SteelWatch Comment on Proposed Revisions to Japan’s Act on Promoting Green Procurement

A key missing driver for green steel in Japan are signals from steel buyers that they are willing to pay more for low-emissions steel. As a major steel buyer, the Japanese government could help drive market formation and encourage investment in low-emissions steelmaking technologies through green purchasing.

A key missing driver for green steel in Japan are signals from steel buyers that they are willing to pay more for low-emissions steel. As a major steel buyer, the Japanese government could help drive market formation and encourage investment in low-emissions steelmaking technologies through green purchasing.

Steelmakers are faced with investment decisions this decade on whether they extend the life of coal-based blast furnaces or invest in low to zero-emissions steelmaking through renewable-based hydrogen direct reduction of iron and electric arc furnace (H2-DRI-EAF) technologies, so we welcome the explicit inclusion of steel in these green public procurement guidelines.

Green procurement, in principle should:

• Reward first-mover producers
• Facilitate investment in steel production with significant emissions reduction potential
• Exclude high-intensity production methods that have incorporated only marginal emissions reductions. 
• Lead by example and add credibility that influences other buyers 

SteelWatch finds that the definitions in the current draft revisions to the Act on Promoting Green Procurement are insufficient to achieve these goals. Steel is a globally traded commodity, and Japanese steelmakers will need to decarbonise steel production to meet the needs of buyers and to be able to sell at competitive prices in geographies with carbon pricing, such as Europe. How low-emissions steel is defined needs more examination and we recommend postponing a final revision to the green purchasing guidelines to gather more information and perspectives. 

Firstly, we urge the Ministry of Environment not to include “mass balance accounting” in these guidelines. The draft guidelines referenced the Japan Iron and Steel Federation (JISF)’s mass balance accounting method. It is unlikely to be accepted by buyers as meaningful or having any value towards reducing their scope 3 emissions, especially as it is not recognised under standards like the SBTi Corporate Net-Zero Standard. The International Energy Agency states that near-zero emissions should be “physical”, meaning that “offsetting emissions from outside the supply chain or aggregation of emissions reductions credits/certificates across multiple units of production and/or supply chains is not permitted for near-zero emissions recognition.”  

In contrast, the JISF allows a “corporate-based” mass balance approach, in which emissions reductions anywhere within a corporate boundary can be aggregated and then allocated virtually to specific products. Nippon Steel and JFE have both adopted this corporate-based approach. This means that these mostly blast furnace-based steelmakers can make minimal emissions reductions from their existing production processes, in particular very CO2-intensive blast furnaces, virtually aggregate the reductions, and rebrand such steel products made from coal as zero-emission. Steelmakers could also mix reductions from completely different and unrelated methods of steel production, such as from an EAF to a blast furnace. It is also possible to imagine absurd scenarios where a steelmaker claims emissions reductions from protecting land or reducing food waste from their corporate cafeteria and allocating this to claim zero emissions steel products. In these ways, a corporate approach does not meaningfully contribute to reducing total emissions or the emissions intensity of the existing steel production processes. Despite limited emissions reductions, Japanese steelmakers seek high premiums for such steel.

Steelmaker self-certified products such as these are under increased scrutiny as “greenwashing”. In June 2024, South Korea’s Ministry of Environment issued an administrative guidance to POSCO to correct its  advertising of its mass balance “Greenate Value Chain” steel products for exaggerating the emissions reductions from a product still produced using coal.

We are not aware of any major international buyers paying a green premium for Japanese mass balance certified steel. This may be in part because they do not recognise the claimed reductions, are concerned they too could be exposed to accusations of greenwashing dirty steel, and because there are more credible low-emissions offerings by rival global steelmakers.

Secondly, to ensure environmental benefits, including emissions reductions that contribute to meeting Japan’s commitments to 1.5C under the Paris Climate Agreement, set strict minimum emissions reductions levels required to be eligible for government green purchasing. Review and strengthen this level over time to send a clear signal that emissions must fall until all green steel procured is at a near zero emissions level. Procurement has to set a clear signal to steelmakers to invest in new technologies and green supply chains that deliver near-zero emissions steel. Take into account the percentage of steel scrap inputs that are used and provide clear incentives for both scrap-based producers and those using ore-based iron to seriously decarbonise.

To conclude, government green procurement rules should encourage the production of physically near-zero emissions steel. Steelmakers would benefit from purchase commitments that justify new final investment decisions, investments in green supply chains, and the scaling-up of green steelmaking technologies. This would reward steelmakers that invest in new decarbonization technologies such as H2-DRI steelmaking that will be at commercial scale globally within the next three years.

SteelWatch is a global non-profit organisation with four Japan-based staff that works to support the decarbonisation of the global steel industry. 

For further reading:

Renewable Energy Institute, “Towards the Green Steel Market Formation: Issues and Conditions for the Use of the Mass Balance Method”. Aug. 23, 2024.

Renewable Energy Institute, “Call for a revised procurement policy that truly contributes to the formation of a market for green steel.” Dec. 6, 2024. (Japanese)

Solutions for Our Climate, “POSCO Profile No. 2 – The Journey Toward Greenwashing: Greenate”