A smaller share of operational capacity similarly uses coke oven gas (COG) as a source of hydrogen for direct reduction. Relative to blast furnace hydrogen retrofits, the investment required for these projects is larger on a per ton basis, as are the emission reductions, but they are still dependent on fossils and far from fully decarbonized. However, they are a potential stepping stone to more decarbonized pathways, providing an opportunity for learning on the direct reduction processes China has minimal experience with, as well as hydrogen in ironmaking. A small amount of investment has gone towards pilot projects for carbon capture and hydrogen smelting— an alternative reduction technique that avoids the high iron quality requirements of direct reduction—but commercial scale-ups have yet to move forward.
The next round of projects under construction and announced in China builds on this experience, with the majority of investment going to fully green hydrogen DRI. Although investment in this technology achieves limited capacity, it results in much larger emission reductions than the transitional fossil-based techs. However, the high investment requirements relative to more incremental technologies necessary to build out both ironmaking and fuel infrastructure for hydrogen DRI risk a major drag on deployment. Given the economic disadvantage of green hydrogen DRI and the fact that China has yet to give significant policy attention to fully green steel, the amount of capacity under development is notable—1.7 Mt of capacity with a secure hydrogen source is under construction in China, compared to 2.6 Mt in Europe, where policy support has been far stronger.
An incremental policy push
Compared to the direct grants and funding given to steelmakers in Europe especially, policy in China to steer investment toward the highest-impact green steel pathways described above has been more minimal, and most deployment to date has been undertaken with private dollars. Recent policy language does indicate Beijing increasingly sees hydrogen DRI as worth pursuing—the 3-year action plan released in June 2026 explicitly names it as a technology to work on implementing—but with less specific timelines than those given to efficiency gains in traditional technologies. The clearest signal of direct support to date has been the selection of Baowu Zhanjiang, the first full-scale green H2 DRI facility in China, for the “List of Demonstration Projects for Advanced Green and Low-Carbon Technologies” in June 2025. This designation made future site development eligible for central government funding mechanisms, but occurred after the first hydrogen furnace was already in operation.
Domestic policy puts efficiency gains first, green hydrogen later
Chinese policy directed at emissions in the steel sector to date largely serves to encourage incremental efficiency and emission reductions at plants rather than large-scale transformative change. Notably, China is currently in the process of integrating blast furnace ironmaking and sintering into its emissions trading system (ETS). In 2024, plants were given emission allocations equal to their emissions, and in 2025 and 2026, only plants with emissions worse than the sector average are forced to pay for additional credits.
From 2025 onwards, the emissions allowances are slated to tighten, with plants evaluated on an emissions-intensity basis—so plants do not need to purchase additional credits simply for increasing production. This approach aims to force the shutdown of the most emissions-intensive plants, while rewarding those that are able to achieve efficiency gains to meet the narrowing emissions intensity bar. However, since the allocations are based on a plant’s own emissions, there is no reward for building a new green steel plant under this system—a plant with no emissions would receive no allowances, while a plant that reduces its emissions from the higher baseline on which allowances were based would end up with surplus credits to sell.
In 2025, China also issued a directive on “zero-carbon industrial parks,” which could support more transformative industrial projects. This set of guidelines allows provinces to establish a boundary around industrial clusters with near-zero emissions, which can then receive preferential regulatory treatment, access to special loans and bonds, and other perks. To date, 52 parks have been proposed, and although several are adjacent to major steel zones, none yet explicitly include the steelworks themselves. Under the stringent emission requirements, green hydrogen DRI plants would be the only steel technology under development in China that could qualify for inclusion—blast furnace hydrogen retrofits and coke oven gas-based hydrogen DRI, which benefit from the ETS policy, are barred from inclusion due to their dependence on fossil.
In tandem, China also laid out guidelines for “zero-carbon factories,” with slightly more permissive emission accounting rules that encourage waste-based hydrogen (like COG DRI) as well as green hydrogen. This scheme covers multiple industrial products, and steel is designated as a second-level priority industry—in choosing facilities to designate as “zero-carbon,” provinces are instructed to focus on other industries for now and prepare to give more attention to steel post-2030. The main advantage of a plant being labeled “zero-carbon” is market access and product labeling, especially for foreign markets and to establish compliance with external rules like the EU’s Carbon Border Adjustment Mechanism (CBAM).
CBAM favors incremental gains, but other trade measures bite more
Domestic policy isn’t the only force shaping green steel incentives in China, and foreign trade policy like the EU’s CBAM attempts to steer the global technology direction by penalizing high-emission imports. Under CBAM, the main mechanism is the application of Europe’s own carbon market prices to imports, with a phase-in period of technology-specific benchmark emission allowances that apply carbon pricing to only a portion of embedded emissions, ramping up over a decade. These benchmark allowances put uneven pressure on Chinese steelmakers in ways that reinforce China’s own focus on incremental emission reductions.
Looking across the distribution of China’s steel facility emissions intensities, most plants in China have emissions exceeding the emission benchmark allowances and would be charged a fee on embedded carbon emissions for exports to Europe. But the size of the fee currently rewards retrofits to blast furnaces more than it rewards lower emissions-intensity steelmaking pathways. That’s because under CBAM, the benchmark varies depending on if steel is primarily DRI, blast furnace, or scrap based. The allowance for scrap-based electric arc furnace (EAF) finished steel is very low at 72 kg CO₂/ton in 2026, and most Chinese EAFs have significantly higher emission intensities; production routes using DRI or blast furnaces however are compared against benchmarks of 481 kg CO2/ton and 1370 kg CO2/ton respectively and thus facilities that have implemented incremental changes like blast furnace hydrogen injection or COG reduction pay lower carbon fees despite having higher overall emissions.
However, this advantage is temporary. The emission allowances phase out by 2034, closing the gap that favors incremental blast furnace improvements. Long-term, the hydrogen DRI facilities are the only iron producers with near-zero fees levied on emissions.
