June 28, 2022
During the height of the COVID-19 pandemic, many corporations, governments and non-governmental organizations began formulating their post-pandemic sustainability-focused economic recovery plans, eager to capitalize on the momentum of globally accelerating energy transition ideologies. As part of this effort, multiple international entities, including the International Energy Agency and the international non-profit Climate Group along with Mighty Earth (a global climate advocacy organization), have come out with broad frameworks for decarbonizing heavy industry, seen as one of the key pillars in the drive towards emissions reductions. This article aims to explore the common themes of these two frameworks, to review these principles in greater detail and to investigate the extent to which any progress has been made over the past few months.
Heavy industry is a term that encompasses various industrial processes, including the production of steel, cement and chemicals, as well as the extraction and refining of oil, gas and coal. The heavy industry sector is estimated to consume approximately one-third of all energy produced, and accounts for about 35-40% of all global greenhouse gas emissions.
With approximately 86% of the S&P 500 filing sustainability reports, there is a strong drive towards decarbonizing the industrial sector. Within the industrial sector, two sub-sectors—steel and cement—collectively account for approximately 14% of total global carbon dioxide emissions, 34% of total global methane emissions and 47% of heavy industry’s carbon dioxide emissions. In fact, every ton of steel produced in 2018 emitted on average 1.85 tons of carbon dioxide, equating to about 8% of global carbon dioxide emissions.
Companies manufacturing in these two areas can significantly reduce their greenhouse gas emissions through implementing a wide range of energy-efficiency improvements, replacing feedstocks and fuels with hydrogen, and employing point-source carbon capture initiatives. These wide-ranging measures are necessary to mitigate emissions both from the industrial/manufacturing processes as well as from fossil fuel-based power generation. Fully implementing these measures is expected to take decades and is projected to cost between $11 trillion and $21 trillion through 2050 to fully implement at a net-zero level. Furthermore, implementation will necessitate investing in, and accelerating the development of renewable-energy capacity to provide an estimated four to nine times more clean power input than would be required in the absence of any concerted effort to reduce emissions in this sector. Viable decarbonization pathways already exist for the electricity and transportation sectors, however, for heavy industry the current decarbonization routes are not cheap and have not begun scaling to cost-efficient levels. Therefore, high impact, high risk and high reward makes the industrial sector a prime target for decarbonization innovation considering the potential emissions reduction opportunities that exist.
The Global Framework Principles for Heavy Industry Decarbonization, originally published by the Climate Group and Mighty Earth in February of 2021, is centered on six principles that seek to guide the industry through a “just, accessible, regenerative and inclusive recovery” from the COVID-19 pandemic. Within this context, each principle embodies a particular theory that policymakers can use, and industry insiders can advocate for, to ensure the greatest odds for decarbonizing heavy industry within the time goals set out by various international climate accords. Additionally, the International Energy Agency released their report last month that provides ten recommendations to decarbonize heavy industry.
Common themes between these two frameworks, are as follows:
While eighteen months is not a very long period of time, in the world of climate technological innovation and global warming, eighteen months is enough such that scientific understanding has evolved, and the global community has updated its climate change expectations. The United Nations Climate Change Conference (COP26) in November of 2021 was the first real admission by the international community that the goals set out in the 2015 Paris Agreement were not being met due to insufficient policy progress. Most notably, policymakers acknowledged that the international community is likely to soon exceed the possibility of achieving the 1.5°C maximum warming target. International policymakers have also since acknowledged that absent unprecedented rapid and massive changes to the world’s economy and infrastructure, as well as stringent reductions in emissions of not just carbon dioxide, but also of methane and nitrous oxide, a 2°C warming target is likely a more realistic one.
The development of financial frameworks to drive investments in heavy industry has made significant gains, with the broader deployment of public-private financial partnerships, as well as significant government pledges to finance energy transition and decarbonization technologies that heavily impact the industrial sector. Drawing upon past experience of successful deployment of renewable energy projects, there are many additional policy measures that can be implemented to support demand for low-carbon and resource efficient materials. These include programs akin to the offering of tax credits for wind, solar and carbon removal projects in the U.S., the offering of feed-in tariffs to promote the production of renewable energy in Germany, and the offering of low cost, hundred million dollar-plus loans like those recently issued by the U.S. Department of Energy to finance Advanced Clean Energy Storage, a clean hydrogen and energy storage facility capable of providing long-term, seasonal energy storage.
Progress is indeed being made on this front. One of the latest Notices of Intent from the U.S. Department of Energy, through the Bipartisan Infrastructure Bill, has authorized $8 billion in funds for investments in hydrogen hubs to decarbonize hard-to-abate industrial sectors. Earlier, Germany pledged $10 billion to fund 62 hydrogen projects. The European Union President, Ursula von der Leyen, recently announced that the continent’s Covid recovery plan is worth €750 billion over four years, and that more than one third of the funds are earmarked for the goals set in the European Green Deal to ensure sufficient renewable electricity to produce renewable hydrogen.
Calibrating these targeted financial injections to align with GHG emission reduction commitments in reality has been much more challenging, and financial institutions worldwide continue to under-invest in green assets. Some of this could be due to unforeseen circumstances that perhaps have suggested a slower drawdown of legacy power generation sources than previously projected. More than ever, there is a pressing need to unlock capital globally for clean industrial decarbonization efforts, clean energy production and energy storage. The financial sector will be a critical player in both areas, and cooperation in this endeavor will be absolutely necessary, as the financial players all share nearly the same systemic risk.
Banks and private equity firms alike have increasingly devoted more attention and capital in these areas of industrial decarbonization and sustainability. The emergence of the Glasgow Financial Alliance for Net Zero (GFANZ) from COP26 was a noteworthy evolution of the financial sector. GFANZ now includes over 100 global banks committed to helping clients achieve net-zero by 2050 commitments, as well as science-based 2030 emissions reduction targets. Over the last few years, Ara Partners, a pure-play decarbonization investor, has raised a total of $1.7 billion across three funds. Blackstone, one of the largest investment management companies, has committed over $15 billion energy transition-related investments, and plans to invest an estimated $100 billion in energy transition and climate change solutions projects over the next decade—a significant amount of which are expected to be directed to focused decarbonization efforts. Together, firms like these are actively prioritizing funding for deployment of low and zero carbon technologies to help phase out fossil fuel use.
Another framework principle calls for the implementation of policies to create demand for low-carbon, circular and resource efficient basic material products, supported by the use of standardized lifecycle carbon footprint labeling and performance incentives for end products. In this regard, there has been significant progress on the corporate front. As companies are increasingly disclosing their sustainability efforts and metrics, there has been a renewed focus on lifecycle carbon footprint reporting. While these efforts remain voluntary, investor pressures are filling in the gaps for legal obligations while the U.S. Securities and Exchange Commission (SEC) plays catch-up. The SEC, however, has proposed recent amendments that would require enhanced disclosures by funds to even include the emissions that their portfolios are responsible for, including the carbon footprint and intensity of the companies they invest in. The rationale behind this move, as explained by SEC’s Chair Gary Gensler, is that “investors should be able to drill down to see what’s under the hood of these strategies… allowing them to allocate their capital efficiently and meet their needs.”
Another principle that is common between the two frameworks is to encourage greater international coordination to share and co-develop technologies, create viable circular economy pathways (such as expanded material re-use and recycling networks), sunset clauses for high-emitting technologies (by specifying a date beyond which these technologies plants must be retrofitted or close), and implement responsive trade policies to reduce emissions leakage between economies has taken hold and is, for the most part, demonstrably scaling upwards. COP26, while criticized for its failure to yield more profound and binding climate action, did succeed in bringing the international community together through the Glasgow Climate Pact, which agreed on a global phase-down of coal-based electrical generation. Already many nations are preparing for more aggressive proposals in the run-up to COP27 scheduled for November of 2022. The rising tides of nationalism, growing vulnerability over energy security, and the ongoing war in Ukraine have served to undo significant coordination and progress and have once again thrust much of the war into re-polarized positions. Nevertheless, the international climate community and global industrial players must remain optimistic that their improvement efforts can persist in spite of the outwardly decaying international dialogue.
On the emissions leakage front, much work remains to be done, as developing countries such as China and India continue to increase their emissions footprints, due in large part to shifting mass production to factories in these countries that operate at significantly less cost and under considerably less environmental regulation. Without international carbon markets, or carbon border adjustments, the plummeting cost of coal is an incentive for emerging countries to invest in coal power plants. The end result of course, being that the net emissions footprint has shifted somewhat out of sight and has increased. Clearly, there is much work to be done in reducing these cross-border emissions leakages.
There are several opportunities in the industrial sector that are ripe for disruption, and that fall in line with the proposed framework principles. Investors and corporations are beginning to seize upon green manufacturing alternatives to produce essential industrial commodities such as steel, cement and chemical production. They are increasingly incorporating advanced materials that reduce the environmental footprint of many manufactured goods. Service providers are working more closely than ever with industrial clients to decarbonize their operations, and the pace of financial investment and subsequent technological innovation in the manufacturing and industrial sectors has picked up considerably. It is now clearer than ever that the industrial sector is poised to have an outsized impact on global decarbonization efforts; what remains is merely the confluence of innovation and drive to see this transformation through.
Special thanks to Neil Segel who contributed to this article.