between the "strike price" (the levelized cost of low-carbon production) and the market price of conventionally produced steel. This stabilizes revenues, improves bankability, and lowers financing costs.

A Carbon Contract for Difference works similarly but is structured around an agreed carbon price rather than production costs. This could be viable in India post-2030, once the Indian Carbon Market is fully functional and has demonstrated credibility.

Article 6 Mechanisms

Article 6 of the Paris Agreement enables voluntary international cooperation among countries through market-based mechanisms and non-market approaches. This could facilitate financing linked to carbon emissions reductions, technology transfer, and capacity building for industrial decarbonization projects.

Carbon revenues from direct sales of certified emissions reductions or internationally transferred mitigation outcomes (ITMOs) can help reduce the viability gap of projects, though they may not completely cover it.

Blended Debt Fund and Partial Credit Guarantee

A blended debt fund combines capital from multiple sources, using public capital to derisk and mobilize private investment. It typically has at least two tranches: a concessional tranche funded by public sources that is subordinate to a senior commercial tranche funded by private sources.

This can be complemented by a partial credit guarantee mechanism that covers the risk of borrower default on a portion of the loan amount. This helps mobilize debt financing for bankable projects, reduces information asymmetry, and encourages lender participation in target sectors.

Transition Finance

Transition finance is emerging as an important category to enable private finance flows toward "transition activities" that may not qualify for green finance but are important steps toward decarbonization.

This includes financing technologies that offer incremental emissions reductions but aren't fully aligned with net-zero targets. Instruments like sustainability-linked loans and bonds can help trigger entity-wide transformations and reduce exposure to transition risks.

Several Indian companies have already raised financing through sustainability-linked instruments, including JSW Steel, which raised $1 billion through sustainability-linked bonds—becoming the world's first steel company to do so.

The EU's Carbon Border Adjustment Mechanism: A Game-Changer?

One external factor that could accelerate India's steel decarbonization is the EU's Carbon Border Adjustment Mechanism (CBAM). This policy puts a price on carbon emitted during the production of carbon-intensive goods entering the EU, encouraging cleaner industrial production in non-EU countries.

Exporters to the EU will face a border adjustment "tariff" based on the embedded emissions of their products. The tariff equals the difference between the carbon price in the EU and the price already paid in the country of origin.

Iron and steel are the most exposed sectors for India, with around 23.5% of the country's steel exports going to the EU. While this is relatively small compared to total steel production, it could still impact competitiveness.

Indian steel producers have options:

  • In the early stages of CBAM implementation, producers with low-emission intensity may maintain exports to Europe
  • Others can divert higher-emission steel to alternative markets
  • Over time, as climate policies spread globally, producers who decarbonize could capture higher margins in premium markets

The CBAM is expected to generate €1.5 billion annually for the EU by 2028. This raises questions about whether such policies represent genuine climate action or a form of green protectionism.

Either way, it's a signal that carbon-intensive production will face increasing economic penalties in global markets.

The Role of Development Finance Institutions: Catalytic Capital

Development finance institutions (DFIs) have a crucial role to play in providing both financial and non-financial assistance to stakeholders:

  • Advisory for policy formulation at the government level
  • Development of low-carbon pathways at the sectoral level
  • Transition planning at the corporate level
  • Technical assistance for project implementation
  • Direct financing and risk mitigation instruments

However, industrial decarbonization remains a nascent space for DFIs. Only the Climate Investment Funds have a dedicated program on industries, while a few others include heavy industries as a focus area.

In India, the Small Industries Development Bank of India (SIDBI) is the only DFI that assists industries on decarbonization, through the Partial Risk Sharing Facility and the recently launched Decarbonization Challenge Fund.

There's a clear need for DFIs to prioritize industrial decarbonization by implementing new programs dedicated to heavy industries and scaling up existing ones.

The Transition Finance Opportunity: Beyond Green

One area that particularly interests me is transition finance. Unlike green finance, which focuses on near-zero emissions technologies, transition finance supports activities that reduce emissions in hard-to-abate sectors but may not be fully aligned with Paris Agreement goals.

This is crucial for industries like steel, where the transition to zero-carbon production will be gradual and require intermediate steps.

However, there's currently a lack of global consensus on the definition and framework for transition finance. This has kept the market small and created ambiguity about the role of financial institutions.

To scale up transition finance flows in India, several measures are needed:

  • Country- and sector-level transition pathways linked to definite net-zero targets
  • A formal definition and taxonomy for transition finance
  • Robust monitoring and reporting standards
  • Integration of climate risk in financial risk assessment models

The development of transition finance could unlock significant capital for industrial decarbonization, particularly for technologies that offer incremental improvements rather than transformative change.

The Bottom Line

The decarbonization of India's iron and steel sector presents both an enormous challenge and a significant opportunity. While the current trajectory points toward increased emissions and carbon lock-in, there's still time to change course.

This will require concerted efforts from multiple stakeholders:

For Policymakers:

  • Implement comprehensive green steel policies that balance competitiveness, growth, and decarbonization
  • Create enabling conditions for low-carbon technologies through targeted incentives and regulations
  • Develop clear frameworks for transition finance to unlock private capital

For Industry:

  • Invest in R&D and pilot projects for emerging technologies
  • Develop transition plans with clear milestones and targets
  • Explore innovative business models that distribute risks appropriately

For Financial Institutions:

  • Develop tailored financial products for industrial decarbonization
  • Build internal capacity to assess and finance low-carbon technologies
  • Incorporate climate considerations into risk assessment frameworks

For Development Finance Institutions:

  • Increase allocation of risk capital and concessional finance to heavy industrial sectors
  • Provide technical assistance for project development and implementation
  • Support the creation of blended finance vehicles and risk mitigation instruments

The financing gap for industrial decarbonization is substantial, but not insurmountable. By combining targeted policies, innovative financing mechanisms, and strategic public-private partnerships, we can mobilize the capital needed to transform India's steel sector.

As I reflect, I realize that the decarbonization of "unsexy" sectors like steel may ultimately be more important than the more visible transitions in transportation and electricity. After all, you can't build wind turbines, electric vehicles, or modern buildings without steel.