India needs targeted public finance to scale green steel production

The analysis finds that government-backed credit guarantee facility can mobilise commercial capital with minimal budget outlay for steel decarbonisation

A new analysis found that India needs to deploy public capital strategically to bridge the finance gap for green steel projects, which are technically proven but still considered risky for private finance. This analysis by the Institute for Energy Economics and Financial Analysis (IEEFA) said it will help avoid carbon lock-in from its planned capacity expansion. 

The analysis highlighted that with 92% of India’s planned steel capacity expansion from 180 million tonnes (Mt) to 300Mt not yet built, technology choices made now will influence emissions for 30–40 years. Steel plants typically operate for decades once constructed, making early public finance intervention important. 

“Carbon lock-in occurs when steel plants with 30–40-year lifespans are built with conventional technology, locking in emissions until 2060–70. This could affect India’s net-zero goals,” said Saurabh Trivedi, Sustainable Finance Specialist, IEEFA, and a co-author of the briefing note.

According to the analysis, despite $9 trillion in renewable energy investment since 2010, industrial processes remain 80–85% dependent on fossil fuels, globally. The steel sector has been slower to decarbonise than others.Yet, India has an opportunity to leapfrog traditional pathways if the right financial mechanisms are deployed.

The analysis said that International evidence shows public costs for green steel range from $110 to $1,168 per tonne of CO2 abated — up to 13 times the EU carbon price — highlighting that carbon pricing alone cannot drive the transition.

Private Finance is Not Suitable for Green Steel 

Meenakshi Viswanathan, Energy Finance Intern at IEEFA and a co-author of the note said, “While venture capital and private equity typically fund emerging technologies, these sources may not be well-suited for green steel given its low technology readiness level, massive capital requirements, and extended payback periods.”

About $24 billion has already been invested in steel decarbonisation projects and virtually every major green steel initiative globally has relied on substantial public finance to reach viability.

India’s Policy Response and Current Mechanisms at Place

The Indian government is also formulating a National Mission for Sustainable Steel with an estimated ₹5,000 crore ($600 million) outlay aimed at decarbonising steel production. The programme is likely to offer production-linked incentives, concessional loans, or risk guarantees to steelmakers, with up to 80% of funds expected to support secondary steel mills.

Another key pillar under development is Green Public Procurement (GPP). A draft GPP policy would mandate that 25–37% of steel used in public projects be low-carbon, creating an assured domestic market for green steel. The report said that implementing GPP has been challenging as the finance ministry had rejected the proposal to establish a centralised agency for bulk procurement of green steel in 2024.

Steelmakers are also tapping into capital markets through Sustainability-Linked Bonds and green bonds. “However, these instruments support incremental improvements rather than the deeper technological shifts required for complete decarbonisation,” said Trivedi.

According to the analysis, how markets differentiate between green steel types. Gas-based Direct Reduced Iron projects like Cleveland-Cliffs in the US and ArcelorMittal in Germany failed to secure buyer premiums and were cancelled despite grants, while integrated hydrogen-based projects like Sweden’s Stegra secured long-term offtakes with 20–30% premiums.

Recommendations to maximise impact

Based on these insights, the report stated that a government-backed credit guarantee facility can mobilise commercial capital with minimal budget outlay; competitive product-based Contracts for Difference can discover true green premiums through auctions; and dedicated project preparation facilities can help MSMEs access existing finance.

“India’s approach will differ from the West — focusing on maximising impact through instrument design rather than large direct subsidies,” concludes Trivedi. “Ultimately, India’s green steel transition demands strategic public capital deployment that ensures judicious use of taxpayers’ money, while spurring innovation and investment from industry, global financiers, and technology providers.”

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