Macroeconomic implications of switching to process-emission-free iron and steel production in Europe

Options to significantly reduce global greenhouse gas emissions in line with long-term political targets include switches in production technologies to those free of industrial process emissions. Exemplifying this transition, we analyse such a switch of the European iron and steel industry and its sectoral, macroeconomic and social implications. We employ a recursive-dynamic multi-region multi-sector computable general equilibrium approach in order to cover feedback effects originating from the integration of European sectors in a globally embedded context. Against the backdrop of a globally implemented CO2 price trajectory, we investigate how the range of macroeconomic implications depends on (i) the timing of the switch (either starting early in 2020 or late in 2035) and (ii) the investment and operating cost of two promising low-carbon technologies. We distinguish between high-cost and low-cost technological specifications, though both face cost disadvantages relative to conventional iron and steel production for current intermediate inputs and primary factors. An early implementation of a `high-cost' technological alternative further reduces long-term GDP in 2050 among EU regions (-2.3% to -0.5% as compared to -1.4% to -0.3% for a late implementation starting in 2035). By contrast, GDP implications in 2050 seem to be unconstrained by early or late implementation of a `low-cost' technology (regional range of -0.3% to 0.9% for both). However, welfare is reduced, particularly during the initial implementation phase since additional investment to build up new facilities reduces output available for other consumption needs. This `build-up' might represent a barrier to such transitions, as the generation to decide on implementation and potentially bearing (macro)economic costs might not be the generation benefitting from it.