Tata Steel deal to cost hundreds of millions more annually than the Dutch government claims

The Netherlands aims to achieve its climate targets by 2030, and the basic industry is the most challenging sector in this regard. That is why the government is entering into individual agreements with large, established greenhouse gas emitters to enable them to become sustainable more quickly, with subsidies, faster than the European Union’s Emissions Trading System (ETS) requires them to. These subsidies are called “tailor-made subsidies”.

Tata Steel is the largest emitter in the Netherlands, responsible for 7.6 per cent of national CO₂ emissions. If Tata Steel fails to become more sustainable, the rest of the Netherlands will have to compensate with disproportionately heavy measures. This position gives them power over the government at the negotiating table.

From this disadvantageous position, Dutch Minister of Climate and Green Growth Sophie Hermans signed a letter of intent with Tata Steel last September. The message was clear: the government will limit its contribution to a maximum of €2 billion. The problem with this is that this representation is incorrect, due to the terms negotiated by the steel company. Hidden in the letter of intent are three grounds for termination and three government obligations.

Grounds for termination – Tata Steel may terminate the deal in the event of:

1. Higher network costs: if the transport of electricity via the power grid becomes more expensive.
2. A national CO₂ tax being imposed on emissions to accelerate sustainability, essentially exempting Tata Steel from this tax.
3. Stricter rules for steel slag: a toxic byproduct of steel production that may not be treated as waste.

Government obligations – The government is required to develop:

1. A biomethane market: fermented manure as a substitute for fossil gas.
2. Infrastructure for the capture and storage of carbon (CCS) underground.
3. Offshore wind farms for electricity that directly connect to Tata Steel’s facilities.

The letter of intent is not yet a final agreement. However, Tata Steel indicated in a response to SOMO that these are conditions for which there must be “(prospects for) a solution” in order to reach an agreement with the government. If these conditions are included in the final agreement, they will create tacit guarantees that will cost hundreds of millions of euros annually.

The estimated annual costs of €375 to €580 million do not stand alone. This is money that does not go to a sustainable economy. Not to public housing. Not to healthcare or education.

Tata’s plan

So what exactly is Tata planning? According to the letter of intent, the sustainability plan will be implemented in two phases. By 2030, the company will replace one of its two fossil fuel production lines with a smaller, gas-fired production line. Steel production will fall by 19 per cent; 49 per cent of current production will then run on gas, while 32 per cent will remain coal-fired. From 2032, CO₂ capture will be added, and fossil gas will make way for biomethane.

Tata Steel does not intend to phase out coal completely until 2037. How this will be achieved has not been agreed. Originally, they planned to switch to hydrogen, but that route has been abandoned: it appeared to be too expensive. In the company’s current plan (with gas and biomethane), electricity costs will be reduced, but new costs for CCS infrastructure and biomethane will be introduced. The bill is shifting from Tata Steel to the taxpayer.

The costs

The largest expense is biomethane: €195 to €330 million per year from 2032 onwards. Tata Steel needs 0.5 billion cubic metres, one and a half times the Netherlands’ current national production. Because the biomethane market is nascent, the government promises to develop and subsidise it so that Tata Steel does not pay more than it would for fossil gas. A breakdown of the total costs is shown below.

Added up: €375 to €580 million per year, until at least 2040, on top of the one-off €2 billion. And that’s not including the additional costs for steel slag. Moreover, the biomethane market is so uncertain that the subsidy needed may turn out to be higher than stated here. Despite these uncertainties, the direction is clear: the additional annual costs to the Dutch state will run into the hundreds of millions of euros per year.

Precedent

This deal has implications far beyond Tata Steel. It will set a precedent for broader Dutch industrial policy.

If Tata Steel is granted an exemption from the national CO₂ tax, how will a new government impose that tax on other companies? If the biggest polluter is given a low net taxation rate, how can the government ask other companies to accept higher rates?

With similar concessions for the rest of the industry, the cost of these subsidies will quickly rise to €6 to €8 billion per year.

The subsidy drain

Apart from the costs involved, there is the structure of the deal. Tata Steel has responded in a reaction to SOMO by stating that the conditions are necessary for a healthy business climate and that the government is only committing to “reasonable efforts,” not obligations. That nuance is legally correct, but misses the point: once billions have been invested, failure to deliver on agreed terms will become politically untenable for the government. This is a classic subsidy drain.

Take the biomethane market. If it does not get off the ground, Tata Steel will remain dependent on LNG imports. Methane leaks in the supply chain largely negate the CO₂ savings, but after investing billions, further investment in biomethane becomes politically inevitable. Otherwise, both the money and the climate targets will be lost.

Phase two also remains vague. Minister Hermans says that no follow-up subsidies are needed, but this is qualified in the letter of intent, which says no subsidies are needed “as it currently stands”, leaving the door open to further subsidies if the situation changes. The letter of intent commits the government to accommodating Tata’s “reasonable interests”, making it politically difficult for the government to reject Tata Steel’s requests for follow-up funding or to ban coal-based steel, as that would likely harm the company’s interests.

The subsidy trap is sprung; the government is trapped.

What is the alternative?

Tailor-made subsidies are intended to accelerate sustainability. But in Tata Steel’s case, that is highly questionable. Under the European Emissions Trading System, Tata’s emissions must be net zero by 2040; this plan will achieve that only in 2045, with a five-year delay. Moreover, the ETS already creates a business case: from 2031, 78 per cent of free emission allowances will disappear, and from 2034, they will disappear entirely. The costs of fossil steel production will then rise to such an extent that sustainability will become economically rational. Why the need then for the additional subsidy?

And at an even more fundamental level, why should Dutch taxpayers invest billions in making steel in the Netherlands? Only 11 per cent of Tata Steel’s production goes to the Dutch manufacturing industry. Through European tendering, the Netherlands can strategically purchase this quantity and, at the same time, stimulate hydrogen-based steel production in Europe, where renewable energy is cheap, thus reducing the carbon footprint. The post-fossil era calls for allocation based on efficiency and sustainability, not on fossil infrastructure from the past.

Private profits, public costs

If the conditions proposed in the letter of intent are indeed included in the final agreement, it will represent a massive transfer of risk and costs from Tata Steel to Dutch society. They will receive substantial commitments and termination rights. The government is committing itself to infrastructure investments and annual subsidies without comparable guarantees.

In this way, profits remain private while costs are socialised. This is the pattern that SOMO observes worldwide among large multinationals that abuse their power to extract concessions from governments. The estimated annual costs of €375 to €580 million were not offered voluntarily. They are the result of negotiations in which Tata Steel used its position as the largest emitter in the Netherlands to extract maximum public support.

The case of Tata Steel is a litmus test for the new cabinet. The choice involved requires, at the very least, transparency about the true costs.

Note: This article is a summary of the research conducted by SOMO and published in the economics journal ESB. The full article can be read here(opens in new window) .