China’s New Steel Rules Test Decarbonization Limits
China’s Ministry of Industry and Information Technology (MIIT) has released the most significant overhaul of steel capacity replacement rules since 2021, ending a nearly two-year suspension of new approvals and raising the bar for one of the world’s hardest-to-decarbonize industries. The revised measures, announced on May 18, require 1.5 tonnes of existing capacity to be retired for every tonne of new capacity added — a uniform national standard that replaces the previous patchwork of regional ratios.
The changes come at a pivotal moment for China’s steel sector, which produces approximately 1 billion tonnes of crude steel annually and accounts for roughly 16 percent of the country’s national carbon emissions. As Caixin Global reported, the industry is facing slower demand growth, weak profitability, and mounting pressure to reduce emissions.
A Decade of Policy Evolution
China’s capacity replacement mechanism has evolved considerably since its introduction in 2014, when it emerged from twin policy priorities: tackling severe industrial overcapacity and improving air quality. The first rules required 1.25 tonnes of existing capacity to be retired for every tonne added in key air-pollution control regions, and a 1:1 ratio elsewhere.
The 2017 revision introduced preferential treatment for electric arc furnace (EAF) steelmaking, which is less carbon-intensive than the dominant blast furnace-basic oxygen furnace (BF-BOF) route that still accounts for around 90 percent of Chinese steel production. Following China’s 2020 pledge to peak carbon emissions before 2030 and achieve carbon neutrality by 2060, the 2021 revision incorporated explicit climate objectives, tightened requirements, and added support for emerging low-carbon technologies such as hydrogen-based steelmaking.
The latest 2026 revision goes further still. Beyond raising the standard replacement ratio, it excludes long-idled facilities from replacement calculations, restricts cross-regional and cross-company quota trading, and provides more explicit support for hydrogen metallurgy and low-carbon processes.
Key Changes in the 2026 Rules
According to Eco-Business, which republished analysis from Dialogue Earth, the revised framework addresses several structural weaknesses that had emerged over a decade of implementation.
Unified replacement ratio: The national ratio is now uniformly 1.5:1 across all regions, eliminating the previous distinction between key pollution-control areas and other regions. Wang Guoqing, Director of Lange Steel Research Center, told Beijing News/Shell Finance that the revision focuses on “controlling total volume, promoting integration, pushing green development, and strengthening supervision.” The policy intensity, he said, “has significantly increased.”
Phase-out of quota trading: Cross-company capacity trading will be eliminated after a two-year transition period. After this window, capacity can only be transferred through substantive mergers and acquisitions. Zhang Yabin, Senior Analyst at China Steel Network Information Research Institute, described the new rules as a “2.0 version of supply-side structural reform” that reshapes industry competition by raising entry barriers and plugging institutional loopholes.
Green technology incentives: The rules provide preferential 1:1 replacement ratios for EAF projects producing high-end specialty steel, hydrogen metallurgy projects achieving at least 60 percent carbon reduction versus blast furnaces, and projects achieving at least 30 percent carbon reduction within three years. This reflects recent industrial experience with large-scale hydrogen metallurgy projects, including Baowu’s demonstration project in Zhanjiang, Guangdong, and HBIS’s Zhangxuan project in Hebei.
Exclusion of idle capacity: Facilities that have been idle for two or more years — with utilization rates below 25 percent or operating fewer than 90 days per year — cannot be used as replacement capacity, closing a loophole that had undermined the credibility of previous capacity reductions.
The Gap Between Upgrading and Decarbonization
Despite a decade of policy evolution, a critical insight from the research is that capacity replacement has been more effective at modernizing facilities than driving structural decarbonization. Between 2017 and 2024, approved replacement plans included approximately 400 million tonnes of new blast furnace capacity, 318 million tonnes of new BOF capacity, and 128 million tonnes of new EAF capacity, according to CREA. BF-BOF projects continued to dominate.
Newer blast furnaces are more energy-efficient than old ones, but they still rely on coal. Additionally, some replacement projects retired underused or idle facilities while new plants were more productive, meaning nominal capacity reductions did not always translate into lower production or emissions.
Jiang Wei, Vice Chairman of the China Iron and Steel Association, noted in April 2026 that “the contradiction between strong supply and weak demand in the steel market remains prominent, and maintaining profitability remains the primary task.”
Can the New Rules Accelerate Decarbonization?
The revised framework could help create more favorable conditions for steel decarbonization by making it harder for high-carbon capacity to remain in the system and sending a clearer signal for future investment in low-carbon technologies. However, capacity policy alone is unlikely to drive a rapid transition.
Despite years of policy support, EAF steel’s share of crude steel production has remained around 10 percent in recent years, well below the 15 percent target set for 2025. Low-carbon technologies remain significantly more expensive than conventional BF-BOF production, while demand for certified green steel is still nascent.
Research from CREA estimates that approximately 350 million tonnes of blast furnace capacity may need to be retired by 2030 to support the sector’s decarbonization pathway. Achieving this will require not only stricter capacity management but also parallel policies: the expansion of China’s national carbon market to include steel, the development of green steel standards and certification systems, and efforts to green industrial supply chains.
Yang Li of the Institute for Global Decarbonization Progress noted that green procurement by state-owned enterprises “can help reduce the commercial risks associated with low-carbon investments by providing more stable demand signals for suppliers, including steel producers.”
What to Watch For
Nearly a month after the revised rules came into effect, no entirely new capacity replacement plans have been announced. The only plan issued so far, by Shandong’s provincial industry authority, relates to a project that had already completed public consultation before the 2024 suspension.
The effectiveness of the 2026 reforms will ultimately depend on how they interact with broader policy shifts — including carbon market expansion, green procurement mandates, and the evolving economics of low-carbon steelmaking. For an industry that has spent a decade modernizing without decarbonizing, the real test lies ahead.