Local governments approved 7.1 million metric tons of new steelmaking capacity from January to June, but all of it was for cleaner scrap-based electric arc furnace (EAF) projects, rather than coal-intensive blast furnaces, said the Centre for Research on Energy and Clean Air (CREA).

China's efforts to cut production and recycle more scrap via EAF could reduce CO2 emissions from the steel industry by 200 million tonnes by 2026, equal to the entire emissions of the EU steel sector, CREA said.

China's steel industry, by far the world's biggest, is under growing pressure to decarbonise. It is expected to join China's own emissions trading scheme this year, and exports to Europe will be subject to the Carbon Border Adjustment Mechanism (CBAM) starting from next year, which could make them 11% more expensive by 2030.

"Chinese steelmakers targeting the EU market will need to take action to reduce the carbon intensity of their products in order to maintain competitiveness," said Xinyi Shen, the report's co-author.

Europe introduced CBAM in order to tackle the problem of "carbon leakage", which allows businesses to avoid carbon costs by sourcing products from countries with weaker climate compliance. Starting from 2026, importers of steel, fertiliser, cement and chemicals will pay levies based on the carbon footprint of the products they buy.

Researchers at China's Institute for Global Decarbonization Progress (iGDP) said last week that China's steel industry could face up to 5.9 billion yuan ($811.09 million) in total CBAM levies by 2030, depending on how much it cuts emissions.

Traditional blast furnace steel could face levies of around 250 yuan per ton by 2030, but scrap-based EAF would not yet face any additional charge, it said.

($1 = 7.2742 yuan)