IEA (2020), A policy framework for accelerating sustainable energy transitions in heavy industry, IEA, Paris https://www.iea.org/commentaries/a-policy-framework-for-accelerating-sustainable-energy-transitions-in-heavy-industry
The world’s industry sector is one of the most critical engines of global economic growth, but also one of the largest emitters of CO2. Industry currently accounts for a quarter of global energy and process-related CO2 emissions, with 70% of the sector’s emissions produced by three heavy industries: steel, cement, and chemicals. The materials from these industries are needed for buildings, infrastructure, vehicles, consumer goods like mobile phones and detergents, packaging, fertilisers and many other uses that are integral to thriving economies and our daily lives. Society will surely continue to need these materials far into the future, including in a future where society ambitiously pursues net-zero emissions: we must keep the materials and lose the emissions.
Achieving ambitious emission targets in heavy industries constitutes a formidable challenge. Heavy industry is an area whose emissions are often considered “hard-to-abate,” and one we provide in-depth analysis on in Energy Technology Perspectives 2020. There is a lack of market-ready zero or near-zero emission technologies to replace current industrial processes that are highly reliant on fossil fuels and generate process emissions. Industry’s long-lived and capital-intensive assets also pose a challenge, since high costs would be incurred if plants were retired early to switch to alternative technologies. Furthermore, the highly competitive global markets in which industrial products are traded lead to thin profit margins, which constrain large investments that are likely to be required for near-zero emission technologies.
New technologies under development could lead to drastic cuts in industry sector emissions, but the required changes will not come about fast enough on their own. Robust government policy frameworks can help fill the gap by supporting development and rapid deployment of low-emission technologies, while maintaining industrial competitiveness.
Many governments are already adopting policies to stimulate emissions reductions in industry. Some target lower emissions across multiple sectors of the energy system, such as the European Union’s emissions trading scheme, which has covered energy-intensive industries and power generation since its inception in 2005, widening to cover aviation within Europe in 2012. The People’s Republic of China is developing a similar scheme, which would first apply to the power sector and would later be expanded to energy-intensive industries. Other policies target a specific reduction strategy for industrial emissions, such as energy efficiency improvements for existing processes. India’s Perform, Achieve, Trade Scheme, which began nearly ten years ago, is a tradeable energy performance standard that has successfully reduced energy consumption across a number of industries.
Additionally, many governments are supporting clean energy technology innovation more broadly, with different schemes targeting lab, pilot and demonstration stage projects. In the United States, the Advanced Research Projects Agency–Energy funds high-potential, high-impact clean energy technologies that are considered too premature to attract private sector investment. The EU’s Innovation Fund targets technologies that are further along the innovation pathway by supporting demonstration projects; energy-intensive industries and carbon capture and storage are among the Fund’s focus areas.
Policies already adopted by governments are important but, as analysis in the IEA’s Stated Policies Scenario shows, they are not sufficient to drive the massive transformation that will be needed for deep reductions in industry sector CO2 emissions.
Governments can enable more ambitious and comprehensive strategies by establishing a robust policy framework for reducing CO2 emissions from heavy industry. A strong framework will require a multi-faceted policy response, measures that address complex elements, and collaboration between multiple stakeholders. Predictable and credible policies that set the long-term emissions reductions ambition should underpin the framework. Supporting specific technology areas and strategies, as well as ensuring that necessary enabling conditions are in place are also paramount. See Chapter 4 of the IEA’s Iron and Steel Technology Roadmap for a full description of the framework.
A policy framework for accelerating heavy industry clean energy transitions
|Driving force: stakeholder collaboration|
Governments, material producers & other actors
Planning and policy for long-term CO2 emissions reductions
|Targeted actions for specific technologies and strategies|
|Production technologies||Material demand & recyling|
Managing existing assets & near-term investments
Creating a market for near-zero emission materials
Developing earlier-stage technologies
Accelerating material efficiency
|Necessary enabling conditions|
International cooperation & a level playing field
Infrastructure planning & development
Tracking progress & improved data
Establishing a strong, predictable, long-term policy signal for CO2 emission reductions early on is critical for industry planning and decision-making. Because heavy industry plants typically have long lifetimes of around 30-40 years, the transition will take time. If investment decisions made in the near-term can take into account the level of CO2 reduction that will be required over the next several decades, the need to incur losses from the early retiring of high-emitting plants can be reduced. Long-term policy also helps provide confidence that high-cost, high-risk innovation efforts on near-zero or zero emission industry technologies will pay off.
Thus, government plans, roadmaps and targets will be useful to set the direction and pace of the transition. These should be underpinned by mandatory CO2 reduction policies that increase in stringency over time, such as emissions trading schemes, carbon taxes or tradeable CO2 performance standards.
Policies targeted towards particular technology areas and strategies will be needed to complement and reinforce broader CO2 reduction policy. One such area is management of existing and near-term assets. Energy performance schemes can encourage industrial plants to improve their operational efficiency and adopt energy saving add-ons such as waste heat recovery. A balance needs to be struck, however, between investing in incremental improvements for high-emitting conventional plants in the near-term, and the need to shift to near-zero emission production in the medium-term. Governments might consider differentiated energy performance requirements for existing and new plants to ease the financial burden for companies that demonstrate commitment to medium-term, near-zero emission technology shifts.
Meanwhile, sunset clauses – which specify a date beyond which high-emitting plants must be retrofitted or close – can set the timeline for shifts to near-zero emission technologies. Where feasible, this can include adapting, rather than closing, existing plants, such as through CCUS retrofits or shifting to the use of hydrogen. Because it will likely be another five to ten years before near-zero emission technologies are ready for market deployment, retrofit-ready requirements for near-term new-builds can smooth the transition.
Near-zero and zero emissions production processes that are not market ready today – many of them utilising CCUS or hydrogen technologies – account for 45% of cumulative CO2 emission reductions in heavy industry in the Sustainable Development Scenario. Government support to accelerate innovation will be crucial (see the IEA’s Special Report on Clean Energy Innovation and accompanying ETP Clean Energy Technology Guide). Increased government funding for research, development and demonstration of near-zero or zero emission industrial technologies will be important to leverage corporate efforts in bringing these innovations to market by mitigating investment risks. Governments can also help with coordinating and stimulating knowledge sharing and innovation efforts among relevant actors.
Continued funding for innovation can help bring down costs and improve performance even after technologies are market ready. An area of key importance is maximising the energy efficiency of new technologies. For example, improving the conversion efficiency of electrolysers would reduce the amount of electricity needed for hydrogen-based industrial production, thus easing the burden on electricity grids, which may already be facing challenges in their transition to zero emissions.
Once near-zero emission technologies reach commercial scale, they will likely still be higher risk initially, and have face increased costs relative to high-emitting conventional technologies. Policies can help create markets for near-zero emission materials produced using these technologies. Carbon contracts for difference – in which governments provide certainty to producers by covering the cost difference between low and high-emitting production for a guaranteed volume of output – may be particularly helpful for the first few plants using a new technology. Subsequent deployment could be supported through other mechanisms such as public procurement and minimum market share requirements. Government financing for new technology deployment will also be helpful, such as low-interest and concessional loans, or blended finance mechanisms in which public funding takes on higher risk and is used to mobilise private finance.
Another important lever for reducing industry emissions is greater material efficiency, which involves reduced material use and increased recycling (see our report on Material Efficiency in Clean Energy Transitions). Policy can help overcome various barriers related to cost, delivery times, coordination, lack of awareness and the regulatory environment. Regulations that consider lifecycle emissions can help incentivise material savings and durability. Modifying design regulations to focus on performance rather than prescriptive requirements can facilitate leaner construction and use of less emission-intensive materials. Policies such as demolition fees and building refurbishment incentives can target longer lifetimes of products and structures. Governments can also help coordinate improved channels for end-of-life material collection, sorting and recycling.
Beyond support for specific technologies and strategies, policies need to cultivate an environment conducive to enabling change. A level playing field is needed for producers shifting to clean technologies because many industrial products are traded in highly competitive global markets. Producers required to adopt higher-cost clean technologies may have trouble remaining competitive, the result being that regions with weaker regulations may gain market share at the expense of those with stronger ones. Aligning global ambition through a common carbon price or global sectoral agreements could resolve this, but may be very difficult to achieve in the near term. International technology transfer and best practice sharing could help encourage greater ambition in other regions. But other options may still be needed to provide a level playing field.
Special provisions in emissions regulations, such as free allocation of permits in emissions trading systems, could help reduce costs to industry; however, at higher ambition levels, such provisions may weaken the incentive to reduce emissions. An alternative could be CO2 footprint-based tariffs on imports that are currently being discussed in some countries. Careful design would be needed to comply with international law, and potentially complex systems would need to be established for CO2 footprint tracking. Other options include consumption-based regulations that place CO2 requirements on materials going into products rather than production itself. In addition, market creation policies such as those noted above could help address the price differential for clean technologies.
Furthermore, many innovative technologies that will be key for deep emission reductions in the heavy industries will require supporting infrastructure. This includes CO2 transport and storage, hydrogen production and distribution, and zero-emission electricity generation and transmission. In many cases this infrastructure will be shared by multiple users. Thus, governments have an integral role to play in coordinating infrastructure planning and development. They will also likely need to provide public funding or financing support to mitigate high upfront investments for shared infrastructure.
Additionally, improved data and classification systems will be important for tracking progress and supporting decision making. Tracking progress can enable governments to modify their policy strategies in areas that are falling short. Knowing which production is “green” can facilitate purchasing decisions, policy implementation, and investor finance choices. Here, governments can encourage industrial actors to report energy and CO2 data to existing data reporting schemes, or develop new schemes as needed. They can also help coordinate certification and labelling schemes and taxonomies that differentiate sustainable production.
Time is of the essence. We are now only one or two investment cycles away from a target of drastically lower CO2 emissions for industry. But the transition cannot happen overnight, which is why the next ten years – from now to 2030 – is a critical window to lay the groundwork needed for long-term success.
The economic crisis brought on by the Covid-19 pandemic may pose challenges in the near-term. But it should not be reason to halt action. In fact, stimulus packages being adopted in the wake of the crisis can be an opportunity to direct funding towards low-emission technology deployment and development.
In the near term, we can focus on the “low-hanging fruit” when it comes to emission reductions, and prepare for deeper reductions thereafter. Policies promoting material and energy efficiency would be strategic, given that technologies and strategies in these areas are already commercially available. Funding for near-zero emission technology pilot and demonstration projects will also be critical to accelerate progress towards market readiness to take advantage of upcoming investment cycles. Meanwhile, planning and developing supporting infrastructure would facilitate rapid deployment once these technologies become available.
The changes ahead will not be easy. But strong government policy support can help make clean energy transitions for heavy industry all the more feasible.
A policy framework for accelerating sustainable energy transitions in heavy industry
Tiffany Vass, Energy Analyst - Clean Energy Technologies
Peter Levi, Energy Analyst - Industry Commentary — 21 December 2020