Steelmaker ArcelorMittal is likely to benefit from a windfall of free European Union carbon allowances potentially worth hundreds of millions of dollars while it installs new technologies to decarbonize its Dunkirk steel plant with the aid of French government subsidies, an analysis by OPIS shows.

The windfall will come on top of a surplus in free European Union carbon permits allocated by the French government to the installation operator over 2020 to 2022 that were worth approximately €410 million ($446.13 million) at average benchmark prices.

Luxembourg-based ArcelorMittal, the world's second-largest steelmaker, will receive an €850 million grant from the French government as part of a €1.7 billion investment to cut emissions at its steel production facilities in Dunkirk and at Fos-sur-Mer in southern France.

The company's Dunkirk facility, which has two blast furnaces, will see the construction of a 2.5 million metric ton direct reduced iron furnace and two electric arc furnaces, slated to be operational by 2027. An electric furnace will also be installed at ArcelorMittal's Fos-sur-Mer plant.

These investments are expected to cut ArcelorMittal's total annual carbon emissions in France by around 7.8 million tons of carbon by 2030, according to the steelmaker, representing a 40% drop on 2018 levels. The operator anticipates that the Dunkirk plant will produce 4 million metric tons of low-carbon liquid steel per year.

ArcelorMittal said in a statement that the new installations at both Dunkirk and Fos-sur-Mer are expected to be operational in 2027 and that the two blast furnaces at its Dunkirk site will be gradually phased out by 2030. The state aid will be doled out in four payments between 2023 and 2026, the EU Commission said in July last year.

Representatives from ArcelorMittal and the French government did not respond to OPIS's requests for comment.

 

EUAs Surplus During Electric Arc Furnace Installation

In addition to the €850 million grant from the French government, the steelmaker will benefit from a surplus of EU carbon allowances (EUAs) as it will still receive free EUAs while the upgrades are made in the coming years.

Under the EU Emissions Trading System, many industrial operators must buy and then surrender an EU carbon allowance (EUA) for every metric ton of carbon dioxide they emit. However, the EU grants hard-to-abate sectors like steel manufacturing an annual allocation of free EUAs to stop operators from being undercut by competitors in countries that do not face equivalent levies on their emissions.

Operators can convert EUAs into cash if they choose to sell any surplus allowances on the Intercontinental Exchange (ICE) secondary market, incentivizing recipients of free allowances to cut their carbon emissions in low-cost ways. EUAs reached an all-time high early last year, breaching the €100/mt threshold, but have since fallen to under €64/mt in the wake of a sharp decline in emissions across the EU in 2023.

According to EU Commission figures, the Dunkirk installation has emitted a total of 19,536,531 metric tons of carbon over 2020-2022. During the same period, the French government issued ArcelorMittal 27,002,671 free EUAs, leaving the company with a surplus of 7,466,140 EUAs over those three years.

Based on the average price of carbon for each of those respective years, ArcelorMittal was issued a surplus of free allowances worth €410.2 million in EUAs.

 
ArcelorMittal Dunkirk Steel Plant Key Data 
Year            Emissions       Free permits     Difference 
2020            5,851,655       8,291,093       +2,439,438 
2021            7,274,573       9,379,705       +2,105,132 
2022            6,410,303       9,331,873       +2,921,570 
Source: EU Commission 

The verified data showing how much carbon EU installations subject to the EU Emissions Trading System emitted in 2023 will be uploaded onto the EU Commission's website this spring. The website shows that the Dunkirk installation operator had a provisional allocation last year of 9,331,873 free EUAs worth €797.78 million, using the 2023 average price for EU carbon permits.

The activity level change (ALC) adjustment will reduce the number of free EUAs that the Dunkirk plant receives because its carbon emissions will fall while units are offline and the new technology is installed. If emissions in a calendar year drop more than 15% compared to the average emissions of the previous two years, allowance allocations are revised down through the ALC and some free permits are returned. Nonetheless, the operator will receive a substantial surplus of EUAs during the transition.

 

Looming Port Talbot UK Carbon Allowances Surplus

Tata Steel's Port Talbot is another steel plant that is switching over to an electric arc furnace and will likely receive a substantial surplus of carbon allowances during the transition. The U.K. also employs a similar system to the EU ETS and grants free allowances to hard-to-abate sectors.

The installation is the United Kingdom's largest carbon dioxide emitting plant and is expected to receive a £500 million government subsidy as part of a combined £1.25 billion investment in the plant's decarbonization.

A spokesperson for the India-based company told OPIS last year that the new technology would reduce annual emissions by 85%, which, based on the plant's 2022 emissions data, would fall to as low as 850,000 metric tons of carbon per annum.

British government data shows that the Port Talbot site emitted 6,643,839 mt of carbon dioxide in 2021 and 5,673,654 mt in 2022. Since 2021, the government has issued Tata 5,768,835 free UKAs every year.

Port Talbot is also expecting its emissions to fall during its transition. A Tata spokesperson would not be drawn last year when asked by OPIS whether any units will be operational while the electric arc furnace is installed.

 

This content was created by Oil Price Information Service, which is operated by Dow Jones & Co. OPIS is run independently from Dow Jones Newswires and The Wall Street Journal.

 

--Reporting by Humberto J. Rocha, hrocha@opisnet.com; Editing by Anthony Lane, alane@opisnet.com

(END) Dow Jones Newswires

January 19, 2024 13:54 ET (18:54 GMT)

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