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Volvo's plan to drive the green steel market

The danger of low-carbon initiatives: If the premium is too high for decarbonized products, consumers could move to cheaper, less climate-aware brands.

Volvo production facility

Volvo has a new initiative to slash emissions: a plan to begin manufacturing its cars with fossil-free steel by 2026. 

The Swedish carmaker signed a statement of intent with Nordic steelmaker SSAB last month to commercialize a process to produce steel using green hydrogen instead of coal. According to Volvo, this is the first collaboration between a carmaker and a green steel company. 

If achieved, this would be no small feat. Steel is one of the most energy-intensive industries in the world, contributing 11 percent of total global emissions. If steel were a country, it would be the third-largest contributor of carbon dioxide, behind only the United States and China. And with the U.S. considering a massive infrastructure bill, it’s possible demand for steel will skyrocket over the next decade.

Volvo’s announcement illustrates the potential of corporations to push new markets for cleaner industrial processes — and how complicated reaching carbon neutrality commitments will be for companies in manufacturing. 

Destination: Carbon neutrality 

Steel is one of the three largest sources of embedded carbon in car manufacturing, accounting for 35 percent of the production emissions for Volvo’s internal combustion vehicles and about 20 percent in electric vehicles, where batteries are responsible for a larger part of the pie. (The other two largest sources of emissions being aluminum and batteries.)

Volvo has set out on a journey to be carbon neutral by 2040, with an interim goal of reducing emissions associated with raw materials and suppliers by 25 percent by 2025. According to Jonas Otterheim, head of climate action at Volvo Cars, there’s no path for the company to reach its climate goals without decarbonizing steel. 

"When comparing the magnitude of different emission categories, steel is more or less half of the material of the car," said Otterheim in a phone interview. "To reduce CO2 emissions as much as we hope to, we must reduce it from steel."

The cost of not acting is likely greater, because one way or another the world needs to change and the world needs to meet these climate ambitions.

As countries and states look to drive down their transportation emissions and accelerate the uptake of electric vehicles, less attention has been paid to the emissions associated with car manufacturing. 

"End customers don't know what emissions come from what part of the car," Otterheim said. "That's something we're trying to change right now. People talk about electric cars as zero emissions and the silver bullet, and we don't necessarily agree with that. We think electrification alone is not enough. We need to reduce all other emissions as well."

The agreement is just the first mile of a long road ahead for Volvo to decarbonize. The plan, according to Otterheim, is to bring the green steel into a concept car or early-stage product. Then it will test-drive that prototype to ensure the steel can meet the company's quality standards. Once complete, and once green steel is broadly available, the company plans to rev up its use across its vehicles. 

In other words, green steel cars are still miles from their destination. 

Jumpstarting a market for green steel

The technological challenge of the initiative is being driven by SSAB and its partners, utility Vattenfall and iron ore processor LKAB. Through a joint venture dubbed Hybrit, SSAB is working on a process to replace coal with hydrogen produced via electrolysis using carbon-free energy sources. (Given the energy make-up of Scandinavia, this is likely a combination of nuclear, hydropower and wind.) 

Hybrit steel plant

Once the green steel is produced, Volvo plans to plug it into its existing manufacturing process. The agreement is non-binding, meaning that if the steel isn’t up for the task or if the price is prohibitively high, Volvo could stay the course, manufacturing cars with the same dirty steel as always. 

Where Volvo is showing its leadership, according to Otterheim, is in signaling to suppliers that there is demand for green steel, as well as providing a partner to figure out how to use it in industrial processes as soon as possible. And, along the way, lay claim to what likely will be limited supplies for the next few years.

"Big customers of steel must drive demand, otherwise there won't be supply enough to meet our future demands," Otterheim said. "Someone must act early. I think that is a critical activity to do for many companies. Just starting to sow the future demand instead of just talking about it is an important thing."

The drive to cleaner transportation

As the net-zero drumbeat increases, other car companies have begun to roll out plans to slash emissions holistically, including those buried in their supply chain.

Earlier this month, Porsche called on 1,300 suppliers to switch to clean energy to reduce emissions in its supply chain. Daimler’s climate goals extend to its suppliers, as well, working to reduce and offset emissions associated with its procurements. GM also has goals to reduce emissions in its supply chains, including working with them to procure clean energy

The wildcard to all of these initiatives is the sticker price. After all, if the premium is too high for decarbonized products, forcing companies to raise showroom prices, consumers could move to cheaper, less climate-aware brands. According to Otterheim, Volvo is dedicated to figuring out the right business models as decarbonized steel becomes a reality. 

"The cost of not acting is likely greater, because one way or another the world needs to change and the world needs to meet these climate ambitions," he said. "It's rather a question of how much [green steel] we use by when, instead of the cost at the moment."

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