Managing market and regulatory uncertainty in steel producers' decarbonization strategies: a European perspective

The revised ETS Directive, included in the Fit for 55 package, requires Europe's energy-intensive sectors to make significant investments to meet decarbonization targets by 2030 and climate neutrality by 2050, as envisioned in the Green Deal. Among these sectors, the steel industry is most affected by the need to invest in reducing Scope 1 emissions from the production process and Scope 2 emissions from the energy consumed. To meet decarbonization targets, the steel sector will need to embark on a significant endogenous technological innovation pathway related to steel production and processing operations. However, the achievement of climate targets also depends on exogenous innovations related to the ability of European countries to promote the development of electrical and thermal renewable energies and to ensure an efficient regulatory and market framework. Our purpose is to explore the exogenous innovation factors and to characterize the risk profiles of the main exogenous factors quantitatively and qualitatively: market structure, technical and economic regulation, and licensing procedures. Specifically, we aim to shed light on the occurrence of corporate exogenous factors that cannot be controlled by investment decisions but that significantly influence the decarbonization strategies of steel industries that intend to reduce their environmental impact. Based on an in-depth analysis of disclosed prominent market operators’ commitment, the research questions are straightforward. How do such exogenous factors affect the likelihood of success of companies' decarbonization strategies? Can such risks be internalized? These are topical questions to which solid answers can help avoid strategic drift, that negatively impact corporate financial reputation. It is anticipated that duly evaluating and incorporating such risks in corporate decision-making results in more robust planning. To contextualize the analysis, we focus on the Italian and German cases to provide an European perspective, knowing that the results are easily extendable to other states.