Green hydrogen-based steel pathways are unlikely to meet cost parity with blast furnace production by 2050 in Japan under current and upcoming policies, according to new analysis by non-profit RMI.
The organisation found domestic green hydrogen-based steel would be 62% more expensive than blast furnace steel in 2035. Using Australian green iron, the premium could drop to 32%, but neither would reach parity by mid-century.
Even with ambitious carbon pricing, tax credits, and dedicated subsidies, the premium would still be over 15%.
Policies make little impact
RMI’s analysis suggests Japan’s ¥3 trillion ($19bn) hydrogen contract for difference (CfD) scheme will do little to close that gap under its current design, despite being one of the country’s largest hydrogen support mechanisms.
The 15-year scheme is designed to bridge the price gap between clean hydrogen and incumbent fuels, with projects competing for support through a reverse-auction mechanism.
However, RMI expects other sectors to outbid steelmakers for support.
“The hydrogen CfD scheme has no impact since it is likely that sectors with a lower cost gap between conventional fuels and green hydrogen will outbid steelmakers in the reverse auction system, thus leaving minimal funds available for the steel sector’s hydrogen demand,” RMI said.
Japan’s emissions trading scheme (ETS) is also expected to have limited impact. Despite green hydrogen direct reduced iron (DRI) having the potential to reduce up to 95% of emissions compared to blast furnaces, RMI expects the ETS to cut green steel premiums by just 2% to 3% in 2035.
RMI attributed this to the low carbon prices and generous emissions benchmarks. The $29/tonne CO2 price ceiling for 2026 to 2029 sits well below the $83/tonne average EU ETS price in 2025, while only around 0.1 tonnes of CO2 per tonne of hot-rolled coil from blast furnace production is initially expected to be priced.
Japan’s high renewable power costs further complicate the economics. RMI said its 62% premium already assumes an “optimistic” domestic hydrogen production case combining dedicated renewable generation with some grid electricity. A fully behind-the-meter green hydrogen configuration could push the premium to 71%, it added.
Importing green iron from lower-cost renewable energy markets could offer another route. Producing steel in Japan from Australian green hot-briquetted iron (HBI) would reduce the projected 2035 premium to 32%.
The findings come as Japan decides how to upgrade more than 43 million tonnes of blast furnace capacity that is expected to require reinvestment over the next half-decade.
Around 74% of the country’s steel is currently produced through coal-based blast furnace-basic oxygen furnace technology, while the sector accounts for approximately 13% of national emissions.
RMI warned that relining existing blast furnaces could lock coal-based steelmaking into Japan’s production base for decades, while tightening carbon regulations threaten the competitiveness of emissions-intensive exports.
Dedicated support leaves sizeable premium
RMI modelled an alternative policy package incorporating higher carbon prices, tighter emissions benchmarks, an extension of low-carbon steel tax credits, and crucially, dedicated hydrogen CfD funding for steelmaking.
But even then, Japanese steel produced from Australian green HBI would still carry an 18% premium over conventional blast furnace pathways by 2035. Fully domestic H2-DRI-EAF production would remain 40% more expensive.
RMI recommends that Japan consider earmarking hydrogen CfD funding for steel alongside expanded end-use incentives, increased green public procurement, and green iron partnerships with countries like Australia and Brazil.
However, neither country is expected to have green HBI production online by 2030.
The analysis comes amid growing stated demand for near-zero-emission steel, although uncertainty remains over customers’ willingness to pay the premiums needed to support new projects.
The findings strengthen the case that high-energy-cost regions in Europe and Asia may increasingly rely on imported green iron to retain downstream steelmaking.
Steel decarbonisation advocacy group SteelWatch previously estimated that importing green iron to Europe, compared to importing hydrogen and iron, could reduce shipping volumes by nearly 75%.
