India Needs Targeted Public Finance to Scale Green Steel: IEEFA

India’s accelerated steel capacity expansion presents a golden opportunity to adopt cleaner, future-ready technologies — but only if the country deploys the right public financing tools. A new briefing note by the Institute for Energy Economics and Financial Analysis (IEEFA) warns that without strategic intervention, India risks locking itself into high-carbon steelmaking for the next four decades.

Key Takeaways

Global dependence on fossil fuels remains high, with industrial processes still 80–85% fossil-fuel-driven despite US$9 trillion invested in renewable energy since 2010. The steel industry’s decarbonisation lags behind other sectors. With India yet to build 92% of its planned steel capacity expansion from 180 Mt to 300 Mt, the country can leapfrog to cleaner technologies through smart financing.

Carbon pricing alone is insufficient. International studies show public costs for green steel range from US$110 to US$1,168 per tonne of CO₂ abated — up to 13 times the EU carbon price — indicating the need for additional financial incentives.

IEEFA recommends three strategic financial instruments:

• Government-backed credit guarantee facilities to mobilise commercial capital at minimal public cost.

• Contracts for Difference (CfDs) through competitive product-based auctions to determine actual green premiums.

• Project preparation facilities to help MSME steel producers tap existing financial resources.

Global project experiences show what works. Gas-based “transitional” projects failed to secure buyers even with large public grants, whereas fully integrated hydrogen-based projects with verified renewable credentials successfully secured offtake agreements with 20–30% premiums.

India’s Decarbonisation Imperative

Since steel plants operate for 30–40 years, technology decisions made today will define India’s emissions trajectory until 2060–70.

“Carbon lock-in occurs when long-life steel plants are built with conventional technology, locking in emissions for decades. This could jeopardise India’s net-zero goals,” notes Saurabh Trivedi, Sustainable Finance Specialist at IEEFA.

Beyond climate concerns, India’s heavy dependence on imported metallurgical coal is projected to nearly double by 2035 if traditional BF-BOF (blast furnace–basic oxygen furnace) routes dominate capacity expansion.

Public Finance: Essential Yet Under-Optimised

IEEFA’s analysis finds global public support for green steel varies widely based on technology choice and policy design:

• Electric Arc Furnace (EAF) with scrap requires the least public support.

• Hydrogen-based Direct Reduced Iron (DRI)–EAF projects require higher initial backing but offer long-term decarbonisation benefits.

• Credit guarantees mobilise 2.4 times more private capital compared to the 0.5–1.5 times achieved through direct grants.

Globally, nearly US$24 billion has flowed into steel decarbonisation — almost always anchored by public funding.

India’s Policy Landscape: Progress, but Funding Still Modest

The government is preparing a National Mission for Sustainable Steel with a proposed ₹5,000 crore (US$600 million) outlay. Expected support includes:

• Production-linked incentives

• Concessional loans

• Risk guarantees

• Approximately 80% of the funds may target secondary steel producers.

India is also drafting a Green Public Procurement (GPP) policy, proposing that 25–37% of steel used in public projects be low-carbon. However, efforts to set up a centralised green-steel procurement agency were rejected by the Ministry of Finance in 2024.

From October 2026, India’s Carbon Credit Trading Scheme will impose emissions-intensity targets across sectors, including steel. Its effectiveness, however, will depend on the eventual carbon price.

“Despite these steps, the scale of funding remains modest relative to the challenge,” says Meenakshi Viswanathan, Energy Finance Intern at IEEFA.

Markets Reward Only Fully Verified Green Steel

Analysis of recent global projects highlights a clear market trend:

• Gas-based DRI projects in the US and Germany failed despite subsidies due to the absence of buyer premiums.

• Hydrogen-based integrated projects like Sweden’s Stegra have secured multi-year offtake agreements at 20–30% price premiums.

“The data shows buyers pay premiums only for steel with credible end-to-end green attributes — from renewable energy to hydrogen to finished steel,” says Viswanathan.

IEEFA’s Recommended Path Forward

India must prioritise strategic over large-scale spending. The briefing suggests:

1. Credit Guarantee Facility

• Mitigates commercial risk

• Mobilises significantly higher private capital

• Minimises burden on government budgets

2. Product-Based CfDs through Auctions

• Helps discover the real green premium

• Ensures market efficiency and fairness

3. Project Preparation Support for MSMEs

• Helps smaller producers conduct feasibility studies

• Enables them to access existing financing channels

Conclusion

As Trivedi notes, “India’s approach will differ from the West — it must focus on maximising impact through smart instrument design, not heavy subsidies.”

A strategic, well-targeted public finance framework will be critical to ensuring India builds a competitive, low-carbon steel sector without burdening taxpayers.

The writer of this article is Dr. Seema Javed, an environmentalist & a communications professional in the field of climate and energy