Incentivising Change: Transition Finance for China’s Steel Sector

Steel is the largest source of industrial carbon emissions, responsible for about 7–9% of global CO₂ emissions. China produces over half of the world’s steel, making its steel sector a key contributor to global emissions. More than 90% of its production still uses high-carbon blast furnace–basic oxygen furnace processes. Electric arc furnaces make up only 10%. 

Transitioning to low-carbon technologies is urgent but costly. Climate Bonds estimates at least USD18bn is needed in the next five years, including investments in electric arc furnaces and hydrogen-based steelmaking.

Transition finance can help bridge this gap. China has made progress with policies and pilot projects in transition finance. However, steel companies face low profits and long payback periods, and banks struggle to find credible low-carbon projects due to unclear standards and limited disclosure. These practical challenges have resulted in a significant gap between the scale of transition finance and the industry's funding requirements.

To address these challenges, CBI has released a new report Incentives for Enhancing Transition Finance in China’s Steel Sector: Effective Pathways, Key Challenges, and Action Recommendations. Focusing on incentives designed and implemented by governments or market actors, the report identifies three key pillars for effective transition finance.

1. Strengthening Identification Standards

Clear and reliable standards help both companies and investors understand which projects qualify as transition finance. This includes defining eligible technologies, standardising company transition plans, and improving data transparency. 

As China’s largest steel-producing region, Hebei province serves as a practical example. It has a local transition finance directory covering 135 low-carbon technologies and provides standardised templates for steel company plans, guiding investment and policy design.

2. Implementing Financial Incentives

High costs and uncertain short-term returns make private capital hesitant. Fiscal subsidies, tax relief, preferential loans, and carbon market mechanisms can improve the risk–return profile and incentivise investment. 

In China, central bank carbon reduction support tools and national carbon trading help lower financial risk. Internationally, Japan provides subsidies to car manufacturers that purchase low-carbon steel, showing how demand-side incentives can complement supply-side support.

3. Enhancing Multi-Stakeholder Coordination

Coordination across government and market actors creates stable, predictable signals. Policies that help steel companies upgrade to low-carbon technologies, ensure a reliable supply of key inputs like scrap steel and green hydrogen, and stimulate demand for low-carbon products all work together to accelerate transformation.

For example, Hebei Iron & Steel Group (HBIS), one of China’s largest steel producers, is partnering with BMW to build a low-carbon steel supply chain, aiming to cut up to 95% of CO₂ by 2026.

Challenges and Recommendations

Despite progress in transition finance, the steel sector still faces key obstacles that slow low-carbon investment, affecting steel companies, financial institutions, and downstream buyers.

Steel companies often lack risk-aligned financial support and face unstable supply of low-carbon inputs, such as scrap steel and green hydrogen. Limited planning and incomplete carbon data also hinder adoption of deep decarbonisation technologies.

Financial institutions struggle with unclear standards, inconsistent disclosure, limited expertise, and weak incentives, which limit their participation in low-carbon steel projects.

Downstream buyers receive limited incentives for purchasing low-carbon steel. Without subsidies, tax benefits, or clear certification, demand remains low, reducing the overall market pull for green steel.

To address these challenges, the report recommends:

• Boost steel companies’ transition drive: Provide grants, bond subsidies, and tax relief; prioritise decarbonisation projects; support scrap recycling and green hydrogen; offer online tools for tech screening, carbon accounting, and disclosures.
• Incentivise financial institutions: Issue sector-wide transition finance standards and plan templates; provide disclosure guidance, training, and extended carbon support tools.
• Encourage downstream demand: Offer fiscal or tax incentives to buyers; certify low-carbon steel, track carbon footprints, and include low-carbon steel in building, automotive, and ship standards to create a demand-driven ecosystem. 

In summary, targeted incentives for steel companies, financial institutions, and buyers are key to unlocking investment, boosting demand, and accelerating the sector’s low-carbon transition.

‘Till the next time, 

Climate Bonds