Green steel: Who pays, and is there a return?

If demand were genuinely outpacing supply, a wholesale shift across the industry would follow with producers racing to decarbonize their operations. But this has not yet materialized.

As the steel sector stands at the center of the energy transition, understanding this imbalance becomes critical. What is holding buyers back? What signals do producers need? And ultimately, what conditions must be met to turn ambition into a scalable, investable reality?

As the market evolves, steel producers are being challenged to make capital-intensive decisions under uncertainty. 

The hard truth

“Green steel” is not one product, one route, or one market. True green steel is arguably more a concept than a material, with producers instead focusing on lower-carbon steel solutions such as:

• Gas/transition direct reduced iron (DRI)
• Hydrogen DRI (near-zero)
• Scrap-based electric arc furnace (EAF)
• Carbon-capture-storage-enabled routes 

These approaches all carry different risks, which vary by process and project. Electricity prices, hydrogen supply, carbon costs, raw materials, and certification requirements are all among the top risks impacting production.

Blast furnaces are likely to remain as a key technology in steel manufacture and could form part of the future production landscape for low-carbon steel. Tata Steel has recently entered into agreements to implement the world’s first EASyMelt technology from SMS Group — an electrically assisted syngas smelter — which aims to cut CO₂ emissions by more than 50% compared to traditional blast furnace operations.

Demand-side volatility is the next critical challenge.

Demand is starting to emerge in sectors with strong climate targets and pressure to reduce supply-chain emissions, but not all end users will reward low-carbon steel equally. A producer selling into automotive, high-specification industrial equipment, data centers or public infrastructure may have a clearer route to recovering a green premium than a producer selling mainly into commoditized and price-sensitive markets.

In the automotive sector, steel typically accounts for only around 2% of total vehicle cost, making higher input costs easier to absorb. But for construction, steel represents a larger share of overall costs, meaning any premium is more likely to depend on regulation, public procurement, green standards, investor pressure, or buyer demand. Steel producers pursuing green steel may consider prioritizing high-strength steel over rebar.

The economics of low-carbon steel vary by end market, and steel producers are challenged to decide where it will deliver the most value.

Demand for steel by sector

Early agreements show the direction of travel: Stegra has signed agreements with customers including Mercedes-Benz and Microsoft; SSAB and Volvo Cars have agreed to use SSAB Zero steel in serial production; and Volkswagen has signed an agreement with Salzgitter for low-CO2 steel from Salzgitter's decarbonization program.

Even where demand exists, new green steel projects must clear major hurdles: power availability, hydrogen supply, permitting, construction risk, ramp-up risk, and product qualification. Offtake agreements help, but they do not eliminate project risk.

 “The transition for steel producers is becoming more complex due to energy demands. The electrical requirement to make 1 ton of steel using green hydrogen is 2,500 kWh. If Europe’s steel output (126 million tons a year) all converted to hydrogen-based steel production, then the power required would be the equivalent of the entire United Kingdom’s power capacity,” Thomas Mallindine, Head of Energy Transition and Development, Willis Natural Resources.

Arguably, Scandinavia is currently one of the few regions with the infrastructure needed to produce green steel, although not without challenges. “Scandinavia has some of the best conditions in the world to lead the transition to low-carbon steel. With a largely fossil-free electricity system and deep industrial expertise, the region is uniquely positioned to drive this transformation. To fully realize that potential, however, we also need faster, more predictable permitting processes for the investments in power infrastructure and new technologies that are essential to the transition", says Thomas Hörnfeldt, Vice President Sustainability, SSAB.

The decarbonization imperative

Environmental, social and governance (ESG) obligations remain in place for the end users of steel, and green steel is a way buyers can meet regulatory requirements. But green steel remains relatively nascent and expensive in comparison to other potential decarbonization activities.

Decarbonization drives a technological shift in steel production, even in business as usual (BAU) scenarios and when hydrogen and CCS enter the technology mix. 

Projection: The steel mix from 2020 to 2055

• Blast furnace retirement/retrofit needs to be aggressive to keep to the carbon budget for the steel sector. This trend has been adjusted since 2021 to reflect reduced carbon budgets
• Commercialization of new technologies (DRI Melt, H2 DRI EAF) are now seen even in BAU due to a spate of commercial-scale announcements
• CCS remains speculative and commercial projects are being assessed for feasibility. But to meet transition targets, it is still required given lack of sufficient DRI-grade iron ore

“The issue is not only whether production routes can decarbonize, but which companies are positioned to recover the costs, access supportive policy and serve end markets that value lower-emission products”, Martin Perez Davila, Manager, Climate Transition Analytics at Willis.

For experienced steel producers, the strategic trade-off is especially challenging. Brownfield sites face high conversion costs while striving to remain profitable during the transition process. For new entrants, the opportunity is to design low-carbon production from the start, but they must still prove industrial reliability and financing credibility.

The economic question becomes who pays for green steel? Depending on policy design and market structure, the additional cost could sit with steel producers, be shared with governments through subsidies, be passed to customers through green premiums, or by cross border regulation such as CBAM. The answer is likely to vary by region, technology route and customer base. 

Making long-term decisions, today

Green steel is not a single investment decision. It is a sequence of decisions across technologies, assets, customers, regions and time horizons.

“For investors and board members, the challenge is therefore not simply whether low-carbon steel will grow. It is when to commit capital, where to commit it, how much flexibility to preserve, and which signals should trigger a change in strategy.” Muhammed Suleiman Anwar, Senior Director, Strategic Climate Disclosure, Climate Practice, Risk and Analytics, Willis.

Transition pathways are uncertain because models often underestimate real-world complexity, including:

• Consumer behavior
• Price elasticity
• Sectoral adoption

This creates uncertainty in:

• Demand forecasts
• Technology adoption speed
• Investment returns

A traditional investment case can still answer key questions – comparing returns across technology routes, assessing carbon price impacts or testing hurdle rates. But for capital-intensive transition decisions, this is only part of the answer. A single forecast can create a false sense of precision in a changing market and encourage binary decisions (“invest now” or “do nothing”), when choices can instead be staged, expanded, deferred or adapted as evidence improves.

A more flexible approach to long-term decision-making becomes valuable. The aim is not to predict the future perfectly, but to understand how different futures affect the business, identify decisions that are robust and recognize where flexibility itself has value. A steel producer may secure renewable power before committing to hydrogen, prioritize customer segments with strong willingness to pay, or invest in enabling infrastructure while preserving optionality. Offtake agreements, partnerships and policy support can also reduce downside risk before larger capital commitments.

This thinking aligns with real options theory, though it need not be a technical exercise. Management retains choices over time – to wait, stage, expand, switch or abandon investments as conditions evolve. The more uncertain and irreversible the investment, the more valuable these choices become. In green steel, the strongest strategies may not optimize for a single future, but remain resilient across several.

The same logic applies beyond transition risk. Steel producers face physical climate risks such as heat, water stress, flood, storm and supply-chain disruption. A decarbonization-only strategy may overlook the need for adaptation, resilience and insurance optimization. Long-term scenario analysis can help quantify these impacts across warming pathways, integrating them into financially grounded, options-based strategies for the future.

The practical advantage is matching decisions to uncertainty. Some actions such as improving data, partnerships and customer engagement can be taken early, but others may require staged investment with trigger points linked to market signals, such as green premium development, hydrogen costs, power availability, carbon regulation or customer offtake. Larger irreversible investments demand stronger evidence, while physical risks may require evolving adaption and risk transfer solutions that challenge the insurance markets.

Sophisticated platforms, such as WTW’s Climate Transition Analytics, supports this by translating transition and physical scenarios into financial impacts at company, sector and asset level. The approach combines sector-specific transition pathways with analysis of business model exposure, market positioning and financial sensitivity. It enables comparison of risks on a decision useful basis, helping clarify where to deploy capital, preserve flexibility and monitor signals.

Inputs include:

• Transition risks and opportunities such as revenue, commodity prices and wider supply/demand dynamics
• Physical risks and opportunities such as physical damage, business interruption and operational efficiencies 
• Climate scenarios are used as alternative economic pathways and risk is measured by the extent of deviation from the business-as-usual baseline.

Outputs after analysis help to build:

• Strategic insights which better inform where to invest/divest and enable defensible portfolio decisions
• Asset resilience and credibility with stakeholders to de-risk project execution and reduce cost overruns
• Clear disclosures and regulatory compliance

This is increasingly important for investors, who want to see how climate strategy is embedded in capital allocation. By financially quantifying risk, steel producers can demonstrate the value of their strategy in a form useful for valuation and portfolio decisions. This is reflected in WTW’s Climate Transition Index, which has been used to quantify transition risks across multiple scenarios for thousands of global equities, including hundreds in the steel, metals and mining sector, with these insights materially affecting company weightings in WTW’s investment indices.

The winners in green steel will not be those who predict the future perfectly, but those who understand their options, build strategies that can withstand uncertainty, and know when to act as the market moves.

To find out how our team of specialist risk analysis and brokers can help you design a robust risk strategy that delivers long-term value, contact our team.