The Green Steel Dilemma: Why Investment is Collapsing and What it Means for the Energy Transition

The global green steel sector is experiencing a stark reversal. BloombergNEF (BNEF) reports that investment in clean steel projects plummeted to $17.3 billion in 2024—down 57% from 2023’s $40.2 billion—marking the lowest annual figure in six years. This decline signals deeper systemic challenges in decarbonizing heavy industries, with implications for the broader energy transition.

The Economics of High Costs and Overcapacity

At the heart of the slump lies the prohibitive cost of green hydrogen, a critical input for replacing coal in blast furnaces. BNEF estimates green hydrogen’s levelized cost at $3.74–$11.70 per kilogram in 2024—35% higher than two years prior. This has forced companies like ArcelorMittal to delay hydrogen-based projects, while competitors in China pivot toward cheaper alternatives.

Meanwhile, China’s steel sector—a linchpin of global production—faces overcapacity in traditional methods. Reduced demand in construction and automotive industries has slashed investment in electric arc furnaces, which rely on scrap and electricity. Simultaneously, global overproduction in solar panels and batteries has driven down prices, but also created a “winner-takes-all” dynamic favoring Chinese manufacturers. This leaves Western firms struggling to compete without subsidies or trade protections.

Policy Uncertainty and Geopolitical Friction

Policy delays and conflicting incentives further exacerbate the slowdown. In the U.S., the Biden administration’s Inflation Reduction Act (IRA), which allocated $369 billion for clean energy, has been stalled by the Trump administration’s spending freeze. This uncertainty has frozen capital flows into industrial decarbonization projects.

The EU’s Clean Industrial Deal, meant to balance emissions cuts with competitiveness, remains unresolved. Automakers and manufacturers await stricter 2025 CO₂ targets, but regulatory ambiguity has delayed investments. China’s reforms to reduce steel overcapacity also risk destabilizing markets, as electric arc furnace projects—critical for low-carbon steel—face uncertain funding.

Trade barriers compound these issues. The U.S., EU, and India have imposed tariffs on solar equipment and EVs to protect domestic industries, raising input costs for clean-tech manufacturers. These protectionist measures hinder global collaboration, slowing the diffusion of affordable green steel solutions.

Technological Stagnation and Market Realities

Technological hurdles persist. Carbon capture and storage (CCS), once seen as a decarbonization pillar, has underperformed. The UAE’s Al Reyadah plant, the world’s only commercial-scale steel-related CCUS project, captured just 26% of emissions in 2022, underscoring its inefficacy. The International Energy Agency (IEA) has downgraded CCS’s role in steel decarbonization from 53% to 37% by 2050, while boosting hydrogen-based methods to 44%.

Hydrogen-based direct reduction (DRI) faces scalability challenges. Projects require co-located renewable energy and hydrogen infrastructure to achieve cost competitiveness, but developers have scaled back integrated investments in favor of shorter-term projects.

A “Two-Speed” Energy Transition

The green steel slump reflects a broader trend: established sectors like renewables and EVs are surging, while emerging technologies falter. In 2024, renewables, grids, and EVs absorbed $2.1 trillion—up 14.7%—while green steel and hydrogen saw a 23% decline. BNEF warns that this divergence risks leaving critical industries behind.

To meet net-zero goals, annual energy transition investments must average $5.6 trillion by 2030. China led with $818 billion in 2024 (up 20%), but the U.S., EU, and UK collectively lagged. Without policy-driven risk mitigation—such as carbon pricing, subsidies, or demand mandates—green steel projects will struggle to compete with fossil-fuel alternatives.

Outlook: 2025 as a Pivotal Year

BNEF identifies 2025 as a turning point. The EU’s Clean Industrial Deal, U.S. regulatory clarity on IRA funds, and China’s overcapacity reforms could revive investment. However, geopolitical tensions—such as trade barriers and localization policies—threaten to inflate costs and stifle progress.

To succeed, policymakers must prioritize scalable, profitable pathways. This includes fostering partnerships with Chinese manufacturers to share expertise while building local supply chains, and addressing overcapacity in oversupplied sectors. Governments must also drive demand through procurement policies and carbon pricing.

Conclusion: Bridging the Gap or Falling Short?

The green steel sector’s collapse underscores the energy transition’s uneven progress. High costs, policy uncertainty, and geopolitical friction have created a “perfect storm” for decarbonizing heavy industries. While proven sectors like renewables thrive, green steel remains stuck in a costly, unproven limbo.

BNEF’s data is stark: only 16 million metric tons of clean hydrogen capacity will exist by 2030—up from nearly zero today—while CCS capacity will reach just 200 million metric tons. To close the $5.6 trillion annual investment gap by 2030, governments must align policies that balance affordability, scalability, and competitiveness. Without urgent action, the climate goals enshrined in the Paris Agreement risk becoming unattainable, leaving sectors like steel to perpetually chase a green future they cannot yet afford.