Enabling investment in clean primary steel

REPORT

The case for subsidy-and-recharge policies

05 October, 2026 | Industrial Sustainability

João Abbud, Luisa Bianchet, Hugo Bolognesi, Thibault Deletombe, Sabarish Elango, Maude Gibbins, Simone Klein, Antonia Kurz, Lin Ziyue, Hemant Mallya, Joe Morrisroe, Prof. Karsten Neuhoff, Stefania Relva, Simon Sharpe, and Prof. Wang Pu

Suggested Citation: Abbud, João, Luisa Bianchet, Hugo Bolognesi, Thibault Deletombe, Sabarish Elango, Maude Gibbins, Simone Klein, Antonia Kurz, Lin Ziyue, Hemant Mallya, Joe Morrisroe, Prof. Karsten Neuhoff, Stefania Relva, Simon Sharpe, and Prof. Wang Pu. 2026. Enabling Investment in Clean Primary Steel: The Case for Subsidy-and-Recharge Policies. A report of the Breakthrough Agenda Policy Network.

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Overview

Producing primary steel with near-zero emissions is technologically possible, but it costs around 25–50 per cent more than conventional coal-based production in India, Brazil, China, the European Union (EU), and the United Kingdom (UK). This cost gap makes it too risky for companies to invest in clean plants without policy support. The challenge is acute for India, the world’s second-largest steel producer, with 152 million tonnes (Mt) of crude steel produced in 2024–25. The National Steel Policy 2017 targets capacity of 300 million tonnes per annum (Mtpa) by 2030, and much of the planned addition is coal-based. No near-zero-emission primary steel plant operates in India today, so investment choices made in the next few years could lock in high-emission capacity for two to three decades.

This report of the Breakthrough Agenda Policy Network (BAPN) examines a ‘subsidy-and-recharge’ approach: targeted, long-term subsidies for near-zero-emission primary steel, funded by a small ‘recharge’ on steel. The policy is designed to be revenue-neutral for governments. Chapters on China, India, the EU, Brazil, and the UK adapt the approach to each country’s industry, resources, and institutions. Carbon pricing remains useful, but on its own it is unlikely to enable these investments. In India, the Carbon Credit Trading Scheme (CCTS) sets emission-intensity targets without auctioned allowances, wherein effective carbon prices above USD 50 per tonne of carbon dioxide (CO₂) would be needed to make near-zero-emission steel viable, a level that would strain industrial competitiveness.

The India chapter, authored by CEEW’s Hemant Mallya and Sabarish Elango, proposes two variants of the subsidy and recharge mechanism. Both apply a small charge on the verified emission intensity of steel plants obligated under the CCTS, collected on sales and paid into a dedicated clean steel fund. In the first variant, the fund supports two streams: a sector-wide subsidy that rewards emission reductions and compliance with CCTS targets, and reverse auctions that support first-of-a-kind to nth-of-a-kind near-zero-emission plants, covering their extra cost so that their steel can sell at the price of conventional steel. The second variant replaces the first stream with a green public procurement programme based on contracts for difference.

The recharge would be small: about USD 10.5 per tonne of CO₂ (around 5 per cent of the cost of blast furnace–basic oxygen furnace steel) to support near-zero-emission steel equal to 10 per cent of India’s output at today’s green hydrogen costs, and as low as USD 1 per tonne of CO₂ by 2035 if green hydrogen costs fall to USD 2 per kilogram. Passed on to buyers, it would add less than 0.5 per cent to the cost of products and projects such as cars, refrigerators, apartments, and highways. Unlike the flat per-tonne recharges proposed for other countries, India’s charge would not apply to imports, leaving domestic producers with a small cost disadvantage. The chapter also identifies risks that need attention, particularly the governance of the fund, the quality of emissions data, and the legislative time needed for a new Act.

Key highlights

In India, hydrogen-based direct reduced iron–electric arc furnace (H2-DRI-EAF) steel costs about USD 127 per tonne of crude steel (tCS) more than blast furnace–basic oxygen furnace (BF-BOF) steel at a green hydrogen price of USD 3.7/kg. The gap could narrow to about USD 10/tCS if green hydrogen falls to USD 2/kg.
Carbon credit trading alone is unlikely to close the current cost gap. The targets under the CCTS amount to reductions of 5.6 per cent by 2026–27 from the 2023–24 baseline, which mainly incentivises efficiency gains within coal-based routes.
We propose a recharge on the verified emission intensity of the 255 obligated steel entities under the CCTS. Revenue would be paid into a dedicated, non-lapsable fund governed by an independent statutory board and created through a standalone Act, following the model of the Sugar Cess Act, 1982. In the first variant, the fund supports two streams:
- Stream 1 is a sector-wide performance subsidy paid in the year after verified CCTS compliance. Cleaner plants receive more per tonne of CO₂ reduced, and carbon-intensive plants receive less but remain eligible, so the recharge is not a one-way levy.
- Stream 2 uses reverse auctions to support first-of-a-kind to nth-of-a-kind clean steel plants (technology-agnostic). It covers the green premium via operating cost subsidies to reach cost parity with BF-BOF steel for a fixed period.
- In the second variant, Stream 1 is replaced by a contracts-for-difference programme in which government agencies buy certified green steel and the fund pays the gap between a strike price and the BF-BOF reference price. Such a programme will support demand-certainty for clean steel and could be aligned with India’s notified Green Steel Taxonomy.
The recharge would be about USD 10.5/tCO₂ (USD 25/tCS, or 5 per cent of BF-BOF steel cost) to support near-zero-emission steel equal to 10 per cent of India’s output at today’s green hydrogen prices. A flat rate of USD
2/tCO₂ (about 1 per cent of steel cost) would still support around 3 million tonnes of clean steel a year, and the rate could fall to USD 1/tCO₂ if green hydrogen prices drop to USD 2/kg. At this price, Stream 2 could support over 30 Mtpa of near-zero-emission steel.
The cost to buyers would be small. At the 10 per cent stage, the recharge would raise the price of a compact car by about 0.2 per cent, a refrigerator by 0.3 per cent, a residential apartment by 0.4 per cent, and a four-lane highway by 0.3 per cent. Doubling or tripling these estimates to allow for supply-chain margins would still keep the increase below 1.5 per cent.
India’s recharge would not apply to imports, because a flat levy on imports would not be compatible with World Trade Organization rules for an emissions-based charge. Domestic producers would therefore face a small cost disadvantage of about 1 per cent of production costs at USD 2/tCO₂, partly offset by Stream 1 for CCTS-compliant plants. A border adjustment could address this in principle, but it is unlikely to be cost-effective at current recharge levels.
The mechanism is self-financing, with no net fiscal cost to government beyond administration. It is designed to be transitional and could be wound down over two to three years once green hydrogen costs fall to about USD 1.9/kg.
Key uncertainties include the split of funds between the two streams, the quality of CCTS emissions data, fund governance (less than a quarter of India’s Clean Energy Cess of 2010–17 reached its intended purpose), the room to change import duties, and the legislative priority needed to pass a standalone Act to collect a recharge or to revise the CCTS mechanism such that it generates recharge revenue for the government.

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Hemant Mallya

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“There is an urgent need to explore mechanisms to raise capital for industrial decarbonisation efforts. A subsidy-and-recharge mechanism could unlock substantial clean steel output for India at a minuscule cost penalty and help establish demand for clean steel both domestically and internationally.”

FAQs

How can India’s Carbon Credit Trading Scheme (CCTS) make green steel viable?

The 2026 report of the Breakthrough Agenda Policy Network finds that India's Carbon Credit Trading Scheme (CCTS) alone may be insufficient to catalyse new near-term investments in green steel production. The report recommends a parallel mechanism that charges a small fee on all steel consumption or emissions that can be utilised to bridge the green premium on clean steel production. Such a mechanism would minimise the risk of first-movers in establishing clean steel production capacity.
Why is carbon pricing alone not enough for India’s steel sector?

Carbon pricing can encourage smaller emission reductions, but it is unlikely to close the cost gap for near-zero-emission steel on its own. India’s Carbon Credit Trading Scheme (CCTS) is built around emission-intensity targets with no auctioned allowances. The report estimates that effective carbon prices above USD 50 per tonne of carbon dioxide (CO₂) would be needed to incentivise near-zero-emission steel, and that a price at this level would harm industrial competitiveness. The proposed mechanism therefore complements the CCTS rather than replacing it.
What is a subsidy-and-recharge policy?

A subsidy-and-recharge policy has two parts. First, governments give long-term subsidies, ideally awarded through auctions, to plants that produce near-zero-emission primary steel. Second, the total cost of these subsidies is recovered each year through a ‘recharge’, a levy spread across the steel sector, which makes the policy revenue-neutral for governments. In most of the countries studied, the recharge is a flat rate per tonne on all domestic and imported steel and is waived on exports. India’s version differs, as explained below.
How would the subsidy-and-recharge mechanism work in India?

Each steel plant obligated under the CCTS would pay a recharge equal to a levy rate multiplied by its emission intensity and the steel it sells, so more carbon-intensive plants pay more. The revenue goes into a dedicated fund with two streams. Stream 1 is a performance-based subsidy that rewards emission reductions and compliance with CCTS targets, so every obligated plant receives some return. Stream 2 uses reverse auctions to support plants that use green hydrogen or carbon capture and storage, covering their extra cost so that their steel matches the price of conventional steel for a fixed period. An alternative variant replaces Stream 1 with a green public procurement programme.
How would the policy affect prices of products and infrastructure in India?

At the 10 per cent stage, the estimated price increase is about 0.2 per cent for a compact car, 0.3 per cent for a 250-litre refrigerator, 0.4 per cent for a 1,000 sq ft residential apartment, and 0.3 per cent for a four-lane highway. At a flat recharge of USD 2 per tonne of CO₂, the increases fall to between 0.04 and 0.08 per cent. These estimates assume the recharge is passed on in full. The report notes that supply-chain margins could raise them, but finds that even a doubling or tripling would keep the increase below 1.5 per cent.
How would the policy affect the competitiveness of Indian steelmakers?

The recharge adds between USD 2 and USD 25 per tonne to steel costs, or 0.4 to 5.1 per cent of the cost of conventional steel, depending on the green premium and average emission intensity. Stream 1 returns part of this to plants that comply with CCTS targets. Because a flat import levy on an emissions-based charge would not be compatible with World Trade Organization rules, domestic producers face a small structural disadvantage, roughly 1 per cent of production costs at USD 2 per tonne of CO₂. Steel product prices changed by about 5 per cent a year on average during 2021–24. A border tax calibrated to the recharge is possible in principle but is unlikely to be cost-effective at current rates.
What is clean primary steel, and why does India need to invest now?

In the report, clean primary steel is made from iron ore with near-zero emissions, at least 90 per cent below a typical blast furnace–basic oxygen furnace (BF-BOF) plant. Primary steel accounts for around 85–90 per cent of the sector’s emissions worldwide. India’s steel sector emitted about 350 million tonnes of CO₂ equivalent in 2023–24, at an average of 2.40 tonnes of CO₂ per tonne of crude steel. With 26 Mtpa of blast furnace capacity under construction and about 166 Mtpa of capacity announced, the report warns of lock-in for two to three decades unless policy action diversifies the technology mix.