Policy Memo: Guide for Preparing Strategies to Decarbonize Steel in Latin America

steel

To: Multilateral Development Banks, Bilateral Development and Cooperation Agencies, and International Organizations working in Latin America on Industrial Decarbonization (“Development Partners”)

 

From: Paola Galeano Echeverri

 

In Brief:

 

Steel production is one of the most carbon-intensive industrial activities in Latin America. However, most countries in the region lack steel decarbonization strategies.

This memo presents a guide for Development Partners on how to provide technical assistance to governments for preparing steel decarbonization strategies depending on the role each country plays in the steel value chain.

 

Problem and Background

 

Steel production is one of the most carbon-intensive industrial activities in the region, but also one of the most promising ones considering its iron ore reserves. (IEA, 2024). Although Latin America has one of the cleanest electricity sectors in the world (IEA, 2023), contributing to its 9% lower than world average steel factor for crude production (CRU, 2022), its steel industry emissions remain high.

In a country like Mexico, steel decarbonization through a mix of policies could have a significant reduction of industrial emissions, corresponding to 46.2 million tons/year, as shown in the below figure.

 

A graph with a line AI-generated content may be incorrect.

Source: Energy Policy Simulator

 

While the industry in the region wants to decarbonize, it has repeatedly said that significant investment and governmental policy support are required to enable the technological transition to low-carbon steel . (ALACERO, 2024). Globally, steel decarbonization efforts rely on a variety of policies including public finance and subsidies, standards and reporting requirements, carbon pricing and market instruments, R&D support, target setting, trade-related measures, and workforce training, applied differently depending on the decarbonization objectives, as shown in the figure below.

 

A graph of a bar chart AI-generated content may be incorrect.

Source: Climate Club

 

Countries should begin with a strategy to have a clear path towards steel decarbonization. Clear strategies are essential to coordinate these diverse instruments over time, align public and private investment, and sequence actions so that short-term enablers (finance, standards, skills) effectively support long-term industrial transformation. This can be done in broader industrial decarbonization strategies, or in individual steel strategies, which is preferable for producing countries.  

 

Guide to Decarbonize the Steel Sector in Latin America

 

This policy memo provides a guide for Development Partners in providing technical assistance to governments preparing decarbonization strategies of the steel sector to 2050 between 2025-2028. Development Partner assistance will need to be tailored to each country’s role in global steel production and can utilize several existing funding initiatives to finance this technical assistance.

 

Vision and Baseline: The first step towards decarbonization of the steel sector is to help each country determine its sustainable vision and establish a baseline. Steelmaking in Latin America varies by plant age, production technology, energy supply, and market orientation. Each country should establish its position within the global and regional steel value chain, whether as producers, importers, exporters, or end-use consumers, and articulate the role they aspire to play in a low-carbon steel value chain.

For producing countries, visioning and establishing a baseline requires a detailed mapping of existing production pathways, such as blast furnaces and direct reduced iron plants for ironmaking, or basic oxygen furnaces and electric arc furnaces for steelmaking. A comprehensive assessment will include assessing the carbon footprint and energy sources of the steel countries’ industry’s source, and the resilience of their supply chains. Countries that are exporters must analyze the implications of evolving trade policies, such as cross border adjustment mechanisms. Nonproducing countries, meanwhile, should focus on mapping their role as importers, consumers, and traders within the value chain.

Baseline analyses will enable governments to design tailored roadmaps that align industrial, energy, and trade policies to safeguard competitiveness and long-term industrial resilience while advancing a decarbonized future.

 

Building Strategies: The design of steel decarbonization strategies to 2050 should reflect each country’s role in value chains, energy systems, industrial and labor structures, natural resource availability, and financial capacity. Strategies should incorporate modeled scenarios of technology adoption, emissions abatement curves to prioritize actions by cost-effectiveness, policy cost curves, and an assessment of funding gaps. 

Depending on the product ion pathway, countries should establish their strategies based on existing decarbonization alternatives and their technological readiness. These may include a shift toward electric arc furnaces, expanding recycling, replacing natural gas with hydrogen, increasing energy efficiency, and installing carbon capture, utilization, and storage technologies. Country strategies should encourage early adoption of no-regret measures during the 2030s such as energy efficiency retrofits, digital optimization of production, and renewable energy sourcing. Technologies that require minimal retrofitting, such as biomethane substitution in blast furnaces or direct reduced iron processes, should also be prioritized during this decade.

Strategies must also include a comprehensive review of existing regulatory frameworks to ensure they enable the deployment of early decarbonization pathways. They should clearly signal the regulations and policies that will be adopted, and those which will be modified or adjusted. For example, establishing national scrap recycling programs and targets can stimulate demand and improve material circularity. Likewise, strategies should incorporate just transition considerations, with concrete actions to support reskilling, workforce adaptation, and compensation packages.

 

Consultation: A structured consultation process of the country’s steel decarbonization strategy should be designed from the outset, culminating in the public release of the strategy prior to its formal adoption. This process should engage stakeholders across government, industry, labor unions, civil society, women, and academia. It should also include clear, accessible materials to ensure that all stakeholders can provide informed and meaningful input. The objective is to ensure that strategies are technically robust, economically viable, and socially inclusive, while balancing industrial competitiveness with climate commitments.

Development Partners and governments should be prepared to support countries in answering questions and opposition regarding funding of the strategy’s implementation, jobs losses, and effects on GDP. A preliminary analysis undertaken for Mexico with the Energy Policy Simulator shows potentially substantial impact on GDP and jobs. While there is a brief rise, probably during the construction and retrofitting phase, by 2050, the GDP falls significantly compared to the baseline. Jobs are also projected to drop by approximately 110,000 compared to the baseline. This underscores the importance of incorporating just transition measures, job retraining programs, and complementary industrial strategies to mitigate employment losses and offset potential GDP declines. 

 

A graph of different colored lines AI-generated content may be incorrect.

A graph of different colored lines AI-generated content may be incorrect.

Source: Energy Policy Simulator

 

Conclusion

 

Steel decarbonization is essential for reducing industrial emissions. This memo, intended to guide Development Partners towards providing technical assistance to country’s from 2025-2028, outlines how they can help governments prepare steel sector decarbonization strategies for 2050 based on their specific roles in the value chain. The recommended steps are: (i) define the country's vision and role in the steel value chain and set a baseline; (ii) develop a strategy to align policy incentives with other national objectives, production methods, technology, and resources; and (iii) hold structured consultations with relevant stakeholders before adopting the strategy.

 

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