Vintage structure dynamics and climate change policies: the case of US iron and steel

The US iron and steel industry consists of two main sectors—integrated firms producing outputs predominantly from virgin materials and fossil fuels, and electric arc furnaces operating mainly on scrap and electricity. Capacity and market shares of the former have declined for more than three decades, leading to reductions in energy use and emissions as the existing capital stock is retired. In contrast, electric arc furnace production not only continues to expand along with its capacity expansions but is also able to adopt advanced technology and improve energy efficiencies and carbon intensities. This paper investigates implications of changes in the cost of carbon for output, energy use and carbon emission profiles of the two sectors of the industry, and compares the results for different climate change and technology policies. Special attention is given to the dynamics of the industry's capital vintage structure. The analysis indicates that for the case of the US iron and steel industry, an increase in cost of carbon would result in emission reductions by accelerating the shift to electric arc furnaces. The same emissions reductions as those from cost of carbon increases can be achieved by technology-led policies only under the assumption that very sizeable gaps exist between current and possible energy efficiencies for electric arc furnaces and that their existing capital stock can be rapidly turned-over in favor of less carbon intensive technologies.