In its legal assessment, the Montan-Stiftung-Saar trust proposes systematic and legally secure ways to control the costs of transforming the steel industry to produce green steel. The report recommends the use of contracts for difference (CFDs) to provide the long-demanded binding framework for investment in production infrastructure.

“The transformation of the steel industry and the production of green steel are fundamental to the success of the energy and mobility transformation. To succeed with the ‘green transformation’ we are seeking, competition and climate policy must work together and in harmony,” said Reinhard Störmer, Chairman of the Board of Trustees of the Montan-Stiftung trust. “Our report identifies the specific framework for structuring the financing of the transformation within the state aid rules at the EU and federal level. Now legislators must promptly initiate the next steps for implementation,” Störmer added.

The report is a kind of guide for politicians. It has therefore been sent to numerous decision-makers, including the European Commission (Commission President Ursula von der Leyen), the European Parliament, and several Federal Ministers in Germany. The report identifies ways to provide legally secure support to the German and the European steel industry.

What is the current status?

The legal assessment was prompted by the financial challenges facing the steel industry in Europe as a result of the EU’s European Green Deal and its climate targets. Over the past 15 years, Dillinger and Saarstahl have invested EUR 700 million in projects aimed purely at improving environmental and climate protection. The companies expressly commit themselves to the objectives of the Paris Climate Agreement, but they are competing worldwide with non-EU manufacturers that do not have to bear these investments and are not subject to comparable constraints.

This is in stark contrast with the situation for German and European steel producers, which are largely left on their own and can depend on only minimal subsidies and quotas. In addition, companies must first invest large sums in solutions in order to be certified as eligible. This costs valuable time and inhibits needed investments.

Why produce a report?

The steel industry can make a significant contribution to reducing greenhouse emissions and to achieving the EU’s climate targets. This reduction is not reflected in an immediate competitive advantage, however, such as in the form of higher quality products or a feasible price premium for “green” steel. The steel industry is therefore dependent upon state support in the form of subsidies in order to realize its potential to reduce carbon emissions, but the necessary state support is currently blocked by EU state aid law. The current Guidelines on State Aid for Environmental Protection and Energy 2014-2020 (UEBLL) do not provide adequate incentives for the required transformation of the industry.

This is why Montan-Stiftung-Saar commissioned a legal assessment indicating ways the German and European steel industry can be provided with key support in the environmental area, within the context of amending the aid guidelines. This will enable the energy-intensive and foreign trade-dependent steel industry to benefit, in compliance with European law, from public funds and financing options for the conversion of the production infrastructure.

What proposals does the report offer?

The current report recommends that the UEBLL guidelines be extended to include a chapter explicitly defining aid for conversion to green steel production. Contracts for difference are of particular importance in this context. They could constitute a compensation mechanism whereby companies commit to invest in low-emission inputs such as green hydrogen and a new production infrastructure for low-carbon or carbonneutral steel in return for support.

As part of a package of measures, the proposed legal framework should cover the following additional elements:

• Investment aid as individual aid for upgrading production infrastructure, e.g. electric arc furnaces.
• Maintaining the current cost-free allocation of a portion of the emission allowances as well as full compensation of the electricity price.
• An additional supporting measure to prevent carbon leakage by compensating for marginal costs.

With the proposed amendments, the German government’s Steel Action Plan could be implemented in a manner that is compatible with the state aid rules. The highlighted goals of the action plan – equal opportunity on the global market, avoiding carbon leakage, and joint support of the transformation of the steel sector – could be achieved in a targeted and legally secure way with the help of the report presented by MontanStiftung-Saar.