Renewable Energy Institute today released the English summary of "Towards the Green Steel Market Formation: Issues and Conditions for the Use of the Mass Balance Method" (original Japanese full version published in July 2024).
Decarbonizing the steel industry requires technological innovation, the development of new production infrastructure, and a base of decarbonized electricity and hydrogen supply as well as securing or increasing demand of the low-carbon products produced.
However, at a time when low-carbon steel is not yet in production, attention is currently being turned to products using the 'mass balance method' as a transitional measure, where products are labeled as low-carbon by attaching certificates attributing the outcomes of internal reduction measures.
Although steel companies and governments have positioned the role of 'mass balance products' as creating and leading a green market for steel products, the reality is that there are many challenges to overcome.
This report focuses on the issues of these 'mass balance products' and examines the conditions that are needed to avoid their negative impacts. Globally, there has been steady technological progress towards near-zero emissions in the steel industry. In order to promote the transition to real low-carbon steel, we hope that this report will be used as a resource to advance the discussion so that 'mass balance products' can end their role as soon as possible.
Full Report in Japanese （グリーンスチールの市場形成にむけて: マスバランス方式活用の課題と条件)
Towards the Green Steel Market Formation: Issues and Conditions for the Use of the Mass Balance Method
Summary of the Report
■ INTRODUCTION
In recent years, steel companies have commercialized and actively marketed virtual low-carbon steel as an alternative to real low-carbon steel, which actually reduces CO2 emissions in its production process. The product utilizes the 'mass balance method', whereby the results of emission reduction measures implemented within a factory/company are intensively allocated to certain products by means of certificates. A study group organized by the Ministry of Economy, Trade and Industry (METI) has also discussed “the need to apply the mass balance method of reductions in steel products as a method for near-future development”. Steel companies and the government seem to be trying to entrust the role of forming and leading the green market for steel products to 'mass balance products'.
However, 'mass balance products' are a transitional product until real low-carbon steel is available on the market, an alternative in the transition to the decarbonization era. They are built on a virtual system that relies on certificates issued by steel companies, which presents various challenges. It is very different from the methods used so far for palm oil certification, for example, and is not automatically and comprehensively recognized under the name 'mass balance system'. In extreme cases, any industry can sell green products with zero emissions - as long as they put together their own internal energy saving reductions - and this should not set a precedent for such a situation.
At present, the acceptance of these products is left solely to the choice and judgement of the demandsider, but their diffusion presupposes at least a good understanding of the issues involved, not only on the supply and demand sides but also among market players. In addition, if the evaluation of these products is to be established not only for private sales promotions but also for social rules, and if policy incentives are also expected, the definition of these products and the rules for their evaluation and labeling must not only be consistent with emission calculation rules, but must also meet the requirements of transparency, fairness and purposefulness. and avoid future problems, so as not to impede the formation of an inherently green market.
The steel industry has long been described as a 'hard to abate' industry. However, worldwide, the technology for net-zero emissions is steadily advancing, and the chances of this label being reversed are high. This transitional period will not last long. As soon as possible, net-zero technologies and facilities that are directly linked to decarbonization need to be introduced. If there is a role for 'mass balance products' in this context, it should be to encourage investment in innovative technologies and equipment, while ending their role as soon as possible. There is a need to establish the real low-carbon steel material assessment system that will ultimately be required, and to hasten the formation of a true green steel market.
This paper focuses on the challenges of the current 'products using the mass balance system' and examines ways to reduce the harmful effects of this system.
■ OVERVIEW
In recent years, domestic and foreign steel companies have developed and actively marketed steel products that claim to have low GHG (CO2). This reflects the desire of steel companies to recoup the large investments required for the transition to decarbonized steelmaking through the sale of 'green steel', for which premium prices can be set, and the demand-side companies' desire to reduce Scope 3 emissions and demand for steel products with lower emissions. However, at present, with the exception of a small pilot cases, no real low-carbon steel has appeared on the market in primary steelmaking using iron ore as a raw material. As a result, the current mainstream is dominated by products made from scrap iron and products that are regarded as low emission based on reductions elsewhere by certificates.
2. Features and challenges of Japanese mass balance products
The above-mentioned products that utilize certificates are considered to use the 'mass balance method' of managing emission reductions, and the Japan Iron and Steel Federation has issued guidelines for this. This is a system whereby the effects of reduction projects implemented within a company are pooled and the reductions are added to any steel product by means of certificates, thereby deeming the emissions of the product as zero/low emissions.
While this 'product using the mass balance method (mass balance product)' has the potential to promote the formation of a green market, there are various issues to be addressed before it can be widely adopted, such as the appropriateness of reduction projects, consistency with GHG calculation methods and product environmental declarations (EPDs). Particular attention must be paid to which projects are chosen as reduction measures, how they are calculated and to which products they are added.
3. Responses by initiatives
The GHG Protocol, SBTi and other international initiatives on emissions accounting, reporting and disclosure by companies and others are still discussing the treatment of 'mass balance products', in particular whether purchasing companies can apply the reductions to their own Scope 3 emissions, and no firm position has yet been reached.
On the other hand, looking at the steel industry, demand-side initiatives to bundle and expand demand for low-carbon steel, such as Steel Zero, are spreading, and collaboration with Responsible Steel, a standards development and certification organization involving multi-stakeholder groups, is progressing. Mass balance is also being considered by these groups, but the mass balance approach does not guarantee comprehensive recognition, and requirements such as whether the product contributes to the progress of permanent decarbonization and whether physical traceability is possible will become more important.
4. Prerequisites required for 'mass balance products'
Based on the basic premise of disclosing accurate information, we believe that at least the following conditionality is necessary to eliminate as much as possible the possibility of hindering the formation of green markets and to build a bridge to real green steel.
Condition 1: Presentation of specific decarbonization plans for the company as a whole and for each production site (steelworks)
If reduction projects are to be extracted from the company as a whole and pooled together, then a medium- and long-term decarbonization pathway needs to be presented for the company as a whole and for all production sites, including reduction projects. This is because unless it is explained how the reduction projects fit into and contribute to the company's and the sector's overall decarbonization plan, it will not be possible to know whether the selection of projects and their calculation methods are appropriate.
Condition 2: Rigor, clarity and transparency of reduction projects
The relevance of mass balance method depends on reduction projects. The geographical and time scope of the reduction project would be based on the same production sites, with a time frame of one year and a clear indication of the portfolio of the reduction project, together with its content. It is the demand-side who will judge the relevance of the reduction project. It is necessary to select transformative projects that can be chosen by the demand-side and to promote their content, including their implication. In addition, while baseline setting is important in the calculation method of reductions, company-wide emissions intensity should not be easily used as a baseline before reductions. The position and scope of the reduction project in the company's overall decarbonization plan needs to be clarified and the appropriateness of the baseline setting explained.
Condition 3: Ensure consistency with EPDs (product environmental declarations)
Toward decarbonization emission intensity will need to be indicated by EPDs for as many products as possible, and it is very important to ensure consistency with EPDs when using the mass balance method. In particular, if reductions are allocated to specific products and marketed as CO2 reduction products, other products will not be able to show or claim reductions, even if the emissions have actually been reduced in their production process. It is necessary to always clarify the increased emission levels of non-mass balance products, while continuing to strictly manage them by taking actions such as re-calculating EPDs.
Condition 4: Attribution of recycling benefits
Currently the Japan Iron and Steel Federation (JSF) and Japanese blast furnace manufacturers have stated that 'recycling effects' should be included in the calculation of the life cycle emissions intensity (LCI) of steel products from blast furnaces (primary steel making). However, the reductions achieved by introducing electric furnaces instead of blast furnaces and using scrap steel seem to be a major measure for Japanese primary steel makers. The attribution of recycling effects needs to be clarified in order to avoid criticism that they attribute recycling effects to their own products only when it is convenient for them. How the effects of scrap steel and allocate the reductions should be considered for the decarbonization of the steel sector as a whole needs to be fully discussed.
Condition 5: Labelling to avoid confusion with real low-carbon products.
Mass balance products are not real in terms of emission reductions and need to be accurately labelled in this regard. For example,
- The labelling "product with 100% CO2 reduction" is misleading and not acceptable.
- "Products to which the mass balance method is applied for an equivalent of 100% of emissions" or "products that contribute to CO2 emission reductions via certificates" may be acceptable. Appropriate and accurate descriptions should be established based on thorough communicating with consumers and others.
5. Accelerate the transition to real low-carbon product assessments
In order to avoid confusion and competition with real low-carbon products, mass balance products need to end their role as soon as possible. Globally, real near-zero emission steel products are planned to be available around 2025. In Japan, both supply and demand sides should move away from 'mass-balanced products' and move towards to evaluate 'real, lower-carbon products', even if they can not reach zero-emissions. For the transition, we need to start now to build a real low-carbon steel evaluation system.
