New Delhi: India needs to deploy public capital strategically to bridge the financing gap for green steel projects which are technically proven but still considered risky for private finance, and to avoid carbon lock-in from its planned capacity expansion, the Institute for Energy Economics and Financial Analysis (IEEFA) said.
Carbon lock-in refers to the inertia in fossil fuel-intensive systems that prevents or delays the transition to lower-carbon alternatives.
In a briefing note, IEEFA said with 92 per cent of India’s planned steel capacity expansion from 180 million tonnes to 300 million tonnes not yet built, technology choices made now will influence emissions for 30 to 40 years.
Steel plants typically operate for decades once constructed, making early public finance intervention important.
The analysis said India’s planned steel capacity expansion presents an opportunity to adopt cleaner technologies if supported by the right financing pathways.
Globally, despite USD 9 trillion invested in renewable energy since 2010, industrial processes remain 80 to 85 per cent dependent on fossil fuels. The steel sector has been slower to decarbonise than others. Yet, with significant capacity yet to be added, India has an opportunity to leapfrog traditional pathways if the right financial mechanisms are deployed.
“Carbon lock-in occurs when steel plants with 30 to 40-year lifespans are built with conventional technology, locking in emissions until 2060-70. This could affect India’s net-zero goals,” said Saurabh Trivedi, Sustainable Finance Specialist at IEEFA and co-author of the note.
Beyond climate implications, traditional blast furnaces use metallurgical coal as a primary energy source, largely imported from Australia. As India adds more BF-BOF capacity, the country’s met coal imports are expected to nearly double by 2035, posing an energy security challenge.
IEEFA’s assessment of select international green steel projects shows that while public support is needed to make these technologies commercially viable, the efficiency of public spending varies from USD 110 to USD 1,168 per tonne of CO2 abated. This depends on whether projects use Electric Arc Furnace with scrap or Direct Reduced Iron paired with Electric Arc Furnace, and on the level of public support provided.
“While venture capital and private equity typically fund emerging technologies, these sources may not be well-suited for green steel given its low technology readiness level, massive capital requirements, and extended payback periods,” said Meenakshi Viswanathan, Energy Finance Intern at IEEFA and co-author of the note.
Nearly USD 24 billion has been injected into steel decarbonisation projects. Virtually every major green steel initiative globally has relied on substantial public finance to reach viability.
The Indian government is also formulating a National Mission for Sustainable Steel with an estimated Rs 5,000 crore (about USD 600 million) outlay aimed at decarbonising steel production. The programme is likely to offer production-linked incentives, concessional loans or risk guarantees, with up to 80 per cent of funds expected to support secondary steel mills.
Another proposed measure is Green Public Procurement (GPP). A draft GPP policy would mandate that 25 to 37 per cent of steel used in public projects be low-carbon, creating an assured domestic market for green steel. However, implementing GPP has been challenging, a proposal to establish a centralised agency for bulk procurement of green steel was rejected by the Ministry of Finance in 2024.
Under the Carbon Credit Trading Scheme, set to begin trading in October 2026, emissions intensity targets will be imposed across nine industrial sectors, including steel. While this could reward cleaner steel production, its impact will depend on carbon pricing levels which will be driven by target stringency.
“These measures signal government intent, but the scale of proposed funding remains modest. The market data shows buyers will pay premiums for steel with end-to-end green credentials spanning renewable energy, hydrogen production and steelmaking,” Viswanathan said.
Steelmakers are tapping into capital markets through sustainability-linked bonds and green bonds. However, these instruments support incremental improvements rather than the deeper technological shifts required for complete decarbonisation, Trivedi noted.
The Institute for Energy Economics and Financial Analysis (IEEFA), a global think tank headquartered in USA, examines issues related to energy markets, trends, and policies.
