Referring to existing demand-supply models for metal resources, we created a multi-region dynamic model with an objective function based on the global demand-supply system costs for steel. We divided the use of steel into two categories: transportation, electrical appliances and other types of machinery, and building and construction. Focusing on two production methods - blast furnace conversion and electric furnace direct reduction - we studied the demand for steel per region and developed a framework to determine the combination of production method, region and inter-regional transport for minimizing the total sum of costs, including iron ore, inter-region transport of raw materials (iron ore) and products (steel and scrap), steel production facilities, energy (coal, oil, natural gas) and CO2 penalties.
Using our framework, we decided to see what would happen if CO2 penalties were imposed only on energy efficient production regions. The result was a drop in production, with a transfer of operations to other regions, leading to possible carbon leakage and an overall increase in global CO2 emissions. Also, because of the regional differences in the price of energy such as coal, natural gas, and electricity, even in cases where there were no CO2 penalties, we were able to confirm the close link between energy prices and the choice of steel production methods.
We intend to consider the effectiveness of border measures in preventing carbon leakage. We also plan to conduct other evaluations using this framework.