A new linear programming model has been developed for the analysis of CO2 emission reduction potentials in the Japanese iron and steel industry. This model is named Steel Environmental strategy Assessment Program. The model can be used to analyse the impact of CO2 taxes on technology selection, iron and steel trade and product demand for the next three decades. The Japanese iron and steel industry accounts for approximately 15% of the Japanese greenhouse gas emissions. The model results suggest that these emissions will decline from a level of 185 Mt in 2000 to about 150 Mt in 2020-2030 because of declining production and increasing recycling. A further emission reduction to 90 Mt is technologically feasible and can be achieved through a global tax of 5000Yen/t CO2 (120Yen is equivalent to 1 US$). CO2 removal from blast-furnace off-gases and introduction of CO2-free electricity are the most attractive options. If only Japan and Europe would introduce such a tax, Japanese emissions will decline to 25 Mt CO2. However, this effect is mainly caused by relocation of industry. In fact emissions abroad increase significantly, resulting in 70% carbon leakage. However, leakage can be prevented by measures such as import tariffs for steel from countries without CO2 reduction policies.