Tata steel's Port Talbot closure - a lesson in Transition

The weekly magazine's reporting caught my eye where they drew an image of human misery - steel workers walking out of Tata steel plant, on announcing its closer (below).

Each business is locked in a web of transactional relationships with a variety of stakeholders: from shareholders to customers, employees, suppliers & communities, and ultimately to nature and society. For decades, businesses were only thought to be accountable to their shareholders for maximising corporate profits – Climate change is set to change all of that.

Until the planet is undergoing transition activity in its business-ophere (the human business layer that creates all known economic activities) the turbulent cycle of job loss & carbon leak will go hand in hand 

The Culprit: The production of steel is responsible for around 7% of the world's greenhouse gas emissions.

Steel is usually made in a process that starts with blast furnaces. 
Fed with coking coal and iron ore, they emit large quantities of 
carbon dioxide and contribute to global warming.

Why transition plans matter?: The transition to a low-greenhouse gas (GHG) emissions, climate-resilient economy will require fundamental transformations in business and finance. Companies and regulators around the world are increasingly realising that transition planning, embedded in corporate strategy, is a critical tool to deliver this.

Transition plans can help companies develop a vision for what role they want to play in tomorrow’s economy, and what steps they need to take now to get there. The disclosure of these plans will allow investors to make more informed lending, underwriting and investment decisions, enable transition finance to scale with integrity, and support policymakers and regulators in identifying concentrations of climate-related risks, as well as barriers to the transition.

You can read deep dive guidance per sector from TPT for decarbonisation.

However a point I want to highlight is that 'Job losses' can not be a barrier to transition to net zero, media playing on emotions of masses will only make it difficult to a common person to understand and apply the necessary pressure on its government to prepare for climate transition in an orderly fashion.

Climate change targets as well as cost pressures are behind a major overhaul of the UK's largest steelworks. Tata's Port Talbot plant also happens to be the UK's biggest single emitter of planet-warming carbon dioxide. And, coal furnaces at Port Talbot are approaching the end of their lifespan and must be replaced. There are fears that blast furnace is being closed here to show reduction in carbon emissions but since the EAF(Electric Arc Furnace) is not ready yet UK will have to import steel from cheaper places like China/India (no one will count that carbon foot print!) Or even worse same company will open blast furnace in India or China and will continue to generate carbon emissions – the only change will be north will continue to claim its green credentials while global south will continue to produce GHGs – making the zero dent in improving earth’s climate health. 

Side note - carbon border adjustment mechanisms which is proposed – will apply levies on the import of goods from countries with a lower (or non-existent) carbon price. These seek to create a level playing field, preventing firms that export emissions from gaining a comparative advantage over domestic firms through lower costs.

 So what's good about the closer? well the rewarding headline is that the company's plans to shut its blast furnaces could cut Wales' carbon emissions by as much as a fifth. 

The staggering emission numbers: Tata steel states that for every tonne of steel produced in electric furnace it will generate upto 200kg CO2 which is 1/10th of blast furnace emission of 2000kg of CO2 ! Tata says the switch could slash the site's emissions by around 85% a year. 

The cut equates to the annual emissions of almost 2m homes.

The business clearly has Identified potential reduction initiatives and has set near-term target with an immediate action plan. Besides if you care to know much – it was a loss making blast furnace at Port Talbot!

However, 

The Gap is – the blast furnace will stop and the electric furnace is yet to be built. So the people will loose jobs faster than they can be retrained on skills of the new set up.

Yes, Customers want greener credentials. Yes, In the drive to net zero, manufacturers are increasingly wanting to source materials produced without carbon emissions. So, the question we all need to ask before the ballot box in the election year is ‘How is the government (that has known the challenges of Transition to Net Zero for many many years)- planning to address green redundancies that are bound to happen when companies and sectors make a swift transition?’ What/How will the society and governance be able to incorporate transition risk?

So what should we look at carefully?: 

Ideally to hedge the drama of transition the following applies to firms and their stakeholders:

1.     Clarity on path - establish clear definitions to provide guidance on what constitutes a transition

2.     Incentives for sector decarbonisation and plans of proceed of government funding/subsidiary towards safe guarding work force

3.     Incorporate Transition risk and opportunity – Timing opportunity with risk of carrying on should have a safe guard for work force

4.     Banking and financial sector assisting such transition deals are clearly greening the finance by moving to Electric furnace but was concessional financing considered from development banks to fund phaseout

5.     Does your Firm's transition plan/actions creating orderly transition?

6.     Prioritise infrastructure investment for green production but time it with phase out of existing facilities that impacts livelihood.

7.     If your transition will rely on Blended finance that provides support from the beginning to the end of a project from development banks or capital grants from governments that usually involves equipment and training – make a clear plan for human transition ie your workforce.

Every business making such transition changes will need a tailored approach but the banking sector can go beyond the regular/traditional banking. This is their opportunity to provide services beyond regular project finance, banks could offer services such as:

• Sustainability expertise: Assisting with developing and implementing robust sustainability strategies, including carbon footprint reduction plans and life cycle assessments for Electric Arc Furnace production.

• Market intelligence: Providing insights into emerging trends and regulations in the steel industry, particularly those related to green steel production and carbon pricing schemes.

• Relationship management: Building strong relationships with the steelmaker, understanding their specific needs and challenges, and offering tailored solutions throughout the transition process.

 While trying to make sense of transition we all need to understand a bit about Carbon Pricing:

The increasing price of carbon, and its volatility, are key drivers of transition risks, with carbon-heavy industries and companies suffering the most from price spikes. The Loss making businesses have the ripe moment and right incentive to close their GHG emitting shops and move on to better technology because they in any case were not generating value for their shareholder! To properly assess transition risk exposures in their customer and investment portfolios, monitoring and assessing future paths for carbon pricing should become business-as-usual for financial institutions.

Based on the Banking sector’s orderly transition scenario, with a carbon price of $100 per tonne in 2030, many financial institutions – particularly those heavily exposed to high emitting sectors (e.g. power generation, petrochemicals, transport) – will face significant asset and loan impairment. According to some estimates, coal-based businesses could lose 90% of their current (2020) value, and energy sector firms on average 40%. Of course, there will also be many sectors, firms and technologies that gain from higher, and consistent, global carbon pricing, especially renewables, clean transport, and carbon capture and storage

Bottom line: The Transition to Net zero will bring in economic evolution, technological upgrade and change in business strategy and there is a human cost to this change.