Decarbonizing Steel (Part 1: Japan) Remaining Challenges for Mass Balance Products

in Japanese

1. Introduction

Primary steelmaking, the process of producing steel by reducing iron ore in blast furnaces, remains the dominant method of steel production and is a major source of CO₂ emissions. Rapid decarbonization of this process is therefore essential. Expanding recycling-based steelmaking using scrap is an important strategy, but global scrap supplies are limited. As a result, maintaining and decarbonizing primary steel production, particularly in blast furnaces, is indispensable¹.

Achieving decarbonization requires not only solving technological challenges but also supporting the supply side through investments and initial operations, given the scale of equipment transformation involved. It is equally crucial to ensure that demand for the produced steel steadily grows. Recognizing and supporting “lower-carbon steel” produced during the decarbonization transition, and promoting its demand, is of significant importance.

In a fully decarbonized era, the ultimate form of steel products is expected to be “near-zero emission” steel, where direct emissions are not entirely eliminated but are very low². However, at present, commercially scaled production of steel products at the near-zero emission level does not exist³. During this transitional phase, Japan has commercialized steel products whose virtual emissions are reduced through the use of certificates, and the government has begun supporting their production and supply. Discussions on this topic have continued since 2023, and, following revisions to guidelines by the Japan Iron and Steel Federation (JISF), the matter is now being debated internationally within initiatives such as the IDDI (Industrial Decarbonization Initiative)⁴, the GHG Protocol⁵, SBTi (Science-Based Targets initiative)⁶, and the World Steel Association.

The Renewable Energy Institute has repeatedly outlined the ideal form of steel products in the decarbonization era, as well as challenges and solutions related to mass balance steel and Japan’s Green Purchasing Act⁷. In this two-part column, we will present the current status of efforts toward low-carbon steel products in Japan and globally, highlighting what is critical to promoting production that genuinely contributes to decarbonization, expanding its demand, and clarifying remaining and emerging challenges.

2. Deployment of Mass Balance Steel Products in Japan

The Japan Iron and Steel Federation (JISF) has established guidelines for utilizing “green steel produced under the mass balance approach” (hereafter, JISF Mass Balance Steel) as a substitute for steel products of the decarbonization era that are not yet produced at scale⁸. The Green Steel Guidelines define the framework: the CO₂ reduction achieved through a steelmaker’s internal measures is pooled, certified, and allocated to selected steel products (Figure 1). This scheme allows for the carbon footprint (CFP)⁹ of any product to be arbitrarily reduced, effectively designating it as zero-emission or low-CO₂ steel. All three major Japanese blast furnace steelmakers sell products under these guidelines. Key features of this approach include:

• Within the company boundary¹⁰, products do not need to originate from the same production process as the CO₂ reduction project; in other words, any product can be designated as low-carbon steel.
• By combining the product’s calculated CFP with certified reductions verified by a third party, low-carbon steel with arbitrary emission levels can be created.
• Effects from multiple reduction projects can be pooled to maximize utilization.

Each steelmaker has branded their products accordingly: Nippon Steel’s NS Carbolex®, JFE Steel’s JGreeneX®, and Kobe Steel’s Kobenable®.

Meanwhile, electric arc furnace (EAF) steelmakers, which focus on recycling steel, have also pursued measures to decarbonize their power sources, producing and selling products with even lower emission intensities: Tokyo Steel’s Hobo Zero, Chubu Steel Plate’s Sumiles, and Yamato Steel’s +Green.

Figure 1. Concept of JISF Mass Balance Steel

The Japanese government, led by the Ministry of Economy, Trade and Industry (METI), has defined “green steel for GX promotion” and is implementing both public and private support measures. Green steel is defined as “steel that, due to additional direct emission reduction actions at the company level, achieves substantial environmental benefits and, when accounting for the associated costs of these actions, commands a higher price than conventional steel”¹¹. Support measures aim to both assist production of these steels and stimulate demand.

The METI-led Green Steel for GX Promotion Study Group (summary, January 2025)¹² noted that additional examination is needed before JISF Mass Balance Steel can be formally recognized as GX-promoting green steel. Issues include whether certificates issued by companies, which allow arbitrary allocation of CO₂ reductions in line with sales policies, align with the CFP system and operational rules, as well as harmonization with international standards. These topics have since moved into international discussions.

Prior to this summary, the government revised the Green Purchasing Act in January 2025 to include JISF Mass Balance Steel as a priority procurement item. In the same month, the Cabinet approved a measure under the Clean Energy Vehicle Subsidy to increase subsidies by up to ¥50,000 for vehicles using steel produced in innovative EAFs, applying from FY2025, marking the beginning of demand-side support measures.

Table 1. Japanese Government Support Measures for GX Green Steel – Demand-side support:

Table 2. Japanese Government Support Measures for GX Green Steel –Supply-side support:

3. Challenges of JISF Mass Balance Steel

There are three major concerns when promoting JISF Mass Balance Steel as a low-carbon product:

1. Although it is a transitional measure until real near-zero emission steel products enter the market, could it instead impede the production and adoption of real low-carbon steel, potentially delaying the decarbonization transition?
2. Are the reduction projects applied to these products appropriate, and do they genuinely advance decarbonization and net-zero goals in the steel industry?
3. Is the scheme for calculating and allocating reductions reliable? Specifically, are the rules for quantifying project reductions, pooling them, certifying, assigning, and managing them appropriate and consistently enforced?

3.1   Challenges as a Transitional Measure

A primary concern regarding JISF Mass Balance Steel as a transitional measure is the timing of its adoption. Recent presentations by the Japan Iron and Steel Federation describe its use “during the transition period until process conversion is complete,” but no clear end date is defined¹³.

The reductions calculated for mass balance steel, such as when converting from blast furnaces to electric arc furnaces, reflect the emissions difference before and after the transition. While initially reasonable, it is not appropriate to continue counting these reductions against the prior blast furnace baseline for many years or to pool and bank them over an extended period. Similarly, the system should not persist into a period when carbon pricing is already widely established.

Globally, companies like Stegra in Sweden and Salzgitter AG in Germany are planning to begin commercial-scale hydrogen-based steel production within the next few years. Despite hydrogen supply challenges, these developments indicate international momentum toward real near-zero emission steel. The domestic adoption of mass balance products should not delay the production and deployment of real green steel in Japan.

There is ongoing discussion about integrating reductions directly into the carbon footprint calculation instead of simply adding reduction certificates. In such cases, careful attention must be paid to differentiating these virtual reductions from actual low-emission steel.

Considering these factors, JISF Mass Balance Steel should conclude its transitional role promptly. Even with large-scale electric arc furnaces replacing blast furnaces by 2028, the transitional relevance of mass balance steel should, at most, extend to around 2035.

Given this roughly 10-year “shelf life,” exit strategies become critical. Even in a decarbonized era, steel’s ultimate form is near-zero emission, making it difficult to achieve over 90% reductions in the transitional period. Therefore, creating virtually zero-emission steel via mass balance alone may not be appropriate; limitations on reductions within the near-zero emission range may be necessary.

Additionally, it is essential to introduce evaluation and labeling systems that allow end-users to confidently select lower-carbon steel. This will be discussed in the follow-up column.

3.2   Appropriateness of Reduction Projects

Reduction projects must meet certain criteria. According to METI’s definition of “Green Steel for GX Promotion,” projects should:

1. Be within the company boundary
2. Exhibit additionality
3. Involve direct emission reductions
4. Achieve substantial reductions
5. Be associated with significant costs

The JISF guidelines list similar requirements:

1. Conducted within the organization (with some exceptions)
2. Projects must be additional, not simply changes in production volume or product range
3. Planned and executed responsibly within the company’s domestic structure

The guidelines also reference tests for additionality provided by the GHGP “Project Accounting Standard”¹⁴, which, if properly applied, cover METI’s requirements for substantial reductions and costs.

Beyond these criteria, the Renewable Energy Institute has emphasized that reduction projects must align with the company’s decarbonization strategy and ensure progress toward net-zero emissions¹⁵. Projects not directly contributing to decarbonization should be ineligible for substantial policy support or private procurement incentives.

Companies have since detailed their transition plans, showing expected outcomes at least through 2030 (Table 3). The reductions allocated to mass balance steel products from the three major blast furnace companies correspond to these projects, which can be broadly classified as follows:

Table 3. Reduction Projects Allocated to Mass Balance Steel (by Blast Furnace Companies)

1. Expanded use of scrap in basic oxygen furnaces (BOF):
Some projects for Nippon Steel and JFE Steel assign reductions from expanded scrap use in BOFs. Scrap already completes the reduction process during initial production; recycling involves remelting, impurity removal, and reshaping, emitting roughly one-fifth of the CO₂ compared to primary steelmaking. Using scrap as a feedstock significantly reduces emissions from iron ore reduction.

However, as this does not convert existing blast/BOF processes, the additionality of such projects is questionable. It must be demonstrated that the technology or required equipment investments represent a real innovation rather than routine operation. Expanding scrap use, especially municipal scrap, remains a key decarbonization challenge, requiring improved recovery, quality, recycling processes, and policy coordination across stakeholders, including local governments and new actors in the circular economy.

2. Use of direct reduced iron (DRI) in BF-BOF:
In nature, iron exists primarily as iron oxide in iron ore. In primary steelmaking, the process of extracting oxygen from the ore (i.e., reducing it) can be achieved using different reducing agents. Compared with the blast furnace method, which uses coal (carbon) as the reductant, direct reduction using natural gas (which contains hydrogen and other reducing components) emits roughly half as much CO₂. Although the blast furnace method currently dominates globally due to its cost efficiency and suitability for large-scale production, direct reduction using natural gas is employed mainly in countries that produce natural gas. DRI made from natural gas has already undergone the reduction process, and therefore, like scrap iron, it can be used as a major feedstock in steelmaking.

Projects have been launched to import hot briquetted iron (HBI), a compressed form of DRI suitable for transportation, and use it as a partial substitute for blast furnace feedstock. This replacement proportionally reduces coal consumption and consequently lowers CO₂ emissions. Kobe Steel, for example, has already implemented a project to inject DRI into its blast furnaces, achieving a 25% reduction in CO₂ emissions compared with conventional blast furnace operations¹⁶. The company markets a line of green steel products under the brand KOBENABLE®, derived from those emission reductions. Meanwhile, JFE Steel is developing equipment that would enable the continuous charging of DRI into blast furnaces.

Since these initiatives do not involve a fundamental conversion of the existing blast furnace process, they face similar challenges to those encountered when charging scrap into blast furnaces. Nevertheless, if viewed as transitional measures, securing a reliable supply of DRI can be regarded as a key step toward the decarbonization of primary steelmaking. In recent years, DRI technologies allow the hydrogen usage ratio to be flexibly adjusted anywhere from 0% (natural gas only) up to 100% (pure hydrogen)¹⁷. These systems are designed to enable a smooth transition toward net-zero steel production. Consequently, whether such technologies are included in future steelmaking strategies has become an important condition for evaluating the sustainability of these projects.

3. Blast furnace conversion projects (“Innovative EAF”) and the Importance of securing DRI
Among current emission reduction initiatives, the most important are the projects to convert blast furnaces to large-scale “innovative electric arc furnaces (EAFs)”. Unlike conventional EAFs, these innovative furnaces are said to be capable of producing high-grade steel products, such as non-oriented electrical steel sheets, and are therefore positioned as blast furnace substitutes within the decarbonization strategies of major steelmakers.

At Nippon Steel’s Setouchi Works (Hirohata Area), an electric arc furnace has been introduced to replace the former electric smelting furnace and has been operating since 2022. Looking ahead, Nippon Steel plans to introduce EAFs at its Yahata (Fukuoka Prefecture), Shunan (Yamaguchi Prefecture), and Hirohata (Hyōgo Prefecture) sites. JFE Steel has also announced plans to install an EAF at its Kurashiki (Okayama Prefecture) works (see Table 3).

When converting from blast furnaces to EAFs, maintaining production of high-quality steel products equivalent to those from blast furnaces requires technological innovation. For this reason, the Japanese government has positioned the introduction of “innovative EAFs” as a key measure and has decided to subsidize one-third of the initial investment while also making such projects eligible for tax incentives.

For the projects undertaken by Nippon Steel and JFE Steel, the government has already committed over 300 billion yen in financial support¹⁸. Whether these projects are appropriate is, to a significant extent, determined by the conditions and criteria attached to these subsidies—in other words, whether they truly represent a “conversion from a blast furnace/basic oxygen furnace process to a high-grade steel production process using an electric arc furnace.”

The key subsidy requirements are as follows:

• CO₂ emissions must be reduced by at least 50% compared with the pre-conversion process.
• The project must involve the decommissioning of existing blast furnaces and converters, with EAFs introduced in their place.
• The new furnaces must enable the production of high-grade steels that were difficult to achieve with conventional EAFs, meeting impurity concentration standards for elements such as phosphorus and nitrogen¹⁹.

These points are expected to be thoroughly examined during the subsidy screening process.

One further point worth noting, although not explicitly stated as a formal subsidy condition, is the importance of securing an adequate and stable supply of direct reduced iron (DRI), which serves as a critical raw material for achieving both low emissions and high-quality steel production in the “innovative EAF” pathway.

Use of Direct Reduced Iron (DRI) in Addition to Scrap as Feedstock²⁰
The innovative EAF is designed to use scrap steel together with DRI as its main raw materials. While increasing the proportion of scrap is advantageous for reducing emissions, producing high-quality steel products requires lowering impurity levels, necessitating a careful balance between the quality and quantity of scrap used and supplementation with DRI. As noted earlier, securing high-quality scrap is critical, but it is equally decisive to ensure a stable supply of DRI, which currently has very limited trade availability.

Both Nippon Steel and JFE Steel reference the use of DRI in their carbon-neutral strategies, yet given that these projects aim to convert blast furnace–basic oxygen furnace operations into electric furnace–based processes, DRI procurement remains a key prerequisite that warrants continued close attention. This issue will be examined in more detail in the following section.

3.3 Reliability of the Mass Balance Scheme

To ensure JISF Mass Balance Steel qualifies for robust government support and allows buyers to claim reductions (e.g., Scope 3), the reliability of the underlying rules is crucial. The rules governing project execution, reduction quantification, certification, allocation, and management must be credible and enforceable.

Over the past 18 months, JISF guidelines have been revised, improving several rules and clarifying steelmakers’ decarbonization plans:

• Removal of retroactive project conditions (previously extending back to 2013)
• Clearer criteria for additionality in reduction projects
• Limiting reduction validity to three years post-calculation
• Physical linkage between reduction projects and mass balance steel products (including inter-site steel transfers)
• Clarified allocation rules; non-allocated products cannot exceed previous emission factors
• Distinction between real product emissions and virtual reductions via certificates, with CFP/EPD transparency²¹

However, some ambiguities remain. Beyond guideline revisions, credibility can be strengthened through the public disclosure of concrete examples. From a buyer perspective, traceability and transparency remain insufficient. Key points to clarify include:

• Detailed descriptions of all reduction projects (location, technology, scale, etc.)
• Eligibility of all reduction projects (e.g., additionality tests)
• Methods and calculations for reduction quantification
• Measures to be applied to steel products not assigned reductions when the emission factor calculation period begins after the reduction project starts, potentially including EPD reissuance.
• Annual reporting on reduction creation, allocation, and accumulation
• Third-party certification examples, including independence

As described above, in order for JISF Mass Balance Steel to be recognized and promoted as GX Green Steel (qualifying for government subsidies, tax incentives, and policies that encourage private-sector demand, and ensuring that customers can procure it with confidence) it will be necessary to go one step further beyond what is currently specified in the JISF guidelines and beyond the existing government subsidy requirements. The initiative must shift into a higher gear, accompanied by greater transparency and more proactive, credible measures in its implementation.

4. The Critical Importance of Advancing Direct Reduced Iron (DRI) Projects

As noted in the previous section, for the “innovative electric arc furnaces” (EAFs) that form the core of emission-reduction projects, it is crucial to use direct reduced iron (DRI) alongside scrap as a feedstock. Japan’s major blast furnace producers appear to be actively pursuing this transition.

Table 4 summarizes recent developments by each company regarding the production and use of DRI. Among technologies for achieving near-zero-emission steelmaking, hydrogen-based direct reduction is currently considered the most important, and commercial adoption has already begun in several parts of the world. However, DRI production requires high-grade iron ore suitable for direct reduction, and both cost and supply limitations pose challenges. For this reason, R&D is underway to enable hydrogen DRI using lower-grade ores. That said, such technologies will not be ready in time for Japan’s “innovative EAFs,” scheduled to begin operation before 2030. Considering that large-scale, decarbonized hydrogen production and supply have yet to take off globally, building up a DRI supply chain based on natural gas still holds significant value at this stage.

Table 4. Developments by Major Japanese Steelmakers in DRI Production and Utilization

JFE Steel’s project in the UAE and Kobe Steel’s project in Oman both plan to achieve natural gas–based DRI production by 2030. Both companies also envision a future transition from natural gas to green or blue hydrogen. Bringing these projects to fruition and establishing a stable supply of gas-based DRI, and later hydrogen-based DRI, is essential to Japan’s steel sector decarbonization. By contrast, Nippon Steel has taken steps toward securing high-grade iron ore suitable for DRI production²², but has not yet presented a concrete strategy for producing or sourcing DRI, which is an area of concern.

It is worth noting that the Big River Steel (BRS) plant in the United States, known for producing non-oriented electrical steel sheets using EAFs, became part of Nippon Steel’s group following its acquisition of U.S. Steel (USS). In 2024, BRS achieved both “site certification” and the world’s first “product certification” under the Responsible Steel standard for environmental, social, and governance (ESG) practices. The plant’s CO₂ emissions amount to 1.34 tCO₂e per tonne of crude steel, with a scrap utilization rate of 57.2%²³. When considering high-quality steel production at electric furnace sites such as Yahata, BRS offers a valuable reference model for operating high-scrap-use EAF plants.

However, one point of concern is that BRS uses not only scrap but also pig iron supplied from USS’s Gary Works blast furnace as a source of virgin iron. While this may be cost-effective and feasible in the U.S. context due to USS’s integrated operations, such practice should be avoided in Japan, particularly for EAF processes introduced specifically to replace blast furnaces.

5. Conclusion

Since last year, Japan’s government has approved subsidies for the transition projects led by JFE Steel and Nippon Steel to convert from blast furnaces to innovative EAFs, marking their full-scale launch. The government has also defined “Green Steel for GX Promotion,” introducing support on both the supply and demand sides through public procurement and subsidies. However, questions have been raised regarding the mass balance–based products currently targeted by these policies²⁴, and international debate continues. At this stage, it cannot be said that the environment is yet in place for steel users to proactively procure such products.

In response, Japanese steelmakers must build systems with greater transparency and traceability and pursue emission-reduction projects that genuinely contribute to decarbonization, thereby demonstrating the reliability of their mass balance steel products. By going beyond the existing JISF guidelines to meet these conditions, mass balance steel can leverage its inherent advantage, purchasability across applications and locations, and serve as a transitional enabler of market uptake.

At the same time, steel users should also act by demanding transparency, traceability, and the selection of truly meaningful reduction projects to ensure procurement aligns with internationally credible low-carbon steel standards. Even when emission reductions are modest, choosing genuinely low-carbon steel and paying a price premium for real emission cuts is part of the user’s role in forming a green steel market.

Mass balance steel, however, is a transitional measure. It must not persist for more than a decade and delay the advent of a true green steel era. Its significance lies in encouraging the early emergence of real green steel products and in completing its role swiftly. As an exit strategy, Japan should develop systems such as a low-carbon steel labeling scheme to facilitate this transition. Kobe Steel, which has delayed investment decisions, should also move quickly to catch up, turning its late start into an advantage by supplying genuinely green steel products without reliance on mass balance schemes.

The innovative EAF projects mark the first concrete step in transitioning away from blast furnaces. To make this transition real, Japan must establish new supply chains for DRI, including hydrogen-based processes overseas, and formulate comprehensive circular strategies and policies for iron and steel. In particular, taking a leadership role in global hydrogen DRI production and trade would greatly contribute to the decarbonization of not only Japan’s steel industry but also the world’s. Even amid rising geopolitical risks, Japan’s steel sector is expected to steadily integrate decarbonization into its business model, strengthen its future competitiveness, and play a leading role in the global steel industry.