Energy Efficiency and Industrial Output: The Case of the Iron and Steel Industry

The iron and steel industry is one of the most carbon emitting and energy consuming sectors in Europe. At the same time this sector is of high economic importance for the European Union. Therefore, while public environmental and energy policies target this sector, there is political concern that it suffers too much from these policy measures. Various actors fear a policy-induced decline in steel production, and possibly an international reallocation of production plants. This study analyzes the role that input prices and public policies may play in attaining an environmentally more sustainable steel production and how this - in turn - affect total steel output. As we find out for examples of major European steel producing countries, a kind of rebound effect of energy-efficiency improvements in steel production on total steel output may arise.

In the recent years nearly 70% of the crude steel supplied worldwide has been produced by using the blast furnace/basic oxygen (BF/BOF) production route. About 29% of the crude steel is produced by using the Electric Arc Furnace (EAF) production route. Instead of iron ore and coke, scrap is used as main feedstock for this production route. In the EU, currently only these two production routes are in use to a significant extent. Therefore our analysis is focused on the BF-BOF and EAF production routes. Regarding crude steel production, specific energy demand and CO2 emissions vary significantly depending on which production route is selected. Taking into account the high energy demand which is needed for feedstock preparation, the energy demand of the BOF route is significantly higher than the one of the EAF route.

As we found out and as economic intuition suggests, higher energy prices tend to raise energy efficiency (or tend to reduce specific energy consumption) in the steel sector. This tie between energy-price/-efficiency is due to economic agents’ reaction to the price signal: they raise their efforts to diminish the adverse price-effect on their profits by lowering the use of the now more costly input. However, there are different forms of energy inputs (e.g. electricity, coking coal, gas) in the steel sector and divergent paths (e.g. change of production routes or improvement of efficiency within one route) to attain lower specific energy consumption. The consequences of individual responses to energy price changes are far from being obvious. If electricity prices rise, for example, then a natural option to escape a major adverse impact on profits would be to substitute EAF by BOF steel making. However, as the BOF route is associated with higher specific energy consumption, this tends to worsen the steel sector’s performance regarding energy efficiency and to contradict our result concerning the energy-price/-efficiency tie. Yet, as the examples of Italy and Spain show, this is not necessarily the case as steel producers might react to an increase in electricity prices by reducing electricity consumption within the EAF route. Because lower specific energy consumption is related with a higher total steel production, energy price increases might cause a kind of rebound-effect bringing about an increase in total production as a consequence of induced energy efficiency improvements. Altogether the negative relation between input prices and total steel production is not very strong. In the short-run, wages of employees in the steel sector tend to have the biggest influence on total steel production. In the long-run, GDP and investment climate exert the biggest influence. These findings may help to guide public policies aiming (like the 2013 action plan for the European steel industry) at a more environmentally sustainable steel industry and/or stimulating production in this industry.

Flues, Florens, Dirk Rübbelke and Stefan Vögele (2013), Energy Efficiency and Industrial Output: The Case of the Iron and Steel Industry, ZEW Discussion Paper No. 13-101, Mannheim.