Japan’s climate plans favour a gradual transition away from carbon-intensive steelmaking. The national approach mostly promotes carbon capture and storage (CCS) and other purported solutions to “abate” ongoing emissions. Japanese steelmakers and officials reject an alternative transformation that would see rapid deployment of “real zero” technologies capable of eliminating emissions at-source.

In this report, we show that these preferences are flawed. Japanese stakeholders often present their current approach as cost-effective climate action, and aligned with national energy and economic security concerns. However, a “real zero transformation” can be more cost-effective. It can even be cheaper than elements of business-as-usual (BAU) steelmaking. Moreover, real zero need not compromise energy or economic security – in some instances, real zero production can better manage security concerns than even BAU production.

Steelmaking accounts for up to 14% of Japan’s CO2 emissions. Yet the industry’s current target is only a 30% emissions reduction by 2030 (from a 2013 baseline), compared with a 45% reduction goal for the broader Japanese economy. Government plans envision most of these emissions cuts coming from CCS applied to coal-dependent blast furnace-basic oxygen furnace (BF-BOF) production, which generates 75% of Japan’s steel output.

We test whether and how Japanese steel production could be adapted to meet ambitious emissions benchmarks, defined by the International Energy Agency’s “near zero steel” standards, and assess the implications for cost-competitiveness, as well as energy and economic security. A key factor shaping our analysis is that Japanese steelmakers must decide whether to reinvest in roughly half of the country’s carbon-intensive BF-BOF capacity by the end of 2030.

We assess pathways for both “primary” (using mainly new iron ore inputs) and “secondary” steel (using mainly recycled steel inputs), operating under ideal conditions.

 We find Japan already has a real zero steel pathway capable of meeting our ambitious climate benchmark in a more cost-competitive manner than its BAU equivalent. Secondary steel produced in a 100% renewables-powered electric arc furnace can outcompete its BAU counterpart that relies on power from the current grid. Japan could accordingly scale up this scrap-based route, alongside renewable energy production.

Japan will continue to require substantial steel production. However, our analysis finds that the BF-BOF route cannot remain cost-competitive against rival modes while meeting our emissions benchmark. There is no viable real zero pathway for BF-BOF production, and a carbon-abated approach relying heavily on CCS would be prohibitively expensive, requiring unrealistic assumptions about CO2 capture rates.

While other potential options are emerging, the battle over cost-competitive, suitably climate ambitious primary steel production is likely to be confined to the alternative direct reduced iron-electric arc furnace (DRI-EAF) route. Japan does not currently use this technology at commercial scale, and fossil gas-dependent DRI-EAF production elsewhere remains too carbon-intensive to align with climate goals.

DRI-EAF production can be adapted to meet our emissions benchmark through either carbon-abated or real zero pathways. We consider two carbon-abated pathways: one uses fossil gas for energy and “reducing” iron ore into iron, while capturing plant emissions; one substitutes “blue hydrogen” for these same purposes, with emissions mostly captured from fossil feedstocks. We also consider one real zero pathway, using renewables-powered “green hydrogen” for energy and reduction. We also consider trade variations using imported hot briquetted iron (HBI, an easily shipped and handled form of DRI) for both the blue and green hydrogen DRI-EAF options.

With the trade variation of imported green HBI, we find that real zero DRI-EAF could become a competitive option for Japanese primary steel relatively quickly – potentially cheaper than BAU DRI-EAF production by the early 2030s. Carbon-abated DRI-EAF pathways can more easily reach our benchmark emissions levels than carbon-abated BF-BOF alternatives. However, these options would again be more expensive than the imported HBI DRI-EAF real zero pathway (and would still rely on ambitious CCS assumptions).

Under current conditions, more domestically focused real zero primary steel production, utilising the DRI-EAF route, will remain uncompetitive against all current alternatives in Japan, largely due to challenges producing affordable green hydrogen.

Nevertheless, the associated “green premium” for pursuing domestic real zero DRI-EAF production in Japan could be relatively minor, adding only about 1-2% to the cost of a domestically produced car. Policy interventions, such as stronger hydrogen production subsidies, carbon taxes, and coordinated private or public demand could further improve the economics of real zero.

A real zero transformation of steelmaking need not clash with Japan’s stated energy and economic security concerns. The cost-competitiveness of real zero suggests it is best positioned to future-proof Japan’s steel output, and the national values attached to it, as the country achieves its climate goals.

Real zero transformation might also deliver discrete energy and economic security benefits. For example, scaling up EAF-based secondary production relative to BAU primary production could reduce demand for high volumes of imported iron ore and coal in favour of less material- and energy-intensive (and more domestically sourced) scrap and renewable energy. Green HBI imports would also offshore the most energy-intensive stage of steelmaking, and related security concerns, to other countries.

Contrary to what Japanese steelmakers and officials claim, real zero is preferable to a carbon-abated approach on cost-competitiveness, as well as energy and economic security. It can even improve on BAU condition